What is it?
A mining pool is a collection of multiple generating clients/ miners that share their processing power over a network to generate a block, splitting the block reward afterwards. The share is directly proportionate to the amount of work the miners contributed to solving said block. A miner’s contribution is demonstrated through a solved proof-of-work that has to be valid.
How and why it started
Pooled mining appeared when individual miners began experiencing difficulties in generating blocks in a reasonable amount of time, taking years for slower miners to generate even a single block. As a result, miners began pooling their resources to speed up the block generating process, therefore all involved miners consistently received a part of the block reward, as opposed to once every few years on a random basis.
This method of mining is effective in reducing the volatility of block generation reward, over time resulting in a more even spread of the returns.
On average, mining with lower performance devices can take a long time before they can generate an entire block. Mining also consumes a great deal of electric energy, so with more devices with higher performances comes more power consumption. And a bigger electricity bill.
First coined by BitPenny, the second oldest mining pool, pay-per-share mining implies the offering of an instant flat payment per solved share. The payout comes from the pool’s current balance, withdrawals can therefore be made regardless of the state of the block’s solving process. In doing so, cheating pool operators and timing attacks cannot prey on the pool’s earnings.
This method has the least amount of risk, and should there be any losses by the hosting server, the miners will receive a lower payout than the full expected value.
This method is a score-based approach. Miners are discouraged from switching between pools within a round due to the fact that shares from the start of the round have less weight than that of the recent ones.
Created by BTC.com, a highly popular web wallet, the fully pay-per-share makes use of the high transaction fees, sharing some of them to the miners, having a greater advantage over the pay-per-share method. It calculates a standard transaction fee within a certain period then it adds it into the block rewards, the whole remaining to be further distributed just like in the Pay-per-share approach.
P2Pool is a mining method that makes use of mining nodes that work on a chain of shares, similar to that of Bitcoin’s blockchain technology. The block reward is awarded between the most recent shares in this shared-blockchain each time a block is find. The payout is made via generation.
Cloud mining enables the user to mine Bitcoins by outsourcing hash power from other hardware devices. This is done by signing a mining contract that gives the user said power for a certain amount of time. This method is ideal for those that do not want to manage their hardware.
Multipool mining is used by those that want to switch between the most profitable altcoins to mine at the moment. The status of the altcoins is determined by an algorithm that calculates profitability, blocktime and exchange prices. This method of mining increases or stabilizes the value of the mined altcoin. Most multipools automatically exchange the mined altcoin to a mainstream coin (the current one being Bitcoin), to avoid having to make different coin wallets.
Pros and cons
Bitcoin pool mining is somewhat similar to a lottery, in the way that you have little chances of getting the block reward if you choose to mine solo. A larger number of miners have better odds of solving a block and getting rewarded, but the individual reward will be lower because it has to be split among its members.
Although lower than a full block reward, the payment in a mining pool comes on steady basis.
On the downside, pool mining is more prone to suffer interruptions from power outages, thus having lower uptimes. There are also transaction fees, resulting in a smaller reward per discovered block.
A mining pool is a great way of mining Bitcoins for beginners who lack financial resources to purchase and maintain a large number of devices. But the main appeal of pooled mining is that it normalizes your earnings without needing to waste years on finding a block.