Crypto Basics

Crypto Mining Pools Overview: How They Work, Benefits, and Risks

Bitcoin GPU mining

In proof-of-work (PoW) blockchains like Bitcoin, mining is the method by which consensus is achieved. The mining process commits transactions, adds blocks to the blockchain, secures the ledger, and issues new Bitcoin. This process is essential for helping decentralized parties agree on which crypto transactions are valid without the need for centralized authority. 

In Bitcoin’s infancy, just about anyone could mine it using a personal computer with adequate processing power. Competition increased over time as more miners became involved, which led to new mining hardware developments. Then in 2013, the introduction of ASICs (application-specific integrated circuits) purpose-built for Bitcoin mining changed the game altogether. Large mining operations using ASICs rose to the fore, and it became nearly impossible to solo mine Bitcoin without this technology.

Given the highly competitive landscape that has evolved to mine Bitcoin, most miners today collaborate through mining pools in order to maximize their rewards. Mining pools allow individual miners to combine resources and efforts toward solving the puzzle required to create new blocks, and share the subsequent rewards. In this post we’ll cover:

What is a crypto mining pool?

With Bitcoin and other PoW blockchains, miners compete to be the first to solve a mathematical problem that earns them the right to add a new block to the chain. New blocks can contain thousands of new transactions, each one verifying that transactions in earlier blocks belong to the canonical blockchain. The more computing resources a miner deploys attempting to solve the problem, the more likely they are to win the competition, and are rewarded for this work with new Bitcoin and, in most cases, transaction fees. Given the cost, time, resources, required to mine Bitcoin, mining pools emerged as services that allow individuals to collectively deploy their computational resources to do the work. In this approach, the pool mines Bitcoin more frequently and reliably than individual miners could on their own, and shares rewards among the miners.

While large crypto mining companies exist (some of which have their own mining pools), the market is dominated by organizations with dedicated mining pool operations, two of which — Foundry and AntPool — currently hold over 50% of market share at the time of publication. Below are the top 10 Bitcoin mining pools by hashrate, according to MiningPoolStats. Hashrate is a measurement of the total collective computational power being used to mine Bitcoin.

Top ten Bitcoin mining pools as of this publication, according to MiningPoolStats

Mining pool Hashrate (Exahashes per second)
1. Foundry 170.96 EH/s
2. AntPool      148.00 EH/s
3. ViaBTC 81.54 EH/s
4. F2Pool 60.90 EH/s
5. Binance Pool 44.72 EH/s
6. Luxor Mining Pool 17.82 EH/s
7. EMCD Mining Poo 14.82 EH/s
8. SBI Crypto Pool 12.91 EH/s
9. Braiins Pool 12.78 EH/s
10. SpiderPool 11.16 EH/s

How crypto mining pools work

In most cases, mining pools are run by centralized organizations, and participating miners connect their mining devices over a network to increase their chances of getting to create a new block. The organization coordinates these efforts by assigning the work to miners; specifically, each participant receives a range of “nonces” (a number only used once) to guess the answer to the puzzle. Each nonce equals a single guess, and each guess consumes computing resources, or hashrate. The pooling of resources increases the group’s likelihood of success, and when one individual in the mining pool successfully mines a block, the group splits the reward of the newly created Bitcoin, plus transaction fees depending on the pool’s payout structure. Since Bitcoin’s most recent halving event on April 19, the block reward is now 3.125 BTC.

Benefits of crypto mining pools

Due to the hardware and energy demands required to run a profitable solo mining operation, mining pools give individuals the opportunity to vie for rewards without having to invest in cost-prohibitive infrastructure. The chart below shows the benefits of crypto mining pools for individuals wanting to participate in mining, as compared to crypto mining companies.

Crypto mining companies Crypto mining pools
Conglomerates use highly specialized hardware to mine Bitcoin; small solo miners struggle to compete with these operations A central organization coordinates individuals who pool computational resources to mine Bitcoin using their own devices
High barrier-to-entry facilities require cheap source of electricity and many devices Lower barrier-to-entry since resources and hashing power are spread across the group
ASICs algorithmically solve the puzzle required to mine Bitcoin Mining pools assign miners “nonces” with which to guess and potentially solve the puzzles required to mine Bitcoin
A single entity reaps the entire reward All miners in the pool split the reward

Earning rewards

Miners split rewards according to the mining pool’s payout scheme. Here are some of the most common types:

  • Pay-Per-Share (PPS): Miners are paid for each share or block they contribute.
  • Full-Pay-Per-Share (FPPS) or Pay-Per-Share-Plus (PPS+): Miners receive a reward proportional to the quality of shares they provided. The pool also pays a transaction fee reward.
  • Pay-Per-Last-N-Shares (PPLNS): The number of shares a miner contributes between the time the last block and the latest block was found determines the payout.

Mining access and resources

As mentioned, in the early days of Bitcoin, miners could simply use their personal computers to mine. As competition increased, hardware requirements grew in proportion. Today, Bitcoin miners typically need specific types of GPUs (graphics processing unit) or an ASIC to participate in a mining pool. GPUs used for crypto mining offer higher processing speed than the GPUs found in basic computers. By contrast, ASICs, which are used solely for Bitcoin mining and can’t perform computing tasks otherwise, have more processing power and are usually more expensive than GPUs. 

Some crypto miners participate in numerous mining pools, using resources like whattomine in order to decide what’s most profitable to mine in a given timeframe based on the wattage at their disposal. Miners may also switch between pools based on whatever pool they perceive is giving the best rewards or mining the most blocks lately. This practice is commonly referred to as pool hopping, which we’ll discuss later.

Risks of crypto mining pools

While crypto mining pools have helped more miners participate in the PoW consensus mechanism and receive rewards, they aren’t without risk. Market volatility poses one such threat to mining operations. The price of Bitcoin frequently fluctuates, and any drop in value makes mining less profitable. Other risks include centralization and blockchain security, trustworthiness of pool operators, and pool hopping, which we’ll discuss below. 

Centralization and security risks

While a defining attribute of most public blockchain technology is decentralization, mining pools can concentrate too much power in a handful of organizations. This has a couple of implications for centralized infrastructure and hashing power:

  1. If the cloud infrastructure on which these mining pools operate is poorly maintained or attacked, that introduces risks to the mining pool operator. 
  2. If a single mining pool gains a controlling share of hashrate, it could censor transactions by not including certain, or all, transactions in the next block or attempt a 51% attack. 

A 51% or double-spending attack is possible if an entity or person controls more than 50% of the network’s mining hashrate, which would allow them to attempt to double-spend coins and censor transactions. While it’s possible in theory, it’s almost technically impossible to achieve on a network like Bitcoin given the sheer volume of computing power and logistical coordination required to make a 51% attack happen. A mining pool would also need buy-in from its miners to achieve it, which would go against the group’s economic interests and isolate them from the larger community in the future. 

Another more practical mining pool security risk are DDOS (distributed denial of service) attacks, which malicious miners may launch against competitors in an effort to obtain more profit. It’s also possible for nodes to unintentionally facilitate a DDOS attack due to poor security. Mining pools can mitigate these attacks by keeping software updated and performing regular security audits.

Trustworthiness of pool operators

Mining pools must operate in a transparent way that demonstrates trust to their participants.  Common concerns about mining operators include:

  • Not distributing enough of the block reward
  • Mismanaging the pool 
  • Being unresponsive to tickets
  • And falling behind on infrastructure updates

Failure to maintain infrastructure could lead to the security breaches mentioned earlier. For the individual miner, payouts are also a leading concern. Most miners are skeptical of newer pools with payout time frames longer than a day or two as it could indicate a scam that doesn’t intend to pay miners, but will instead disappear with the block rewards.

Pool hopping and other mining strategies

Whether they’re fulfilling their obligations to miners, mining pools run the risk of individual miners moving to other pools that offer better rewards in exchange for their investment. For many miners, this is in fact part of their strategy to maximize profit: going to whatever pool is offering the best reward rates or mining the most blocks within a given timeframe. Pool hopping can undermine a mining pool’s stability and efficiency. It can also lead to unfair reward distribution when miners jump to a new pool that may be discovering blocks faster to reap those rewards, and return to the previous pool and receive a share of a block they didn’t take part in mining. Many mining pool operations develop reward structures to discourage pool hopping, like Pay-Per-Last-N-Shares (PPLNS) or score-based payouts.

Crypto mining pools and money laundering

In the last few years, some bad actors have turned to crypto mining pools to facilitate money laundering since mining provides a way to get funds from a clean on-chain source. Sanctioned nation states like Iran have used these tactics, as has Lazarus Group, a North Korean hacking syndicate. More recently, ransomware actors and crypto scammers have begun doing the same. This problem can be mitigated if, in addition to KYC, mining pools and hashing services establish more stringent wallet screening measures, and use blockchain analysis to see where users’ funds originate in order to reject crypto from illicit addresses. Exchanges must also consider the full exposure profile of wallets sending funds. As mining is a core function for all PoW blockchains, mining pools and exchanges must enact controls to prevent the mining process from criminal compromise. 

The future of crypto mining pools

Mining is essential for PoW blockchains, and today, mining pools are responsible for a substantial portion of Bitcoin mining worldwide. The mining pools that prioritize transparency, security, and compelling rewards attract the most miners, but the more popular any single mining pool becomes, concerns about centralization grow. Though decentralized crypto mining is nascent, some are attempting to tackle the potential power imbalances that mining pools invite. A recent project is OCEAN, a mining pool on a mission to decentralize Bitcoin mining. A decentralized mining pool operates in a non-custodial way, so payouts from block rewards go directly to participating miners, alleviating the need for mining pools to be the intermediary. We’ll be curious to see how this effort unfolds, and if it compels other players to start similar operations.