If you are looking to mine cryptocurrencies but aren’t massively wealthy already, then a mining pool might be what you need. But what is a cryptocurrency mining pool exactly and how do they work?
Well… that is the point of this article. I’ll be covering what crypocurrency mining pool is, how it works, what major problem it solves, scams to look out for when it comes to mining pools and more.
But first I think its important to briefly touch upon what mining actually is in the first place. You probably have at least somewhat of an understanding.
What Is Mining?
There are many different cryptocurrencies out there that are mine-able but they all have the same basic process when it comes to the mining. And since bitcoin is the most popular I’ll be using it as an example…
Bitcoin mining is the action of using computers to solve complex mathematical problems and process transactions.
There is Bitcoin that exists in the protocol’s design but has not been mined yet. The Bitcoins that have not been mined aren’t “active”. They are there but need to be mined and brought to the surface in order to enter the market, similar to how you would mine gold by digging it out of the earth and bringing it up to surface.
When you think of mining you might just be thinking about the monetary reward…. You mine Bitcoin and you earn money, in the form of Bitcoins being rewarded. But there is more to it than that. The Bitcoin miners are the ones holding the whole network together. The miners are actually the ones that are processing all the transactions on the network. They hold everything together and keep things running smoothly.
Providing Bitcoins as a reward for mining is an incentive for people to mine and help secure the network plus keep it running fast and smooth.
There is a lot more to mining than this but this is a basic overview… You mine, you get rewarded in Bitcoin for processing transactions and securing the network.
The Problem With Mining
You will understand the importance of mining pools after this.
The problem with mining is that it can be extremely expensive…. so much so that ordinary people have no chance of ever entering the playing field. The difficulty and expense that comes with mining will vary a lot depending on the cryptocurrency. But for Bitcoin and many others, it is just out of most people’s budget.
the reason for this is because when you are mining, you are in competition with all the other miners. And if the other miners have fancy shmancy equipment for their computers and you don’t then you aren’t going to make out much. This is the problem we are seeing with Bitcoin. Expensive ASIC miners are what you need to have now to compete.
It would take literally well over 100 years to generate a block on the Bitcoin blockchain with may normal computers out there. And who has the time to wait for that to happen?
However, mining pools solve this problem. What is a Bitcoin mining pool? I’ll go over it all…
What Is a Crypto Mining Pool & How Does It Solve This Problem?
If you want to mine cryptocurrencies like Bitcoin but don’t have $150,000+ of cash laying around that you can invest in mining equipment, then joining a mining pool is the only other option.
Mining pools are groups of people that pool their resources together. They consist of many individuals or groups of individuals who contribute to the mining operation. There is only one mining operation going on and everyone that joins contributes to it an only it. With this pool of many resources there is then the ability to compete.
As an individual you don’t have a chance but if you team up and join forces you do. Members or these mining pools are then rewarded based on their input. The more you put in the more you get out.
Ex: So lets say you are involved in a Bitcoin mining pool and your pool just won a block reward of 12.5 Bitcoins. These 12.5 Bitcoins are then distributed evenly among the pool based on what they put in.
The Two Types of Cryptocurrency Mining Pools
There are 2 basic types of mining pool operations that go on. They both have the same goal of pooling together resources and earning block rewards, but the way they operate is very different.
#1 Computational Resource Pooling
The first kind of mining pool is that of computational resources. This is when everyone that joins the pool contributes computational power to the pool.
Basically what goes on here is you join and contribute your own computers resources to the mining pool network. You can help the pool mine cryptocurrencies remotely from your own computer. Everyone in the pool will be contributing and based on the amount of computational resources that you give you will be rewarded.
So with this type of mining pool its not like there is some big warehouse somewhere that is doing the mining. Everyone is collectively contributing their own computer power and being rewarded accordingly.
#2 Monetary Resource Pooling
The second type of mining pool is that of monetary resources. With this type you simply invest money in the mining operation.
For example you could pay $50 a month to “lease” part of a mining rig in some warehouse somewhere. These pool are much more centralized because one entity has control over the operation…. you just invest in them.
The amount of reward you make will depend on the amount you invest. The more invested the more you make of course.
A Word of Caution
You have to be careful when joining a mining pool. There are a lot of scams out there that are capitalizing on this new emerging market and lots of people losing money.
Be especially cautions of the mining pools that require you to invest money. Often times mining pools like this will be undercover Ponzi schemes in the guise of a legitimate mining operation.
Be sure to look into the company behind things. Make sure they seem transparent and trustworthy. If you are investing money to “lease” equipment then look for pictures of their operation. Look for pictures of the mining equipment and how things work.
If there is a lack of information anywhere or the yields that they claim you will earn if you invest seem too good to be true, then its probably best to stay away.
Final Thoughts On Cryptocurrency Mining Pools
Mining pools are without a doubt helpful. Most people stand no chance trying to mine on their own and by pooling many people’s resources together this problem is solved.
Although I do not particularly like mining due to the extreme complete waste of electricity that it consumes, I have to say that mining pools are a good thing. Why? Well because if there were no mining pools then entire blockchains would be controlled by some very wealthy individuals in some cases. But with mining pools everyone gets a share and gets involved.
There is still the issue of centralization, because mining pools still act as one mining operation, but its better than some super elite running the whole show.
If you are wondering if you should join a pool or not it is up to you. You can be rewarded but do your own research first. Make sure you are getting into a scam.
As always, leave any questions or comments below. I’ll get back to you as soon as I can 🙂