Mining Pools in Cryptocurrency
In the previous article, we have already learned about the Proof of Work mechanism which underpins Bitcoin and many other major cryptocurrencies across the world. In any proof of work-based cryptocurrency, every transaction is validated by a miner. The transaction gets added to the blockchain only after such a validation takes place. However, we also know that mining requires computers with advanced computing capabilities. Therefore, retail investors who do not have access to such advanced computing equipment find themselves at a disadvantage. Their chances of ever being able to successfully submit proof of work and then gain rewards are quite limited given the technical challenges they face. In order to overcome these challenges, mining pools have been created.
In this article, we will have a closer look at the concept of mining pools as well as their advantages and disadvantages.
What is a Mining Pool?
Each individual miner may not have the computing power required to successfully mine bitcoin. Hence, it is common for miners to form a group wherein they all merge their computing powers. This is done in order to ensure that their chances of submitting proof of work and earning rewards increase. Pool miners collaborate with each other in order to earn these rewards. Later, the rewards are split proportionately amongst the various contributors. In laymans terms, it can be considered to be a kind of mutual fund for cryptocurrencies. Instead of combining their funds, investors mine their computing powers in a bid to improve their return on investment.
Mining pools are really the only effective way for small investors to get in the game. Cryptocurrencies that use proof of work mechanisms favor miners with more computing power. Hence, retail investors have almost no chance of being successfully able to mine currency on their own. There are online calculators which show that if individual miners were to mine on their own without joining a pool, they would obtain their first reward many years later!
This is the reason why mining pools attract regular investors who do not have deep pockets or are not very tech-savvy.
How do Mining Pools Work?
Mining pools are an effective way of converting idle computing power into a productive force. The steps to joining a mining pool have been explained below:
How Rewards are Distributed Amongst Miners?
Different mining pools have different mechanisms which allow them to distribute rewards amongst various miners. Some of the commonly used distribution mechanisms have been explained below:
The bottom line is that the mining pool provides the retail investor with a mechanism to participate in the Bitcoin mining process and earn rewards. This is the reason why this mechanism has become extremely popular and has attracted a large number of investors.
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