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“I placed an order for an [ASIC mining unit] and have been researching how to set it up so I’m ready when it gets here. I noticed a lot of people join bitcoin mining pools instead of simply mining on their own. If the number of hashes of my unit relative to the network define my payout probability, why pay the administrative cost of a pool?” – Jeremy H.
We regularly receive variations of the above inquiry about bitcoin mining pools and decided a detailed explanation was in order. The question is a valid one and does not necessarily have a correct answer, but there are considerations that should be taken into account by anyone making this decision.
This article is intended for those familiar with a basic understanding of bitcoin mining. If you’d like an overview of bitcoin mining, you can find one here.
Normalization of payouts
The primary difference between independent bitcoin mining and joining a mining pool is the payout schedule for work done. Mining pools work together to find blocks and pay out their earnings regularly based the contributed hashing power of each miner. Independent miners have to wait until they discover a block on their own, but they receive the full payout of that block.
For example, imagine you just purchased a 5 GH/s mining unit. At the time this article was written the total speed of the bitcoin network was 125 TH/s, meaning you control 0.004% of the total bitcoin network computing power. Said otherwise, you could be expected to find one in every 25,000 blocks if mining on your own. Assuming a block is discovered every 10 minutes as planned (though we know that’s not quite exact), statistically, you should expect to find a block once every 25 weeks. With current blocks paying 25 new BTC (plus transaction fees), you would average 1 BTC per week.
If instead you elect to join a mining pool, you would immediately begin to see income from your hashing output. Since the cumulative hashing power of the pool is far greater than any individual within it, the probability of the pool discovering a block is significantly higher. The proceeds of that discovery are then distributed to the pool’s participants based on their share of computational input.
Let’s revisit the example above that assumes you have a 5 GH/s mining unit – in this case you elect to use it towards a pool with 15 TH/s of combined power. Your pool has a combined 12% of the total network hashrate, meaning the pool would, on average, discover roughly one in every 8 blocks. Your contribution of 5 GH/s is equivalent to 0.033% of your pools power, meaning that if blocks pay out 25 BTC you would be owed a payout of 0.0083 BTC per block discovered. Assuming an average of 10 minutes between blocks, you would still average approximately 1 BTC per week, but paid out over regular intervals of smaller payments.
Time is not your friend
While the above illustration is a basic overview of the two primary mining options, there are still a number of other factors to consider, not the least of which is the incredible growth rate of the bitcoin network.
The hashrate of the bitcoin network has grown by 600% since the beginning of this year alone, meaning that the return from a piece of mining hardware decreases dramatically every day. As such, the benefit of receiving payment for output as soon as possible is crucial.
To put the importance of this into perspective, consider this: if we used the same example of a 5 GH/s mining unit on January 1 of this year, you would have expected to discover a block every 4 weeks, or a payout averaging approximately 6 BTC per week. Below is a graph of what the payout for a solo miner in this scenario would look like in 2013. Notice the distance between payouts roughly doubles every time as the network grows.
By joining a pool, you can partially mitigate the risk of your hardware becoming obsolete before you ever see a return due to network growth. The pool will begin paying you for your output from the first day you’re connect. As you can see from the graph below, the majority of the bitcoin mining network has elected to join pools.
Bitcoin mining pools have costs
Pools are run by administrators who handle the work of coordinating the often globally-dispersed miners and appropriately distributing earnings. For the service they provide, they will generally charge a fee.
Fees can vary based on the pool and the payout method used. There are various payout methods; the two most commonly used are the proportional method and the pay-per-share method.
With the proportional method, payouts are delivered as soon as a block is found, based on each miner’s contribution to the pool’s total hashing power. With this method there is still some variance for participants because, even with the cumulative hashing power of the pool, blocks will not be discovered at a perfectly consistent rate. Blocks that take longer for the pool to discover will result in a lower weekly payout for miners, and shorter blocks will result in a higher payout.Due to the variance risk being passed to the miners, fees for participation in these pools is generally lower than pay-per-share (around 3%).
With the pay-per-share method, miners earn shares as they mine and are paid small, fixed dividends on a regular schedule based on the number of shares they own. This provides an extremely reliable and steady payout by pushing the variance risk onto the administrators; even if the pool has an unlucky streak without discovering blocks for an extended period, the individual miners will still receive payouts. For taking on this risk, the fee is generally higher than with the proportional method (around 7-10%).
Pools have associated risks
Joining a mining pool means turning over your hashing power to the pool’s administrator. Though the use of a pool for anything other than bitcoin mining would likely be less profitable, this has occurred in the past. In early 2012, for example, the administrator of the Eligius pool used his control of mass hashing power to destroy a competing cryptocurrency with a 51% attack. While there is an argument that this was in the best interest of the pool’s contributors, it was certainly not within the known mandate when they signed on.
Pools can also become targets for attack. In the past, DDoS attacks have been waged against mining pools to reduce the hashing power of the network and increase the payout to other miners during that pool’s downtime. As part of an attacked pool, the value of your hashing power is negated for the duration of the attack’s effect.
Choosing a pool
When selecting a pool, there are four main considerations. The first is trust of the administrator. Satisfied participants and verifiable payout generally indicate a strong operator. The second consideration is the fee structure. You can find a more detailed dive into alternative fee structures here. The third major consideration is to choose a pool that hasn’t grown too large. As a point of citizenry within the bitcoin network, making sure no single administrator gains 51% of total hashing power will help preserve the value of bitcoin and, in turn, your investment in mining hardware. The final, is reliability and stability of the mining pool. The most reliable way to determine this is to test out different pools to see what percent of your shares are accepted.
Do you have a question about bitcoin you’d like answered? Email us at firstname.lastname@example.org.