What are bitcoin mining pools?

Bitcoin mining is competitive and the goal is that you want to solve or “find” a block before anyone else’s miner does. Then you will get the block reward and transaction fees from the block. During the last several years we have seen an incredible amount of hashrate coming online which made it harder to have enough hashrate personally (individually) to solve a block, thus getting the payout reward.

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To compensate for this pool mining was developed. What a mining pool does is accept connections from miners anywhere in the world (if applicable and some are private) and pool their hashrate together thus mining with a higher total hashrate. In doing this the variance or luck of finding a block is increased to the positive by having a larger total hashrate in trying to process a block the fastest. Here is the official wiki definition of pooled mining:

“Pooled mining is a mining approach where groups of individual miners contribute to the generation of a block, and then split the block reward according to the contributed processing power. Pooled mining effectively reduces the granularity of the block generation reward, spreading it out more smoothly over time among the group.”

There are several types of mining pool payout systems. You can choose which is best for you based on your own personal requirements. The different payout systems are summarized below. Choosing a Bitcoin mining pool is up to which pool you feel is the fairest and which can get you the highest amount of payouts for your investment. Most pools are provably fair and will pay out fairly based on their type of pool approach. Here are a couple of the wiki definitions of the different mining pool payout approaches to help you make an informed decision in choosing your mining pool.

Pay Per Share (PPS)

The Pay-per-Share (PPS) approach is to offer an instant flat payout for each share that is solved. The payout is offered from the pool's existing balance and can therefore be withdrawn immediately, without waiting for a block to be solved or confirmed. The possibility of cheating the miners by the pool operator and by timing attacks is thus completely eliminated. This method results in the least possible variance for miners while transferring all risk to the pool operator. The resulting possibility of loss for the server is offset by setting a payout lower than the full expected value.

Pay Per Last N Shares (PPLNS)

PPLNS has a higher payout. PPLNS will give you wide fluctuations in your 24 hour payout, but for hardcore miners, the law of large numbers states you will earn more this way. This is for people trying to mine as fast as possible. One thing to remember in choosing your pool is to keep in mind the global hashrate and if you can choose a pool that may not have the most hashrate. In doing this you strengthen smaller pools and spread the hashrate out to help mining decentralization. You also want to choose a mining pool with nodes the closest to where your miners are located. While most pools nodes are fine from all over the world it can help with lost shares and lower latency.