Large cryptocurrency mining pools exist so that people who do not have the financial and computational resources to mine competitively can pool their resources and increase their chances of being awarded a coin. While it is possible to mine solo, it is very rare to win any rewards on your own. Joining a mining pool increases your chances of being rewarded.
Whether large mining pools are bad for cryptocurrencies or not depends on your point of view. Learn what effects large mining pools have on cryptocurrencies and what it might mean for their future.
Key Takeaways
- Cryptocurrency mining has become dominated by huge mining equipment farms, which is bad for smaller cryptocurrency supporters.
- You might view mining pools as a good thing for cryptocurrency if you're a small miner.
- Pools and large farms might also be considered good for cryptocurrency because they have inspired further innovation.
- Other consensus mechanisms are being evaluated and researched to try and reduce centralization, market cornering, and bring cryptocurrency back into its original premise of equality and decentralization.
Why Were Mining Pools Formed?
A central tenet behind cryptocurrency is financial decentralization. Anyone with a computer and an internet connection is theoretically free to mine cryptocurrency in exchange for supporting the network, at least in proof-of-work blockchains like Bitcoin.
However, as the popularity and rewards for Bitcoin have grown tremendously, control has shifted towards entities with more funding and computational power. Cryptocurrencies that depend upon proof-of-work validation are mostly mined at large-scale cryptocurrency mining operations. These are centers designed to eliminate competition and corner the mining market.
To gain access to cryptocurrencies, small-scale miners are forced to join mining pools created by these large mining firms, which increases centralization further. Thus, mining pools have both advantages and disadvantages, depending on what you're trying to accomplish and your preferences.
Pros and Cons of Mining Pools
Pros
Faster Processing
Increased chance of rewards
Costs
Cons
Centralization and Control
Profit-Sharing and Fees
Increased Energy Use
Pros of Mining Pools
- Faster Processing: In Bitcoin mining, each miner competes with the rest of the network to add to the overall blockchain and create coins as rewards. Multiple miners in the same network can speed up the discovery process by reducing latency or delays and speeding up the computations.
- Increased chance of rewards: Large numbers of mining systems within the same network also increase the chances that the pool and its miners will solve the block hash and receive the reward.
- Costs: A benefit for small miners is that they do not need to invest in expensive mining equipment to contribute to a mining pool. Dedicated mining machines cost thousands of dollars and consume hundreds of dollars of electricity per year.
Cons of Mining Pools
- Centralization and Control: As discussed previously, mining pools and farms bring cryptocurrency into a centralized validation and creation process. Control then becomes an issue because mining farms essentially control the rewards.
- Profit-Sharing and Fees: One of the main disadvantages of joining a mining pool is that you'll need to pay recurring fees and split any cryptocurrency that is successfully mined with the rest of the pool. Fees are usually paid through your share of the cryptocurrency that is awarded to the group.
- Increased Energy Use: Utility costs, including electricity, represent 75% of the operational costs of these large mining operations. While the price of electricity depends on the country, the global average price paid by miners is estimated at $0.046 per kWh.
How Do Large Mining Pools Affect Cryptocurrency?
Cryptocurrency mining has transitioned from an operation distributed over individual computers to centralized mining pools involving big investments. Mining pools are not inherently bad for cryptocurrency, but they have become a concern because of the amount of energy used and the control and influence exerted by small groups of well-funded people.
Other consensus mechanisms are being used, such as proof-of-elapsed-time, proof-of-claim, proof-of-history, and proof-of-activity.
High energy use has given rise to further research into consensus mechanisms. Ethereum, for example, transitioned from proof-of-work to proof-of-stake in September 2022. In brief, staking is holding cryptocurrency so that it can be used as collateral to keep blockchain validators honest. This transition removed Ethereum from mining pools because proof-of-stake consensus does not use mining.
Cryptocurrency is continuously evolving. It is certainly being affected and influenced by large mining pools. But are mining pools good or bad? In the end, it depends on your beliefs about cryptocurrency, its effect on the environment, and what you want from it.
What Pool Is Best for Mining?
As of October 2022, AntPool is the largest pool by hashrate, followed by F2Pool and ViaBTC. Several exchanges also have pools, so there are several options for miners. Before choosing a pool, look at the fees and reward systems and compare them to find the one you're happy with.
Are Mining Pools Worth It?
Mining pools are good for those who don't have enough capital to invest in machines specifically built for mining or who aren't trying to earn lots of money. Pools have more computing power, so they tend to dominate mining and distribute rewards.
How Much Do Mining Pools Cost?
Each pool charges different fees and has various payout schemes. For instance, F2Pool has a pool fee of 2.5% of rewards for BTC, 3% for BCH, and 4% for LTC; other coins have lower or higher pool fees. F2Pool uses the pay-per-share payout scheme for most cryptocurrencies but implements other payout schemes on a few coins, such as pay-per-last-n-shares (PPLNS) and pay-per-share+ (PPS+).
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making financial decisions. Investopedia makes no representations or warranties regarding the accuracy or timeliness of the information contained herein.
