The news has been filled with headlines regarding cryptocurrency mining facilities taking over dilapidated warehouses. There have also been many reports of mining hardware being seized at borders and being stolen from mining facilities.
With the significant costs involved with starting your own mining setup and the inherent risks is it worth it? When compared to the standard returns in financial markets cryptocurrency mining is 100 percent worth it if the risks can be balanced or stomached.
How are Cryptocurrencies Created
Cryptocurrencies can be created in two ways.
They can be pre-mined, which occurs when the developers and founders have generated all the coins at the beginning of the project. Following the creation of the tokens, they are distributed to the population via an airdrop or token sale.
An example of a pre-mined token would be Ripple (XRP). All the XRP tokens were pre-mined in advance to be sold on the open market, to banks, financial institutions and many others to aid in the seamless transfer of funds across the world on the blockchain. If a crypto is pre-mined, there will be a set number of total coins in existence from the beginning of the project. The alternative to pre-mined coins is a cryptocurrency that requires mining.
This is not the standard type of mining you think of with huge tractors pulling tons of boulders up the side of a rickety cliff. This mining involves highly advanced computer systems using ASICs and GPUs to create new coins. The processing power of these expensive computers is diverted to solving highly advanced math problems while simultaneously ensuring the blockchain remains intact. When the ASICs and GPUs have been functioning for a long enough period, they are rewarded in cryptocurrency for their solving mathematical problems and supporting the blockchain. Mined currencies have an inherent value attached to the value of electricity and computing power that goes into each generated coin. Pre-mined currencies are more reliant on the utility of the coin and what its underlying purpose is.
Similarly, to pre-mined currencies, there will also be a preset “total” number of coins to be released, but the main difference between the two groups is that pre-mined currencies released them all at once. Mined cryptos are released as they are mined. Bitcoin is the most famous mined crypto with 16.8 million having been mined thus far. The total supply is 21 million. Therefore, there will only be 4.2 million more BTCs ever mined. As the process of mining moves further along it becomes more difficult to discover each additional BTC creating a world of both scarcity and deflation. The normal purchasing power of fiat currencies is driven down over time (inflation), with no pegged value to gold/silver and continuous printing while the structure of mined currencies ensure the price continues to be driven up.
How Does the Mining Process Work?
There are two main functions that occur in cryptocurrency mining. The first function is releasing the newly mined cryptocurrency into the blockchain; the second function is verifying the transaction on the public ledger. To accomplish these tasks, the mining hardware must remain connected to the internet. The computer systems running the mining hardware are usually specialized specifically for this task running unique software specializing in controlling the mining process. When BTC’s blockchain was young, standard computers were efficient enough to help support the blockchain and even earn BTC, however, in the last few years, the level of processing power has increased exponentially making most regular computers obsolete for the mining process.
Cryptocurrency mining is a processor intensive process of solving computations and puzzle-like equations while consuming excessive amounts of electricity. This is one of the reasons “green” mining has become such a hot topic. The miner who first solves the puzzle gets to place the “next block” on the blockchain and claim the associated reward. Rewards range from the miner being able to receive fees from transactions to receiving a piece of the newly released BTC. This is somewhat of a race between miners to solve the puzzle first. The race is won by having the most processing power. This is where mining pools come in!
The process to mine new cryptocurrencies is configured so that the more processing power one has, the higher likelihood they will be rewarded for mining. As more miners join a network it is less likely an individual’s mining setup will yield them any returns. This is because their computer is being “out processed” by others trying to solve the equation and the first to solve it is the one rewarded. This results in mining pools, literally pooling processing power, and when rewards are attained being split among all the pool members.
Miners Swim Together in a Pool (Not Seriously, Do NOT Get Them Wet!)
Well, the miners are not actually swimming in a real pool otherwise you’d have destroyed thousands in expensive processing equipment. To increase each individual’s likelihood of attaining regular payouts a “mining pool” is established. A mining pool is a group of miners that’s processing power is linked together substantially increasing their chances of finding a block and receiving a reward. The combined processing power benefits all individuals of the pool by increasing the frequency of receiving a fiscal reward for mining. The same can be said if an individual purchases 100 mining devices instead of five. The 100 mining devices have a much higher chance of attaining a block reward than the five.
A great analogy to consider would be actual mining. A diamond miner can only sift through 20 square meters of river bed on a daily basis. If the Diamond miner had 200 square meters to sift through it would take him ten days to accomplish this task. If ten miners were working this task would be able to be performed in one day. If there was only one diamond in the entire 200 square meters, it would be found on day one and could be split among all the diamond miners. Instead of the original diamond miner spending ten days to find that one diamond, that someone else may have discovered first. Pooling resources benefit the entire mining pool.
How Does the Mining Pool Work?
A mining pool, in essence, is a coordinator of all the members of the pool. The pools primary functions are to manage member’s hash rates, search for rewards through pooled processing efforts, record work performed by each contributing member, and assign specific reward percentages based on the proportion contributed by each miner in the pool. To manage such a significant process, it is not uncommon for the pool to charge a small fee from each member miner deducted from their regular crypto payouts.
There are two main ways pools function. The first is where work is assigned to each miner comprising of a particular range of nonce (the number of blockchain miners are computing for). Upon completion of this block and confirmation, the pool is reassigned to work on a new range of nonce. This keeps the process fluid giving the most power of decision to those running the mining pool.
The alternative is allowing each miner to pick at their own discretion how much work they wish to contribute and to which block reward. This guarantees that no two members take the same range but also has its consequences of taking longer to receive rewards. Two diamond miners inspecting the same piece of land can do it twice as quickly as one. This is the less efficient way to pool mine but provides more choice to the individual miner.
Regardless of how the pool is set up, it is essential to determine how the rewards will be shared.
Mining Pool Reward Sharing
Pool sharing is a fairly sophisticated process but can be explained so most can understand it. When a block hash leads to a reward, the reward is shared among the miners that solved the block. The percentage is determined by how much processing power each of the miners put forth. The miners are then provided a “share” of the reward based on their percentage of the actual work completed.
There are two kinds of shares, accepted and rejected. Mining has some inherent risks, there is no guarantee it will pay out daily, and in some instances, you may miss a reward block entirely. Accepted shares indicate that processing work was completed by a pool member and that member is rewarded their percentage share. Rejected shares represent work that did take processing power and electricity to perform, but did not lead to a blockchain discovery. Rejected shares are not rewarded even though they used electricity and processing power for extended periods of time.
The goal of every miner is to have all their shares accepted by the mining pool so they can receive the highest rewards. Rejected shares, unfortunately, are an inevitable aspect of mining as there is no way to determine which specific computations on a computer will lead to a new coin discovery, or that they will be submitted to the blockchain on time. A delay in submission or not finding a reward block leads to a rejected share for the miner.
Types of Reward Payouts
Pool members are only paid for their accepted shares that helped find a new coin block. A share, accepted or rejected, has no actual value. The purpose is, so the pool has a method to ensure distribution of the rewards is fair. When a share is considered accepted members receive rewards under a few different structures:
- Proportional (PROP): At the conclusion of a mining period, a reward proportional to the member’s shares is provided.
- Pay-Per Share (PPS): Provides instant payout when accepted shares are accepted. This also allows instant withdrawal of one’s balance from the pool’s existing balance.
- Shared Maximum Pay Per Share (SMPPS): Identical to PPS except payouts are limited to the maximum crypto the pool has earned.
- Equalized Share Maximum Pay Per Share (ESMPPS): Similar to SMPPS but distributes payments equally among all miners in the Bitcoin mining pool.
One of the most important aspects to consider prior to joining a pool is which reward system you prefer, and an in-depth analysis of the mining pools fees (and what the pool provides for this fee).
Conclusion: Mining Pools Are Profitable and Better Than Lonely Mining
Mining pools have been very profitable for years. It is challenging to discover block rewards using your miners without being connected to a pool. Therefore, pooled mining has increased in popularity significantly in the last few years. The return of owning actual cryptocurrencies and holding them has outpaced the returns of mining pools, but by owning the digital currency, your portfolio is susceptible to significant swings as the market fluctuates. By owning miners, you ensure yourself a safer long-term (one to two years) investment in the crypto space while also providing the backbone for one of the cryptocurrencies you are supporting.
Mining pools are not only a great idea to be a part of, but they help alleviate the stress associated with the major fluctuations that can take place on a daily basis on the crypto space. By joining a mining pool, the individual greatly increases their chances of discovering block rewards and making mining a profitable venture. Look for mining to continue to become more popular as more energy efficient ways to create cryptocurrencies are developed.
To read the King’s prior articles, to find out which ICOs he currently recommends, or to get in contact directly with the King, you can on Twitter (@JbtheCryptoKing) or Reddit (ICO updates and Daily Reports).