Bitcoin : What is a mining pool and what is its role?

If you are a follower of our many guides already available and that you are a connoisseur and passionate about the evolution of the world of crypto-currencies, you know that everything changes quickly, very quickly. We were already talking about the mining in one of our articles, and we should now focus on mining pools.

Mining pool, quésaco?

To understand what a mining pool is, it is important to know the basics of how blockchain works. As a reminder, where the transactions of our current centralized system pass through from a single intermediary (most often, your banking organization) transactions on the blockchain are verified and validated in a decentralized, ie by all users of the network.

Miners are therefore ordinary individuals, or professionals, who make computer equipment available to the network (mining rigs). This hardware is optimized to provide computing power used in transaction validation. These rigs use either graphics cards (GPU) either processors (CPU) depending on the characteristics of the mined corner.

In exchange for the power allocated to the network, miners are rewarded with fragments of cryptocurrency for each block added to the blockchain.

The basic operation of a transaction on the blockchain

So what is the place of mining pools in all of this?

Well, it’s pretty easy to understand. Where a few years ago the difficulty present on the network was low enough to allow individual mining with reduced computing power, today it is unthinkable to mine alone with modest equipment. Indeed, the more the size of the network and its number of actors increase, the more power required to “create a block” is high.

Mining pools therefore allow the aggregation of the computing powers of several miners to facilitate the resolution of the mathematical puzzles necessary for the proper functioning of the algorithm. Proof of Work.

This particularity makes mining pools essential and essential for the proper functioning of the blockchain.

👉 To find out more: What is proof of work or proof-of-work (PoW)?

A quick point on the story

Imagine. We are in 2011, it is 9:00 p.m. and you have just received an email from a friend of yours who explains how to mine Bitcoin (BTC) by specifying that it is “the money of the future”.

Curious, you follow its directions and start mining with the modest CPU of your laptop. A few minutes later, you participate in the creation of a block and are rewarded with 50 BTC (a current value of $ 570,000 at the time of this writing). Today it may sound lunar, but back then it was the norm for everyone.

Quickly, a industrialization of the process has started and increasingly important investments have multiplied: mining rigs, mining farms, GPU mining… The machine was running.

To compensate for the growing power of GPUs, miners using CPUs began to have more and more difficulty finding blocks. It is this situation that created the breeding ground for the appearance of the first Bitcoin mining pool: Slushpool.

Since then, the entire architecture of the mining world has changed dramatically and the development of new pools and innovations in mining has greatly accelerated.

With the arrival of more efficient equipment (in particular ASICs) and the professionalization of the environment, it is now necessary to go through a mining pool to hope to bring down a block.

In concrete terms, how does that work ?

On a network that operates using the Proof of Work method, it is miners who do the double work of validating and securing transactions. The goal is to avoid as much as possible the risk of double spending (double spend), which consists of fraudulent manipulation of data.

We must not forget that the blockchain is based on a decentralized system, where the security of the system lies in the number of participants in the network. The more miners there are (who each hold different percentages of the total network power), the more reliable the information in the blocks is, as the chances of corruption or errors decrease.

The work of miners is therefore essential for the proper functioning of the blockchain, which is why they are paid in cryptocurrency for their work.

Behind the scenes of a mining pool

We’ve seen the theory, but what about the practice? In fact, what is the relationship between a minor and his pool? How are transactions carried out? Who wins what?

Let’s be imaginative once again. You have a mining rig and want to start mining on a pool. Take for example Cruxpool, a French mining pool.

You plug in your hardware and install mining software (we have already explored several on this site: Claymore, Phoenix Miner, Ethminer, etc.) which then connects to the pool server using a protocol named STRATUM.

The pool then recognizes the miner, assigns him an identifier and adapts the mining difficulty to users so that they can find shares granted to the computing power of their equipment, and therefore, participate in the creation of blocks and receive a reward. .

The exchange of information thus continues between the user and the pool, which provides “jobs” (the mathematical puzzles mentioned above) that the miner must process and solve. We call this process validation of shares.

Share management and remuneration

The validation of shares and the management of them differs depending on the protocols set up in the pool in question. In order to continue on our previous example, we will once again focus on the functioning of Cruxpool, mining pool PPS (Pay-Per-Share).

There are 3 scenarios. If the share is invalid, it is not paid. If the share is valid, but does not allow participation in the creation of the current block, it is all the same recorded to remunerate the minor.

Finally, if the share is valid and that it contains the correct solution required for the creation of a block, not only is the miner rewarded, but the share is also submitted to a blockchain node for integration.

As you have understood, mining pools play a role of conductor between miners and the blockchain. The information that passes between all the players must be fluid, precise and clear. For its part, the pool must constantly ensure that the jobs sent to the miners comply with the nodes of the blockchain. It must therefore study the information of the current block and the transactions to be included in it. Then, as explained above, it transfers these jobs to the miners through the STRATUM protocol.

Once the job is done, the miners send their shares to the pool which then takes care of gathering the information related to the transactions and transmitting them to the rest of the network. If all goes well and the data is correct, a new block is approved.

Finally, as mentioned above, comes the long-awaited moment for rewards: minors are paid according to the shares submitted to the pool. Keep in mind that everyone has a different redistribution policy and this step may vary from pool to pool! (PPS, PPLNS, etc.)

Interactions in a blockchain

Interactions between the mining pool, a miner and the blockchain

The paradox of “decentralized centralization”

Originally, members of the cypherpunk movement saw blockchain as a way to create a decentralized environment that would counterbalance the centralization of our current banking and federal agencies. This vision, evoked by Satoshi Nakamoto, the creator of Bitcoin, aimed to strengthen security and trust in the network by a multitude of small players, who therefore have reduced power.

Blockchain does not belong to anyone, and it is this particularity that gives it its unique characteristics.

However, with the arrival of mining pools, computing powers began to aggregate around much smaller players. This is what we call in the jargon “the attack of the 51%”. Simply, if the same actor holds 51% (or more) of the computing power present on the network, he then has the ability to falsify, corrupt or from modify at will the information on the blockchain, and consequently those which are registered in the blocks. The risk of fraud then becomes enormous.

In recent weeks, the ETC blockchain has also been the victim of two 51% attacks, causing its reorganization on two occasions and reminding everyone of the limits of the Proof of Work.

But the blockchain never stops. New protocols and ideas appear every day. We have only mentioned here the “Proof Of Work” method, which depends on the activity of miners and mining pools to function. But with the arrival of projects like Ethereum 2.0, some currencies will allow the algorithm of ” Proof Of Stake », Which consists of an accumulation of tokens rather than an active participation in the network. In these new ecosystems, the 51% attack is no longer possible.

👉 To go further: What is proof of stake or proof of stake (PoS)?

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About the Author : Eric Geoffroy

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I work for Cruxpool, a French startup specializing in mining solutions. I am in charge of managing the multiple aspects of communication, in order to stimulate the growth of the company.
All articles by Eric Geoffroy.