What is a Bitcoin Mining Pool? Why did the miner go to the pool party? | Billy Boone | Coins | February 2024

This is because solo mining is overheated.

Bitcoin mining is a network. This is a computer distribution company.

The main task of this computer is to add transactions to the digital ledger in the form of blocks (transaction data).

In order for a miner to “earn” the privilege of adding a block, he or she must find a mathematical “needle in a haystack.”. This process involves using the SHA-256 hashing algorithm, a method that generates a unique, fixed-size string of letters and numbers from all input data.

SHA-256 is used in a variety of security applications beyond Bitcoin, including banking, government, and commerce, to ensure data integrity.

In the context of Bitcoin, this means taking information from Bitcoin transactions and previous blocks and then converting it into a compact, unique hash (guess).

To “win” and add a block to the chain, miners must find a hash that is smaller than a certain target value defined by the network. This target is adjusted over time to maintain an average block time of 10 minutes, regardless of how much computing power is used for mining. Without getting too technical, it’s basically a computer that searches for numbers below a set threshold.

Think of mining as guessing combinations of locks where you don’t know the numbers or the length of the combination. Each guess is made by generating a guess using SHA-256, and it continues guessing as fast as it can until it finds the right combination to open the lock. This “lock” is a mathematical problem that Bitcoin miners solve, and finding a solution proves they have done their work to secure the network and earns them new Bitcoins as a reward.

The incentives for miners to do all this are a block subsidy (currently 6.25 btc) and a tip provided on each transaction (TX fee).

When miners are ready to perform hashing operations, they have two options:

• hosting tasks
• solo operation

Hosted jobs are the most common as they allow each miner to remain competitive and increase their chances of profitable hashing.

Teamwork makes dream work happen, and that’s the approach our hosting operation takes.

The miners’ hashrate (guess/sec) teams up or “pulls” together and wins as a team.

Pool managers give each miner a different task assignment to jointly find a winning guess and be rewarded with a block subsidy.

When a single pool miner acquires a block, the reward is distributed according to the hash rate they contributed. This means that if miner A consumes more hash than miner B, miner A gets paid more.

This is great for staying competitive as a freelance miner because each member of the pool receives more consistent and frequent rewards than if they were mining alone.

This is where block templates come in. A block template is essentially a data package that contains the information needed for block mining.

This data includes references to previous blocks, a list of pending transactions that have not yet been added to the blockchain, and the difficulty goal required for the new block. Miners use this template to create new blocks by guessing a valid hash that meets the difficulty criteria.

The potential problem here is that the pool manager is free to call transactions included in the template.

They may prioritize transactions with higher fees or exercise a form of censorship by excluding certain transactions.

“When it comes to censorship, it’s no longer a matter of real resistance, but if the pool just chooses to censor, there are 11 entities that decide which transactions go in or stay in almost every block, and there are simply the two largest entities. If you’re 100% successful, you can impose censorship on everyone else. This is a current reality, not a future risk, and is unsustainable if Bitcoin remains a permissionless currency.” — Luke Dashjour

ocean Mining pools are working to solve this problem by providing full visibility into block templates, creation payouts, miner statistics, etc., allowing miners to know exactly which transactions are contributing to the hash.

Now back to solo miner.

Lone miners are often called “lottery miners” because they are a one-man show hoping for a piece of the pie.

A lone miner might be lucky enough to clear a few blocks a year, but considering they’re chipping away at their power bills 24/7, that’s a very slim payment schedule.

This doesn’t mean you can’t team up a few lone miners to build a pool of aggregate computing resources, but it does assume you have the space, access to sustainable energy, physical security, on-site maintenance, etc.

For most Bitcoin users, it makes more sense to outsource all of these maintenance and operational requirements to a hosting site, unless you are doing it for education rather than profit. Because $0.15/kWh residential electricity won’t get you very far.