Mining is still one of the best ways to get your hands on Bitcoin if you don't want to buy it. But today, the mining space is incredibly competitive. If you want to earn during the process, you must invest a substantial sum in high-quality gear.
Fortunately, mining pools offer a possible solution. By gathering miners together, mining pools provide a low-cost way to break into the market.
What Are Mining Pools?
Bitcoin mining pools are networks of Bitcoin miners who operate across a distributed network and cooperate to mine together. They combine computing power to make mining more effective for each member. When the pool mines a block, each member gets a fraction of the rewards based on their pool contribution.
Mining pools allow miners to collect revenues, the only obligation being to pay the pool operators. Pool contribution is measured in "hash rate" - the number of "hashes" (attempts to mine a block) the pool performs per second.
Whenever a miner in a pool finds a block, they pay the rewards to the coordinator of the mining pool. The coordinator takes a small fee, then pays each pool member based on their contribution to the total hash rate.
Economies of Scale, Saving Costs
As an industry, the mining space offers several impressive economies of scale. But, these only apply to large mining companies and outfits that have the leverage to negotiate.
One of the most significant economies of scale concerns revenue consistency. Larger mining outfits have more revenue streams, decreasing risk over time. Bitcoin miners produce massive amounts of heat, so need effective cooling systems to ensure longevity and efficiency. Regarding things like cooling and operating costs, larger mining outfits enjoy better economies of scale.
There is also rent. Large mining companies rent huge spaces - like shipping containers or warehouses - to host their miners. They can cut costs by negotiating to purchase electricity from utility companies.
Unfortunately, individual miners don't have this same level of negotiation leverage. But mining pools allow miners to combine computing power and resources, allowing miners to grow large enough to afford more extensive operations, negotiate with utility companies, and keep costs low.
What are the Benefits of Mining Pools?
The primary benefit of mining pools is lower costs and the power to mine with what you have. Starting an individual mining project can cost upwards of $10,000 - for mining gear, space, utilities, cooling, gear maintenance, etc. Mining pools cut all of this.
With a mining pool, you simply contribute your fair share of resources and pay a fee. When the pool mines Bitcoin, you collect your revenues.
Mining pools also benefit the Bitcoin network by reducing centralization. Today, several entities with substantial resources control massive aspects of the Bitcoin network. As these entities grow, the Bitcoin network could become more centralized.
However, many mining pools are made up of decentralized miners, helping boost Bitcoin network security and decentralization.
In addition, mining pools compete for customers. So, if a mining pool starts to misbehave (charging high fees or censoring transactions), members can easily leave and join another pool.
Are There Disadvantages of Mining Pools
The primary disadvantage of mining pools is that members must still rely on an organization to earn money. To be able to run effectively, mining pools have to charge fees. And mining pools can suddenly decide to raise your fees. But again, it's easy to go and join a different mining pool.
Also, mining pool members need to watch out for scams. We've heard stories of some fraudulent mining pools. Stay vigilant. Do your research on your mining pool and its terms before joining.