What are Mining Pools?

Mining pools are simply a means for miners to combine their resources and share the rewards of mining, so that they can be guaranteed to earn at least some bitcoins rather than take their chances mining alone. There are many different pools available, and they each offer different advantages and terms for joining.

Bitcoin block rewards

The bitcoin network represents a huge amount of hashing power. With bitcoin difficulty passing 1,000,000,000 at the end of 2013 and 5,000,000,000 by the end of March 2014, miners need ever-faster rigs to compete for a limited share of coins. At the present rate, 25 bitcoins are released every 10 minutes, on average.

However, bitcoins are not evenly shared amongst the network. Every time a block is awarded, it is given to just one miner: the one who finds the hash that is used to verify that block. This all-or-nothing approach means that powerful miners have a better chance of gaining some rewards, whereas miners with lower-powered rigs stand practically no chance of ever receiving any bitcoins. This essentially means that a miner going it alone will be extremely lucky to see any return on their investment.

Pooling resources

The answer to this problem has been the development of mining pools. These allow miners to join together and form associations that can bring enormous collective hashing power to the network. Instead of being awarded to a single miner, any bitcoins received go to the pool. They are then shared amongst its members on a proportional basis, depending on how much hashing power each miner contributes. Lower-powered miners will receive less coins that those who contribute more hashing power. However, the benefit is clear: everyone will receivesomething.

Fees

There are many pools available, and each will have different terms. You should research these carefully as some may be more or less suitable for you. You can find a comprehensive list of pools here. As a broad rule, the amounts these pools pay out is roughly equal; however, there are slight differences and certain models appear to offer advantages at different stages of mining over the months. Others are better suited to newcomers.

Hashrates

The hashrate of a pool is the total amount of hashing power it brings to the network. This is not particularly important in itself, since the rewards you receive will be proportionate to the hashing power you bring, rather than the full pool. When it does become an issue is if a single pool collects enough miners that it represents more than 50 percent of the total mining power in the network. At this point there is a theoretical security issue, since that pool ‘decides’ what the official blockchain looks like. When this has come close to happening in the past, miners have left for other pools to prevent the potential for this to vulnerability to cause an issue.

Merged mining

Some pools allow mining on more than one blockchain using the same hashing. This only works on bitcoin derivatives which use SHA-256 (not on Litecoin and other Scrypt-based cryptocurrencies). It is a way of increasing your potential earnings.

Finally, you should check the reputation and track record of any mining pool you consider joining. Some pools have been subject to hacks and security issues.

Comparison of mining pools

What is Bitcoin Mining? (With 2 Other Sources)

Mining is the process of adding transaction records to Bitcoin's public ledger of past transactions. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.

Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.

Difficulty

The Computationally-Difficult Problem

Mining a block is difficult because the SHA-256 hash of a block's header must be lower than or equal to the target in order for the block to be accepted by the network. This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.

The Difficulty Metric

The difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes. As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.

Reward

When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.

Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.

The mining ecosystem

Hardware

FPGA Module

Users have used various types of hardware over time to mine blocks. Hardware specifications and performance statistics are detailed on the Mining Hardware Comparison page.

CPU Mining

Early Bitcoin client versions allowed users to use their CPUs to mine. The advent of GPU mining made CPU mining financially unwise as the hashrate of the network grew to such a degree that the amount of bitcoins produced by CPU mining became lower than the cost of power to operate a CPU. The option was therefore removed from the core Bitcoin client's user interface.

GPU Mining

GPU Mining is drastically faster and more efficient than CPU mining. See the main article: Why a GPU mines faster than a CPU. A variety of popular mining rigs have been documented.

FPGA Mining

FPGA mining is a very efficient and fast way to mine, comparable to GPU mining and drastically outperforming CPU mining. FPGAs typically consume very small amounts of power with relatively high hash ratings, making them more viable and efficient than GPU mining. See Mining Hardware Comparison for FPGA hardware specifications and statistics.

ASIC Mining

An application-specific integrated circuit, or ASIC, is a microchip designed and manufactured for a very specific purpose. ASICs designed for Bitcoin mining were first released in 2013. For the amount of power they consume, they are vastly faster than all previous technologies and already has made GPU mining financially unwise in some countries and setups.

Mining services (Cloud mining)

Mining contractors provide mining services with performance specified by contract. They may, for example, rent out a specific level of mining capacity for a set price for a specific duration. Hosted mining services and Cloud Mining create systemic risk for Bitcoin because they undermine the security assumption that the control of mining power is well-distributed. If too much hashrate is consolidated in large hosting centres, an attacker is more-easily able to compromise a significant portion of it and could potentially disrupt Bitcoin or steal back their own spent money.

Pools

As more and more miners competed for the limited supply of blocks, individuals found that they were working for months without finding a block and receiving reward for their mining efforts. This made mining something of a gamble. To address the variance in their income miners started organizing themselves into pools so that they could share rewards more evenly. See Pooled mining and Comparison of mining pools.

History

Bitcoin's public ledger (the 'block chain') was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator.

Source 1 (Bitcoinminer.net)

Source 2 (whatis.techtarget.com)