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Bitcoin mining pools are created due to the increasing difficulty involved in solving and generating new blocks in a blockchain.
Since it could take several months and sometimes even years for slower miners to solve a single block, miners began to pool their resources together in order to more quickly solve each block.
By so doing, the processing power is shared among all miners in the pool, and the rewards for solving a block are shared as well. Each time a miner in the pool presents proof of partially solving a block, that miner receives what is termed a “share” which is used to determine the amount of the reward that will be received by that miner.
How Miners are Rewarded
Bitcoin miners may be rewarded in several different ways for their contribution to solving each block in a blockchain. One method in which a miner can earn rewards is on a per share basis. In such cases, the miner is rewarded immediately for his contribution to solving the block. The cost of each share is equal to the expected value of each hash attempt.
The formula for calculating each miner’s reward is as follows:
R = B (n/N) where R stands for reward, B is equal to the block reward minus the pool fee, n represents the number of shares owned by the miner, and N is the total amount of shares in a particular mining round. In this case, the miner’s reward is proportional to the number of shares owned in each mining round.
With Bitcoin Pooled Mining (BPM), newer shares are given more weight than older shares. Rewards are issued as soon as each block is solved. This helps to prevent pool switching during rounds which minimizes each miner’s ability to gain an unfair advantage over other miners in the pool.
Instead of being rewarded per share, a miner may be rewarded based on only the last n shares in a round. In this case, the shorter the round, the greater are the expected profits.
Miners may be rewarded through a geometric or double geometric method. With the geometric method, it is similar to the proportional method, but there are no advantages based on how early or how late the miner enters the round. With the double geometric method of reward, a new parameter, o, or the cross-round leakage is introduced. Of o is equal to zero, it becomes the geometric method.
Multipool Mining
In multipool mining, the miner switches among different altcoins in order to mine the most profitable cryptocurrency at a particular point in time. In these cases, the network’s mining power, and the exchange rate between altcoins is of much importance. Bitcoins are normally used as the accepted mainstream coin for payouts in order to prevent the need for using several different coin wallets within the mining pool. However, what may end up happening, is that the miner may receive more coins in the intended currency than if he were to mine a single cryptocurrency.
