In the early days of Bitcoin, anyone with a personal computer could mine coins and receive rewards. Nowadays, however, network difficulty has surged, making solo mining practically impossible for individuals. This is why the concept of a mining pool arose - a collaborative mining model where miners share computational power and rewards.

What is a mining pool?

A mining pool is a cooperative arrangement where miners combine their computing power (hash rate) to solve blocks on a blockchain and then share the rewards. Instead of competing alone against the entire network, miners work together to increase their chance of generating a block reward.

How does a mining pool operate?

The main process is as follows:

A miner connects their hardware (GPU or ASIC) to the mining pool’s server.
The pool distributes segments of the mining problem to each participating node.
When a member solves a block, the reward is distributed among all participants proportionally to their contributed hash rate.

Common reward-sharing mechanisms:

Here are descriptions of typical methods:

PPS (Pay Per Share): A miner receives payment based on the number of valid shares submitted, regardless of whether the pool finds a block or not.
PPLNS (Pay Per Last N Shares): Rewards are distributed only when the pool mines a block and according to shares submitted during the last N shares prior to block discovery.
FPPS (Full Pay Per Share): Similar to PPS, but includes transaction fees in the calculation.
Solo Pool: A single individual runs the pool; if they mine a block, they receive the entire reward - but with much higher risk.

Advantages of mining pools:

Increased likelihood of earning rewards compared to solo mining.
More stable income and less variance for participants.
Easier access for newcomers who lack large-scale infrastructure.

Disadvantages and risks:

Hash rate centralisation: If one pool controls over 51 % of the network’s hash rate, it may execute a 51 % attack.
Service fees: Most pools charge a fee, typically between 1 % and 3 % of the reward.
Dependence: Miners rely on the pool operator for fair distribution and transparency.

Role of mining pools in blockchain ecosystems:

They help maintain network security and stability in Proof-of-Work (PoW) blockchains like Bitcoin and Litecoin.
They help professionalise mining operations, leading to large mining farms and data centres.
They enable broader participation from smaller miners by lowering entry barriers.

Conclusion:

Mining pools form a vital part of modern blockchain mining. Through collective computing power and shared rewards, they support the sustainability and security of PoW networks. Without mining pools, many individual miners would have been unable to participate meaningfully and the decentralised ethos of blockchain could have been compromised.