In today’s intensely competitive mining landscape, independent small-scale miners—also known as solo miners—have virtually no realistic chance of success. The probability of finding a block and earning enough to cover electricity and hardware costs is extremely low, making solo mining little different from buying a lottery ticket. Even the most powerful consumer-grade ASIC miners cannot compete with large commercial mining farms that operate tens of thousands of chips in massive server facilities located near low-cost energy sources such as hydroelectric plants.
As a result, miners increasingly cooperate by joining mining pools. In a mining pool, the computing power of thousands of participants is combined, and the rewards are shared among them. By participating in a pool, miners earn only a portion of the total reward, but they usually receive payouts on a regular—often daily—basis, which significantly reduces uncertainty.
Consider a specific example. Suppose a miner buys a machine capable of producing 6,000 GH/s of hashing power, or 6 TH/s. In August 2014, such a device might cost around $10,000. It runs at 3 kilowatts (kW), uses 72 kilowatt-hours of electricity per day, and costs roughly $7 to $8 per day in electricity. At the Bitcoin network difficulty of that time, this miner could expect to find a block through solo mining only once every 155 days, or about every five months on average. If the miner does succeed during that period, the reward would be 25 bitcoins. At a bitcoin price of about $600, that reward would be worth $15,000. This would cover the cost of the hardware and electricity over the period and leave a net profit of around $3,000.
However, whether the miner actually finds a block within those five months depends largely on luck. The miner might find two blocks and earn a substantial profit, or might go ten months without finding any block at all and suffer a financial loss. To make matters worse, Bitcoin’s proof-of-work difficulty may increase significantly during that time. Given the rapid pace of improvement in mining hardware, a miner may have no more than six months to recover the investment before the equipment is overtaken by a newer, more efficient generation of machines.
If that same miner joins a mining pool instead of waiting for a possible large payout once every five months, the miner might earn around $500 to $700 per week. This steady income helps spread out the cost of electricity and hardware over time, reducing the need to take on major financial risk. After seven to nine months, the hardware may still become obsolete and the overall risk may remain high, but at least the income during that period is more regular and predictable.
Mining pools coordinate the efforts of hundreds or even thousands of miners through a dedicated mining protocol. After registering an account with the pool, each miner configures their mining machine to connect to the pool server. While mining, the device remains connected to the server and synchronizes its work with that of other participants. In this way, miners in the pool divide the mining work among themselves and later share the rewards.
When a block is successfully mined, the block reward is paid to the pool’s bitcoin address rather than to an individual miner. Once a miner’s accumulated reward reaches a specified threshold, the pool server sends a payout to that miner’s bitcoin address at regular intervals. In most cases, the pool operator charges a percentage fee for providing this service.
Miners in a pool share the work of searching for candidate blocks and receive “shares” based on the amount of work they contribute. To calculate these shares, mining pools set a much lower difficulty target than the actual Bitcoin network difficulty—typically more than 1,000 times easier. When someone in the pool eventually finds a valid block, the pool receives the reward and distributes it among all participating miners in proportion to the number of shares they submitted.
Mining pools are open to all miners, whether large or small, professional or amateur. Some participants may operate only a single small mining device, while others may run a garage full of advanced hardware. Some may consume only a few dozen kilowatts of electricity, while others may use entire data centers drawing megawatts of power. The challenge, then, is how to measure each miner’s contribution fairly while also preventing cheating.
The solution is to use Bitcoin’s proof-of-work algorithm itself, but with a lower difficulty threshold. This allows the pool to measure each miner’s contribution in a fair and verifiable way. Even the smallest miner in the pool can regularly earn some shares, which provides enough incentive to participate. By lowering the difficulty required to earn a share, the pool can estimate how much work each miner is performing. Whenever a miner finds a block header hash below the pool’s target difficulty, that result proves the miner has completed a measurable amount of computational work.
More importantly, this work performed to earn shares provides a statistically meaningful way to estimate progress toward finding a valid Bitcoin block for the network as a whole. Thousands of miners, each searching through smaller ranges of hash values, can collectively produce a result that satisfies the full Bitcoin network difficulty target.
To use a dice-game analogy, imagine that the goal of the overall game is to roll a number lower than 4. That represents the full network difficulty. A mining pool can create an easier intermediate target by counting every roll lower than 8. Rolls lower than 8 do not win the game, but they do count as shares. Because this easier target is met more often, players earn shares regularly even though they rarely achieve the harder target required to win the game itself.
Occasionally, someone in the pool will roll lower than 4, and then the pool wins. The reward can then be distributed according to the number of shares each participant earned. Although rolling lower than 8 does not by itself win the game, it provides a fair way to measure each player’s contribution and will sometimes also produce a winning result.
In the same way, a mining pool sets its internal difficulty so that an individual miner can find a block header hash meeting the pool’s target frequently enough to earn shares. From time to time, one of those attempts will also meet the much harder Bitcoin network target, producing a valid block. When that happens, the entire pool wins.