In this fiercely competitive environment, artisanal miners working independently (aka solo mining) don't stand a snowball's chance in hell. The likelihood of them finding a block to offset the cost of power and hardware is so small that it can be called a gamble, like buying a lottery ticket. Even the fastest consumer ASICs can't compete with commercial mining farms that have tens of thousands of chips in huge server rooms near hydroelectric plants. Now miners are cooperating to form mining pools, pooling the computing power of thousands of participants and sharing the rewards. By participating in the pools, miners receive a fraction of the overall reward, but usually on a daily basis, thus reducing uncertainty.
Let's look at a concrete example. Suppose a miner has purchased a device with a total of 6,000 GH/S of computing power, or 6TH/S, and in August 2014 it is worth about $10,000. The device runs at 3 kilowatts (KW), consumes 72 units of electricity per day, and costs an average of $7 or $8 per day. With the current difficulty of bitcoin, this miner could solo a block every 155 days or 5 months on average. If this miner does mine a block within this time frame, the reward is 25 bitcoins, which would result in $15,000 if each bitcoin costs about $600. This would cover the cost of equipment and power for the entire time period, leaving a net profit of about $3,000. However, whether a block is mined in a five-month time period depends largely on the miner's luck. He could get two blocks in five months and make a very large profit. Or, he could go 10 months without finding a single block and suffer a financial loss. To make matters worse, the difficulty of Bitcoin's proof-of-work (POW) algorithm could rise significantly in that time, which, at the current rate of arithmetic growth, means that a miner has at most six months to achieve results before his equipment is replaced by the next generation of more efficient miners. If this miner joins the pool instead of waiting for a potential windfall that could occur once in 5 months, he could earn about $500-700 per week. The regular income from the pool helps him amortize the cost of hardware and power over time and without taking a huge risk. After 7 to 9 months, the hardware will still be obsolete and the risk will still be high, but the income in the meantime will at least be regular and reliable.
Mining pools coordinate hundreds of miners through a dedicated mining protocol. Individual miners set up their mining machines to connect to the pool server after creating a pool account. Their mining devices stay connected to the pool server while mining, synchronizing their respective work with other miners. In this way, miners in the pool share mining tasks and later share rewards.
The reward for a successful block is paid to the pool's bitcoin address, not to the individual miner. Once the reward reaches a specific threshold, the pool server pays the reward to the miner's bitcoin address periodically. Typically, the pool server charges a percentage for providing the pooling service.
Miners participating in a mining pool split the workload of searching for candidate blocks and earn "shares" based on their contribution to mining. The pools set a low difficulty goal for earning "shares", typically more than 1000 times less difficult than the Bitcoin network. When someone in the pool succeeds in mining a block, the pool is rewarded and shares it with all miners in proportion to the number of "shares" they contributed.
Mining pools are open to any miner, big or small, professional or amateur. Some participants in a mining pool have only a small mining machine, while others have a garage full of high-end mining hardware. Some use only a few tens of kilowatts of electricity to mine, while others will use a data center to consume megawatts of power. How can a mining pool measure each person's contribution in a way that distributes rewards fairly while avoiding the possibility of cheating? The answer is to use Bitcoin's proof-of-work algorithm to measure each miner's contribution while setting a lower difficulty. As a result, even the smallest miners in the pool often get a share of the reward, which is enough incentive to contribute to the pool. By setting a low difficulty to obtain a share, the pool can measure the amount of work done by each miner. Whenever a miner finds a blockhead hash that is smaller than the pool's difficulty, it proves that it has completed the hash calculation required to find the result. More importantly, this work done to obtain share contributions enables a statistically measurable way to find the target hash of a bitcoin network as a whole. Thousands of miners trying smaller intervals of hash values can eventually find results that meet the requirements of the Bitcoin network.
Let's go back to the dice game analogy. If the dice players' goal is to throw dice with results all less than 4 (overall network difficulty), a mining pool can set an easier goal by counting how many times the players in the pool throw results less than 8. When the players in the pool throw results less than 8 (the pool share goal), they get shares, but they don't win the game because they don't complete the game goal (less than ). However, players in the pool will more often reach the easier pool share goal, regularly earning their shares, even though they did not complete the harder goal of winning the game.
From time to time, a member of the pool may throw a result of less than 4 and the pool wins. The proceeds can then be distributed on the basis of the shares earned by the players in the pool. While a target of 8 or less does not win the game, it is a fair way to measure the number of points players throw, and it will occasionally produce a result of less than 4.
Similarly, a pool will set the pool difficulty to ensure that a single miner is able to find a blockhead hash that matches the pool difficulty frequently enough to win a share. From time to time, an attempt will produce a block header hash that matches the bitcoin network's goal, yielding a valid block, and then the pool as a whole wins.
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