Bitcoin Mining Pools Explained: How Miners Share the Work and the Reward

Key takeaways

• A mining pool is a group of miners who combine computing power and share the reward for the blocks they find, so small miners get steady small payments instead of a rare large one.
• Miners prove their work by submitting shares, partial proofs of work that are far easier to find than a full block.
• Payout schemes differ mainly in who carries the luck risk, the pool or the miner. A pool does not raise average earnings, and it charges a fee.
• In the traditional design the pool operator picks the transactions in each block, which is the main centralization concern. Miners can switch pools at will.
• Before joining one, check the payout method, the fee, the minimum payout and what happens to unpaid balances. A real pool never asks you to deposit bitcoin.

What is a Bitcoin mining pool?

A mining pool is a group of miners who point their machines at the same server, combine their computing power and share the reward from any block the group finds. The network pays a block reward only to whoever finds the block, so a pool turns that all-or-nothing prize into regular smaller payments.

Think of an office lottery syndicate. Fifty colleagues who each buy a ticket will almost never win. Fifty who pool their money win more often and split the prize by how much each put in. The expected winnings are the same, minus a cut for whoever runs it, but the experience is very different.

Why do mining pools exist?

Pools exist because finding a block is rare for any single miner, so solo income is extremely lumpy. The network finds one block about every ten minutes and gives it to one winner, and a machine’s chance of being that winner depends on its share of the network’s computing power.

With invented shares: at about 144 blocks a day, a miner holding one-thousandth of the network’s power would win roughly one block a week, while one holding one-millionth would wait around two decades on average. How Long Does It Take to Mine a Bitcoin? has a table.

A business with an electricity bill cannot plan around income that may arrive once a decade, so most operations of any size pool their power, as Inside a Bitcoin Mining Operation describes. Pooling changes the timing of the money and leaves the average where it was.

How does a mining pool work?

A pool works by splitting the search for a block into many easy partial searches, so it can measure every miner’s effort long before anyone finds a full block. The pool operator runs software connected to a Bitcoin node, collects waiting transactions and assembles a candidate block, called a block template. What Is the Bitcoin Mempool? explains where those waiting transactions come from.

The miners’ machines receive work based on that template and try hash after hash, as described in Bitcoin Hash Rate and Mining Difficulty Explained. The pool sets its own, much easier target as proof of effort. Any hash that clears it is a share, and the miner sends it in. Nearly all shares are not valid blocks. Once in a while a hash clears the full network target, and the pool broadcasts the block and divides the reward.

Shares are a fair measure because hashing is random and the pool can check each one, so a miner’s share count tracks its real hash power closely.

With invented figures: a pool holding one-hundredth of the network’s power finds about one block in every hundred, roughly one and a half a day. A member supplying one-thousandth of the pool’s shares earns about one-thousandth of each reward, less the fee.

How do pools pay miners?

Pools pay according to a payout scheme, and the schemes differ mainly in who carries the luck risk. When the pool finds fewer blocks than its share predicts, someone absorbs the shortfall, and the scheme says whether that is the pool or you.

Scheme	How you are paid	Who carries the luck risk	What to know
Pay per share (PPS)	A fixed amount per valid share, whether or not the pool finds a block	The pool	Steady income. Depending on the pool, transaction fees may be left out.
Full pay per share (FPPS)	Like PPS, plus a share of transaction fee income	The pool	Closer to the full block reward. Fee calculation varies by pool.
Pay per last N shares (PPLNS)	When the pool finds a block, the reward is split among the last N shares submitted	The miners	Payouts come only when blocks are found, so they are lumpier, higher in lucky stretches and lower in unlucky ones.

Over a long period the schemes should pay about the same before fees. A pool that promises fixed payments takes on risk, so it usually charges more, and it needs the financial strength to keep paying through a dry spell. Pools use variants and their own names, so read the payout page.

What do pool fees mean?

A pool fee is the cut of the rewards the pool keeps for running its servers and, in fixed-payout schemes, for taking on the luck risk. It is normally a percentage of what members would otherwise receive. This article quotes no figures because they differ between pools and change.

The headline percentage is not the whole story. A low fee on a scheme that leaves out transaction fee income may pay less than a higher fee that includes it, so compare the two together. The halving cuts the subsidy part of every block, and pools pass that cut to members. What Is the Bitcoin Halving? lists the dates.

Do mining pools make Bitcoin less decentralized?

They can, because in the traditional design the pool operator, not the individual miner, decides which transactions go into a block. A few large pools can hold a big share of the network’s computing power, and an operator could in principle leave out certain transactions. A pool with a majority could do more, such as reorder recent blocks.

Several things limit that power. The hash power belongs to the miners, who can move it to another pool by changing a setting on their machines, so a misbehaving pool can lose members quickly. And even a dominant pool cannot create more bitcoin or move other people’s coins, because nodes reject blocks that break the rules.

Work is also under way on newer mining protocols that would let individual miners build their own block templates while still sharing a pool’s payouts.

Can you mine solo instead?

Yes. Solo mining means mining without a pool: you keep the whole reward if your machine finds a block and receive nothing otherwise. Expected earnings match a pool’s before fees, but for a small miner the chance of any payment is tiny.

Some people choose it to avoid fees or to build their own templates on their own node. Treat it as a lottery ticket with electricity as the price, not as an income plan. Mining income can be taxable and local rules can apply, as How Is Bitcoin Taxed in the US? and Is Bitcoin Mining Legal? explain.

What should you check before joining a pool?

Check how the pool pays you, what it charges and what happens to your money before it is paid out.

• Payout method. Which scheme is used, and whether transaction fees are included.
• Fee. The percentage and what it applies to.
• Minimum payout. Small on-chain payments cost network fees, so pools set a threshold, and a very small miner may wait a while for a first payment.
• Custody of unpaid rewards. Until it pays you, the pool holds your earnings, which makes it a counterparty. Set the payout address to a wallet you control.
• Reputation. How long the pool has operated, how clearly it explains its calculations and whether payments match the dashboard. You can confirm them on a block explorer.

Which scams involve pools and mining?

The common scams sell mining income without real mining, and the giveaway is a request to deposit bitcoin or money in return for guaranteed returns. A real pool needs only your machines’ computing power and a payout address.

Warning signs include fixed daily returns that ignore price and difficulty, bonuses for recruiting others, a growing balance you cannot withdraw and fees demanded before a payout. Many cloud mining offers follow this pattern.

Pool hopping, switching pools to chase a lucky streak, adds nothing to the expected reward, because a pool is never “due” for a block. Some older payout designs could be gamed by timing, which is one reason newer ones count recent shares. Be wary of anyone selling a hopping system.

Common Bitcoin Scams and How to Spot Them catalogs the wider patterns, and reports can go to the FTC at https://reportfraud.ftc.gov/. Before buying mining equipment or a mining contract, talk to a qualified financial or tax professional. New to Bitcoin? The Start Here path covers the basics in order.

Where to go next

• How Long Does It Take to Mine a Bitcoin?: what your share of the network means for your wait.
• Inside a Bitcoin Mining Operation: machines, power and the economics behind a mining site.
• Bitcoin Hash Rate and Mining Difficulty Explained: the numbers behind shares and block odds.
• Common Bitcoin Scams and How to Spot Them: the red flags behind fake mining offers.