How mining pools work
Pool operators run the pool coordination software; miners connect their hardware (via Stratum protocol) to the pool’s server:
- Pool constructs the candidate block template from pending transactions.
- Pool distributes work units to connected miners.
- Miners compute hashes; when they find a hash below a lower pool difficulty, they submit a “share” as proof of work done.
- Shares are credited to the miner’s pool balance in proportion to their contribution.
- When the pool finds a valid block (hash below network difficulty), reward is distributed across contributors.
Pool fees are typically 0-2% of rewards. The trade: steadier income in exchange for slight reward haircut + trust that the pool is honest (pools could in principle withhold blocks or manipulate work).
Reward schemes
Different pools pay miners differently:
- PPS (Pay Per Share) — pool pays miners a fixed amount per share, regardless of whether the pool finds a block. Pool absorbs variance. Miners get stable income.
- PPLNS (Pay Per Last N Shares) — miners paid from actual blocks found; payout based on last N shares. Higher variance for miners but higher expected value.
- FPPS (Full Pay Per Share) — includes transaction fees in PPS payouts. Most common modern scheme for large pools.
Pool concentration
Bitcoin pool distribution (rough 2024-2025):
- Foundry USA: ~30%
- AntPool: ~18%
- F2Pool: ~12%
- ViaBTC, Binance Pool, MARA, others: balance
This looks concentrated but is structurally different from single-operator control — miners can switch pools in minutes if they suspect misbehavior. The pool doesn’t own the hashpower; it coordinates it.
Still, pool concentration raises concerns:
- Censorship risk — a pool can refuse to include certain transactions; if pool share is high enough, transactions can be delayed. OFAC-sanctioned transactions have been filtered by some mining pools.
- MEV capture — pools can extract and keep MEV from block ordering. Sharing with miners vs. keeping it is pool-dependent.
- Coordination attack — theoretical scenarios where pools collude to reject certain block types.
Newer models
- Stratum V2 — protocol upgrade that lets individual miners (not the pool) choose which transactions to include. Decentralizes transaction selection while preserving pool’s reward aggregation.
- Decentralized pools (P2Pool) — fully trustless coordination, no pool operator. Historically have had operational complexity issues; small share of total hashrate.
- Solo mining via pool infrastructure — some pools offer “solo” mode where you hunt for blocks individually but use the pool’s infrastructure. Reward variance returns; no pool fee.
Risks and considerations
- Pool insolvency or exit scam — rare but historically has happened (various small pools have disappeared with unpaid balances).
- Payment delays — pools can pause withdrawals during disputes or technical issues.
- Regulatory pressure — larger US-based pools are increasingly subject to regulatory scrutiny; pool-level compliance (filtering sanctioned addresses) has started appearing.
- Hashrate flight — if a pool behaves poorly (delayed payments, censorship, unfair practices), miners can and do switch. Reputation is the pool’s main asset.
For individual miners, pool selection is a standard operational choice: match ideology (decentralization preference), regulatory jurisdiction, and reward scheme to your operation. For outside observers, pool distribution is a rough proxy for network decentralization — but pool dynamics (switch costs, reputation, Stratum V2 adoption) matter more than raw share percentages.