The bitcoin mining pool are open to all miners who are beginners or professionals with small mining machines or high end hardware. How does a bitcoin mining pool measure the individual contributions, so as to fairly distribute the rewards, without the possibility of cheating?
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The Proof of work is used to measure the contribution by each miner, and is set at a lower difficulty level so that even the smallest of contributions could be measured. Each time a bitcoin pool miner finds a block header hash that is less than the pool difficulty, they prove they have done the hashing work to find that result.
Bitcoin Mining Pool Process
Most bitcoin mining pool servers are run by a company or an individual. The pool server coordinates the activities of the pool miners and has direct access to the blockchain database copy. The pool server runs the full node and thus the miners are not burdened with this task as it requires a highly equipped computer and the software requires frequent monitoring and maintenance.
The process of addition of new bitcoin to money is called mining. Mining secures the bitcoin system against fraudulent transactions or transactions that spend the same amount more than once. This is known as a double-spend. Miners provide processing power to the bitcoin network in exchange for the opportunity to be rewarded bitcoin.
Miners can also validate and record transactions and in this way, a new block transaction is added to the blockchain every 10 minutes. These transactions are considered confirmed, thus allowing the user to spend the bitcoin.
The bitcoin system of trust is computation based. Transactions are stacked into blocks, which require enormous computation power for proving, although only small amount is required for verification as proven.This process has two purposes:
- Mining creates new bitcoins almost like the way central bank prints new money.
- The creation of bitcoin per block is fixed and declines with time.
There are two types of rewards for miners: transactions fees from the included transactions and new coins that are formed with each block. The earning of this reward depends on solving a problem that is based on cryptographic algorithm.
The solution of the problem is called Proof-of Work and is a poof of miner’s computing effort. This competition to solve the algorithm is the foundation of security model of bitcoin.
The amount of newly created bitcoin adds to block decrease every four years. Based on the current statistics of decrements, bitcoin mining rewards decrease exponentially. This will continue until the year 2140 by which time nearly all the available bitcoins (20.99999998 million) will have been released into the market.
Every transaction provides the miner with transaction fee in the form of bitcoin between the inputs and outputs of transactions. Currently, the fees represent 0.5% or less of miner’s income yet it is expected to increase over time with the decrease in reward and increase in the number of transactions over time.
Mining is much alike the game of sudoku that resets with every solution of problem and its difficulty level changes with the adjustment of its size so that it would take an estimate of 10 minutes to find the solution. The “Proof-of-Work” involves quadrillions of operations processed per second across the network. The algorithm involves repeatedly hashing the block’s header and a random number along with SHA256 cryptographic algorithm until a solution with a pre-defined pattern is obtained.
The word “mining” is somewhat misleading. The sole purpose of mining is not the reward or generation of bitcoins, rather it focuses on the on the security of the bitcoin system and allows worldwide consensus without central authority.
This competitive environment does not allow the working of solo miners as the chances of them finding a block to support their hardware expenses is almost nonexistent.Even the fastest ASIC mining system cannot keep up with the commercial systems. The miners, thus form pools, pooling the hashing power and sharing the reward.
Bitcoin mining pool connect hundreds of miners, over pool mining centers. The individual miners connect to the mining network by setting up their account. Successful blocks pay directly to the mining pool center rather than individuals. The pool server charges a percentage of the rewards in return for providing the mining service.