Are Large Mining Pools Bad for Cryptocurrencies?

Large cryptocurrency mining pools exist so that people who do not have the financial and computational resources to mine competitively can pool their resources and increase their chances of being awarded a coin. While it is possible to mine solo, it is very rare to win any rewards on your own. Joining a mining pool increases your chances of being rewarded.

Whether large mining pools are bad for cryptocurrencies or not depends on your point of view. Learn what effects large mining pools have on cryptocurrencies and what it might mean for their future.

How Do Large Mining Pools Affect Cryptocurrency? 

A central tenet behind cryptocurrency is financial decentralization. Anyone with a computer and an internet connection is theoretically free to mine cryptocurrency in exchange for supporting the network, at least in proof-of-work blockchains like Bitcoin.

However, control of mining shifted towards entities with more funding and computational power as cryptocurrencies became popular and more valuable. Cryptocurrencies that depend upon proof-of-work validation and reward systems (mining) are mostly mined at large-scale cryptocurrency mining operations, which are centers designed to eliminate competition and corner mining markets.

To gain access to cryptocurrencies, people must purchase crypto or become small-scale miners and join the mining pools created by these large mining firms, which further increases centralization. Another effect these pools have on cryptocurrencies is that they centralize the majority of block rewards to their pool members instead of to a decentralized global network of users as intended by blockchain and cryptocurrency’s original designers.

These pools also influence cryptocurrency demand, which in turn influences market prices.

Are Mining Pools Good or Bad?

Mining pools are not inherently bad for cryptocurrency, but they have become a concern because of the amount of energy used and the control and influence exerted by small groups of well-funded people.

One benefit of the centralization of hashing power is that it inspired some developers to further innovate alternate consensus and validation mechanisms. Ethereum transitioned from proof-of-work to proof-of-stake, and other blockchains emerged using algorithms designed to circumvent this centralization tendency.

For some, mining pools are a benefit. They allow smaller miners to participate and earn rewards in a process they would otherwise be locked out of. While these miners may not reap large rewards, many look to the future for inspiration. Imagine if Bitcoin’s price rose into the millions, as some proponents predict. One miner who had solo mined a total of 0.1 BTC over a few decades would hold 0.1 BTC worth $100,000 if Bitcoin’s price rose to $1 million. Thus, as in all investment opportunities, small investors play a long game.

 Pros and Cons of Mining Pools 

Mining pools have both advantages and disadvantages, depending on what you’re trying to accomplish and your preferences.

Pros of Mining Pools

• Secures the network: In Bitcoin and other cryptocurrency mining, the more miners and participants there are, the more secure the network is from attack. Large pools make networks fast and secure.
• Increased chance of rewards: Large numbers of mining systems within the same pool also increase the chances that the pool and its miners will solve the block hash and receive the reward.
• Lower costs: A benefit for small miners is that they do not need to invest in expensive mining equipment to contribute to a mining pool. Dedicated mining machines cost thousands of dollars and consume hundreds of dollars or more of electricity per year.

Cons of Mining Pools

• Centralization and control: Mining pools and farms bring cryptocurrency into a centralized validation and creation process. Control then becomes an issue because mining farms essentially control the rewards.
• Profit-sharing and fees: One of the main disadvantages of joining a mining pool is that you may pay recurring fees and will split any cryptocurrency that is successfully mined with the rest of the pool. Payouts are usually paid on a per-share-of-work basis, not by how many pool members there are. The less work you contribute, the less you’re paid.
• Increased energy use: Utility costs, including electricity, represent a large percentage of the operational costs of these large mining operations.

The Bottom Line

Cryptocurrency is continuously evolving. It is undoubtedly being affected and influenced by large mining pools. But are mining pools good or bad? In the end, it depends on your beliefs about cryptocurrency, its effect on the environment, and what you want from it.