Are Large Mining Pools Bad for Cryptocurrencies?

Investing News

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, 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.

Key Takeaways

  • Cryptocurrency mining has become dominated by huge mining equipment farms, which is bad for smaller cryptocurrency supporters.
  • You might view mining pools as a good thing for cryptocurrency if you’re a small miner.
  • Pools and large farms might also be considered good for cryptocurrency because they have inspired further innovation.
  • Other consensus mechanisms are being evaluated and researched to try and reduce centralization, market cornering, and bring cryptocurrency back into its original premise of equality and decentralization.

Bitcoin Mining Explained

Why Were Mining Pools Formed?

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, as the popularity and rewards for Bitcoin have grown tremendously, control has shifted towards entities with more funding and computational power. Cryptocurrencies that depend upon proof-of-work validation are mostly mined at large-scale cryptocurrency mining operations. These are centers designed to eliminate competition and corner the mining market.

To gain access to cryptocurrencies, small-scale miners are forced to join mining pools created by these large mining firms, which increases centralization further. However, mining pools have both advantages and disadvantages, depending on what you’re trying to accomplish and your preferences.

 Pros and Cons of Mining Pools 

Pros

  • Faster Processing

  • Efficiency

Pros of Mining Pools

  • Faster Processing: In Bitcoin mining, each miner competes with the rest of the network to add to the overall blockchain and create coins as rewards. Multiple miners in the same network can speed up the discovery process because it reduces latency or delays and speeds up the computations. 
  • Efficiency: Large numbers of mining systems within the same network also make the mining process more efficient.

Cons of Mining Pools

  • Centralization and Control: As discussed previously, 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 to joining a mining pool is that you’ll need to pay recurring fees and split any cryptocurrency that is successfully mined with the rest of the pool. Fees are usually paid through your share of the cryptocurrency that is awarded to the group.
  • Increased Energy Use: From a technical standpoint, an increased number of powerful machines might make the process more efficient. But utility costs, including electricity, represent 75% of the costs of these large mining operations. While the price of electricity depends on the country, the global average price paid by miners is estimated at $0.046 USD per kWh.

How Do Large Mining Pools Affect Cryptocurrency? 

Cryptocurrency mining has transitioned from an operation distributed over individual computers to centralized mining pools involving big investments. 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.

Energy use, and therefore control of cryptocurrencies, has given rise to further research into other consensus mechanisms. Ethereum, for example, was originally designed to use a different mechanism called proof-of-stake, which does not use mining for transaction verification and block creation.

There are a few other consensus mechanisms being researched and used, such as proof-of-elapsed-time, proof-of-claim, and proof-of-activity.

Ethereum is slowly transitioning from proof-of-work to proof-of-stake. Under proof-of-stake, mining pools are not as profitable, but staking is—in brief, staking is holding your cryptocurrency so that it can be used as a transaction validator. The theory is that proof-of-stake will reduce energy consumption and decentralize cryptocurrency again. Whether it will or not remains to be seen.

Cryptocurrency is continuously evolving. It is certainly 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 and what you want from it.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

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