In those days, when Bitcoin had just launched, cryptocurrency mining was accessible to anyone with a basic home computer. But as networks like Bitcoin and Ethereum grew more valuable and competitive, crypto mining became an industrial-scale operation, often costing millions in specialized hardware and electricity.

Seeking better returns, most small-scale miners migrated to pool mining, where they shared computing resources with other miners in a collective pool and earned income proportionate to the hash rate they contributed. Without further delay, here are the advantages and disadvantages of mining pools.

Advantages of Crypto Mining Pools

Here are the major advantages of mining pools:

1. Revenue Generation

The most obvious advantage of mining pools is higher and steadier cryptocurrency earnings for participants. By combining computing power, miners receive more frequent payouts, drawing from much larger block rewards shared among the pool.

Most pools utilize payment schemes that award proceeds proportionate to the amount of hash rate contributed by each individual miner.

For major coins like Bitcoin and Ethereum with high network hash rates, solo mining makes the chance of a miner randomly discovering the next block against industrial-scale competition nearly impossible. Pool mining provides predictable passive income at scale, no matter the size of your mining rig.

To illustrate, if you’re a solo miner with 100 TH/s of computing power, your odds of mining a block on Bitcoin by yourself are astronomically low (around once every 67,000 years, according to estimates). But by joining a mining pool, you can earn a fractional share of the daily block rewards the mining pool earns in proportion to your contributed hash rate.

In short, pools make otherwise unfeasible cryptocurrency mining profitable.

2. Steady Stream of Income

Another major advantage of pooled mining is that it reduces earnings variability and uncertainty. With solo mining, income depends completely on the random chance of discovering scarce new blocks. This leads to an inconsistent stream of income because some days a solo miner may unexpectedly solve multiple blocks; other times they can go months without success.

Pool mining eliminates this uncertainty through reliable fractional revenue streams. Miners collect micropayments each day, avoiding the feast or famine cycles in solo mining.

With crypto mining pools, miners enjoy greater certainty, allowing better business forecasting and resource planning, which is important for industrial-scale mining operations where predictable cash flow and risk matter for making payroll, servicing loans, or estimating budgets.

3. Democratized Accessibility

Crypto mining pools lower barriers to joining the crypto mining industry; pooled mining enables participation for hobbyists who previously faced prohibitively long odds trying to mine solo. Crypto enthusiasts worldwide now have viable ways to earn a slice of coin rewards, regardless of how basic their home computer rig is.

Where solo mining requires expensive specialized equipment worth tens of thousands of dollars to competitively hash, pooled mining welcomes anyone to contribute with virtually any internet-connected device.

Democratized accessibility also gives everyday users chances to familiarize themselves with mining software and hardware before making major investments.

While the lower barriers provide on-ramps for students or those in developing countries to gain exposure and skill sets, allowing upward mobility toward high-paying careers in blockchain technology.

4. Network Security Contributions 

Large-scale mining pools measurably contribute to overall network security, making blockchain histories more immutable. The greater the hashing power applied to proof-of-work mining algorithms, the more immutable ledger histories become, raising costs for potential attackers to attempt to revise transactions from the past.

By merging many smaller miners into collectives representing hundreds of thousands of petahashes per second, pools meaningfully raise barriers for individuals or groups nearing the 51% majority computing required for election manipulation-style assaults on blockchain integrity.

Even though pools may centralize their own administrator power, their sheer mass of distributed hardware power protects the durability of transactions made on the blockchain. In this sense, pooled mining strengthens network security, safeguarding public blockchain goods.

Related: Staking and Masternodes: Sustainable Alternatives to Traditional Crypto Mining

5. Investment in Better Mining Hardware

By consuming electricity and computing hardware in industrial quantities, large mining pools drive innovation cycles and economies of scale, lowering the costs of mining equipment for all participants industry-wide. Mining pools pour capital into in-house engineering of proprietary mining devices such as Bitmain’s Antminer brands, seeking every efficiency edge to maximize mining rewards over electricity input costs.

Their hardware investments directly fund advances in semiconductors, chip design, material science cooling techniques and mass manufacturing processes, dropping costs per terahash for state-of-the-art mining machines. Competitive innovations then diffusing across the global supply chains seed further cycles of advancement.

These upstream hardware gains indirectly trickle down, improving accessibility for hobbyist miners relying on consumer-grade equipment downstream. Cheaper entry costs also promote decentralization by increasing the number of solo miners capable of participating despite low overheads.

Disadvantages of Cryptocurrency Mining Pools 

Here are the disadvantages of cryptocurrency mining pools.

1. Centralization Risks

Despite increased earnings for miners, pooled mining creates the risk of putting all the power in the hands of a few pool operators.

With solo mining, block rewards remain competitively distributed across thousands of independent miners worldwide. But today, the lion’s share of rewards flows first through just 5–10 major mining pools before fractional dispersal to participants.

Of course, pools must ultimately share proceeds, but in theory, they could censor certain transactions. Top pools also wield voting influence over technical changes or soft forking. And should a single rogue pool control 51% of the network hash rate, they could attack the blockchain’s integrity.

Most miners hesitate to leave pools because the huge capital costs of mining hardware discourage shifting allegiances. These factors tend to establish the dominance of big first-movers like AntPool, F2Pool and BTC.com, which secured their place in the crypto mining industry early.

2. Geographic Centralization

A major centralization challenge that is already a thing involves the geographic concentration of mining infrastructure. Early on, miners clustered around cheap hydroelectric power in Tibet and Szechuan, China, maximizing profits.

Regulatory shifts have since shifted specialization across global mining hubs like Texas, Iceland, Kazakhstan and Russia. But disagreements between democratic free markets and authoritarian state interests lead to unease in the crypto community.

Within mainland China, frequent mixed signaling by the government prolongs uncertainty around crypto mining.

So while most hash rates still originate in China and Eurasia, trends show momentum for diversifying mining distribution toward North America, Northern Europe and elsewhere in the long term.

3. Revenue Concentration and Wealth Inequality

A major downside of mining pool economics includes concentrating block rewards first in the hands of pool operators before fractional redistribution to participants. This funnels wealth into centralized intermediaries before individuals receive their slice of transaction fees and minted coins.

Over long periods of time, larger pools amass disproportionate cryptocurrency holdings and rising fiat valuations compared to smaller mining pools and solo miners. Wealth disparities between large mining pools and smaller participants increasingly show the wealth inequality in the crypto mining industry.

As of 2024, AntPool and Foundry dominate the Bitcoin mining industry, according to CoinDesk. Between them, the two mining pools own a total of 53.4% of the world’s hashing power.

These disparities contradict the peer-to-peer vision of blockchain technology, which allows equal opportunity for individuals.

4. Censorship Capabilities and Collusion

The intermediary nature of crypto mining pools also creates potential gatekeeping influence over which blockchain transactions pool operators choose to process in assembled block templates for miners. This could open the door to the risk of censorship should pools collude around restricting interactions with blacklisted wallet addresses or cryptocurrency contracts deemed unfavorable based on internal policies.

For example, the largest pools could jointly refuse to validate transactions coming from a crypto gambling site or controversial dark web marketplace they find objectionable based on cultural norms where pools are physically headquartered.

If coordinated subtly over backchannel communications, such restrictions could greatly inhibit adoption of the targeted app or platform if most miners reject processing its associated payments or smart contracts.

This would be against the open, permissionless innovation philosophies of Bitcoin and the most popular cryptocurrency blockchains. Beyond transaction censorship, shared norms across pools with dominant network hashrate power also raise the possibility of undue collusion around protocol changes biased toward internal interests.

5. Pool Hashrate Monopolization

Some computer scientists believe structural features of blockchains favor continued winner-take-all consolidation where the single largest mining pool has the highest chances of achieving over 50% hashrate shares long-term because the largest pool has the greater statistical probability of discovering the next block, which provides financial leverage, allowing them to increase their lead by re-investing in more mining servers.

In short, once a single mining pool passes the 33% hashrate mark, pure math provides exponentially growing advantages in identifying the next valid block just seconds faster than the rest of the network.

Such fractional time savings randomly reward bigger pools with outsized block rewards, furthering the gap between them and their smaller competitors.

Key Takeaways

1. Essence of Mining Pools: Mining pools emerged to allow smaller miners to pool resources and earn steady crypto income by sharing block rewards proportionate to their contributed hashrate.

2. Pools yield higher, more frequent, and more predictable mining earnings by eliminating the uncertainties inherent in solo block mining.

3. Pools have led to the centralization of power, with just a handful of large pool administrators now controlling dominant shares of networks’ hashrate and voting power.

4. Geographical concentration of equipment also places disproportionate influence in the hands of certain regions and nation-states like China and Russia based on cheap electricity and regulating policies.

Frequently Asked Questions

1. Why were mining pools developed in the first place?

Mining pools became popular when Bitcoin network mining difficulty made solo home mining unfeasible to earn income, leading smaller miners to pool collective hashrate, aiming to share in block rewards more often.

2. How do mining pool payment schemes work?

Most pools pay proportional to each miner’s contributed hashrate via schemes like:

• PPS (Pay Per Share): divided uniformly regardless of luck
• PPLNS (Pay Per Last N Shares): rewards longer loyalty

3. Are mining pools bad for crypto decentralization?

Early pools boosted decentralization by allowing small-scale access, but concentration of power has now made mining pools a major risk to decentralization in cryptocurrency.

4. Which crypto mining pool is the largest today?

As of 2024, AntPool is the largest mining pool, controlling 29.41% of global Bitcoin’s network hashrate and even higher shares of smaller coins. Foundry USA comes in second, controlling 26.14% of Bitcoin’s network hashrate.

5. Why does China dominate cryptocurrency mining?

The five biggest cryptocurrency mining pools are located in China due to cheap Chinese coal electricity combined with existing hardware manufacturing expertise and concentrated mining growth regionally.