What is a Bitcoin Mining Pool?
A Bitcoin mining pool is a group of Bitcoin miners working together to earn Bitcoin. Bitcoin miners use computing power, which is measured in hash rate, to unlock blocks, for which they are rewarded in Bitcoin. Each time a block is unlocked, the Bitcoin system allocates Bitcoin to a miner who participated in unlocking the block. The hash rate of the participating miners determines which miner earns the Bitcoin through random distribution. As the number of miners unlocking blocks increased, miners with low levels of computing power would have to wait extended periods of time, even up to years, to earn Bitcoin rewards. In response to this problem, pools were created to group miners and distribute Bitcoin rewards on a more consistent basis. In other words, pools reduce the “granularity” of the rewards that miners earn.
What are the Largest Bitcoin Pools?
The three largest pools, measured by hash rate, are DiscusFish (also known as F2Pool), AntPool, and BW Pool. These pools comprise approximately 22%, 17%, and 15% of the total hash rate, respectively. DiscusFish is a Chinese mining pool, founded mid 2013. AntPool is owned by Chinese IC design company Bitmain Technologies Limited. BW Pool is also a China based firm.
Why does this Matter to Investors?
The successes and failures of pools could have serious implications for investors. Collectively, these pools make up more than 50% of the total hash rate. If they were to collude, they pose a security risk to the validity of the blockchain. Furthermore, hash rate is important because it indirectly reflects the projected value of Bitcoin. If confidence in the value of Bitcoin is high, people will be more inclined to mine. More mining means a higher hash rate. If these pools disband or suffer from internal error, it could send shockwaves through the Bitcoin community, reflected in its trading value. Given the geographic proximity of these pools, failure of one pool could be shared by others.
In looking at recent history, the primary sources of failure for Bitcoin have occurred during consolidation of information. Two, notable cases of consolidated information failure are the Mt. Gox and Bitfinex exchange incidents. Although pools have not had a severe adverse effect on Bitcoin value yet, investors should monitor the security and growth of pools with wariness.