Bitcoin mining pools are straightforward: complete your share of work to earn your share of the winnings. Roughly $10 billion in annual payouts to miners around the globe makes Bitcoin mining the highest stakes proof-of-work (PoW) competition in the world.
However, formulas for calculating payouts to pool participants vary widely. Since the birth of mining pools 13 years ago, pool operators have used dozens of methodologies to smooth out income or reduce the need for trust.
For example, how can a miner trust that their pool operator is honestly reporting the winnings of other workers and fairly distributing in-band and out-of-band transaction fees?
- Users pay in-band transaction fees in bitcoin, on-chain. These fees are publicly verifiable.
- In contrast, users pay out-of-band transaction fees in any denomination besides bitcoin. For example, mining pool ViaBTC accepts credit card payments for bitcoin transactions.
- Similarly, Luxor mined TaprootWizards’ ‘Big Wizard’ 4MB block with a $0 on-chain transaction fee, mining the entire block for non-bitcoin, out-of-band fees.
Multiple payout types explained
The reason for multiple payout types is that there’s no singular consensus for the best type. Some pool operators assume more financial risks in order to smooth out the income for their participants. Others make participants assume more (or all) of the risk.
Bitcoin mining is a lottery, anyway. Only the winning guess among millions of cryptographic computations will produce a numerical hash for a block of data that satisfies Bitcoin’s difficulty threshold.
The only action that increases your odds of winning any fair lottery — such as Bitcoin mining — is to buy more tickets. Equally, the only thing that increases a miner’s odds of satisfying Bitcoin’s difficulty threshold is contributing more hashes than their competitors.
In the end, miners are free to choose which pools they contribute to in hashrate. Some miners choose conservative pools; others try their luck. The most risk-seeking miners skip pools altogether and ‘solo mine.’
Switching between pools takes between just a few minutes to a few hours. Stratum V2, the newest iteration of Bitcoin’s largest mining protocol, allows for even faster and easier pool-hopping. Nowadays, some miners hop to a new pool within minutes using this protocol.
Each pool generally chooses one of three popular payout methodologies.
The three Bitcoin mining pool payout structures
Nowadays, three payout structures have come to dominate the Bitcoin mining pool industry: pay-per-last-N-shares (PPLNS), full-pay-per-share (FPPS), and pay-per-share plus (PPS+).
During a recent appearance on Matt O’Dell’s Citadel Dispatch podcast, mining pool Luxor’s chief exec Nick Hansen explained the characteristics of each method.
Pay Per Last N Shares (PPLNS): Despite its long name, PPLNS is the most intuitive, understandable payout type. At its essence, PPLNS attempts to simply pay each miner its fair share of the pool’s winnings.
PPLNS pools only pay out to miners when the pool successfully mines a block. However, there are a few quirks that, over the years, have deviated PPLNS slightly from its original simplicity of merely splitting winnings.
PPLNS is a proportional reward system based on ‘shares’ of work submitted by each contributor to the mining pool. Pool operators allocate ‘shares’ of hashing work to its participating miners. For example, miner A might contribute one million hashes while miner B contributes two million. Miner B’s ‘share’ is twice as valuable.
The N refers to a pool’s total hashing power over Bitcoin’s last N difficulty epochs. The pool operator selects the N, a variable number.
Typically, PPLNS pool operators choose a large N number, meaning that many days are included in its look-back period for calculating rewards. Some pool operators use this method to discourage pool-hopping.
Full Pay Per Share (FPPS): By far, FPPS is the most common payout structure for modern Bitcoin mining pools. When calculating their payouts, FPPS operators look over the previous 24 hours of all coinbase revenue. The coinbase is the Bitcoin protocol’s base reward for mining a valid block.
Using this look-back period, FPPS pools pay out mining rewards based on the coinbase reward divided by Bitcoin’s mining difficulty, then multiplied by the number of work shares submitted by each contributor to the mining pool.
Careful readers will note, here, that the pool operator is assuming more financial risk with FPPS than with PPLNS; this is intentional. FPPS’ straightforward daily calculation allows miners to reliably predict their payouts.
FPPS also reduces the need for miners to trust the pool operator’s truthful reporting of earnings or variable selection of N difficulty epochs. The method is publicly verifiable using mostly on-chain data. These qualities explain the overwhelming popularity of FPPS today.
Pay Per Share Plus (PPS+): PPS+ uses an equation similar to FPPS but weights payouts on how much mining revenue the pool receives. It’s a compromise, somewhat in-between PPLNS and FPPS.
With PPS+, miners receive an allocation of the pool’s transaction fees in addition to just the coinbase calculations of FPPS.