While mining is usually used as the analogy for obtaining coins and is quite apropos, we are going to use a jigsaw puzzle analogy to try and give a little more detail how mining in a pool works. It’s not meant to explain what crypto-currency is or delve into the mathematical aspects of what hashing is. I saw someone on reddit explain it this way but in much less detail and thought it was really good. I’ve embellished and rewritten what I remember from scratch.
We’re going to start with a factory that makes jigsaw puzzles. This factory is like the coin network. The factory sends out new puzzles like the network sends out blocks. So for our purposes, the puzzle represents a block. Now, you can solve the puzzle yourself or you can get a few friends together and work on it, pooling your resources. Now, when the factory designs a new puzzle, a copy is given to everyone in the network to work on. The race is on to complete the puzzle because the first person to solve the puzzle gets a reward in coins.
Let’s get down to solving this puzzle! Each person picks up a piece, guesses at which way to orient the piece, then tries one location to see if it fits. If not, rotate the piece and try again until either you or someone else solves that puzzle. This process is the equivalent of hashing. When you see your hash rate as 100kh/s, in means you are trying to place a puzzle piece 100,000 times a second. So the faster you mine, the more pieces you can try placing giving. Some puzzles are harder than others and this is indicated by the difficulty. The higher the difficulty, the harder the puzzle gets and the longer it takes to complete.
If the piece you attempt to place seems to fit, others are asked if it really belongs there or if it was jammed and forced into place. If everyone agrees that you placed the piece correctly, you work is accepted (yay!!!) and are credited with one valid share towards the reward if you or someone in your pool completes the puzzle. If it turns out the piece didn’t really belong there it’s rejected (booooo). This continues until someone solves the puzzle placing the last piece. So now we have one correctly placed puzzle piece equals one valid share in the pool. If another pool or solo miner finishes the puzzle before us, work is stopped on current puzzle and the next one from the factory is started.
When someone places the last piece, the completed puzzle is passed around to other members of the network so it can be confirmed as correctly solved. Once enough people agree that the puzzle is correctly solved, the person, or pool that solved it gets the reward of a random number coins. If another person or pool finished the puzzle and it’s confirmed before yours, the block is considered orphaned and no one gets anything in your pool. The time between each puzzle the pool solves is called a round.
If you are solo mining, you get to keep all those coins to yourself, but only people with a lot of hardware can make that worthwhile. When you are in a pool, the coins are divided up among people that successfully placed a piece of the puzzle. The more pieces you placed, the bigger the share of coins you get. This is why you want as high a hash rate as possible, the more pieces you can try per second, the more you can place correctly.
Pools have two ways of calculating the the number coins each member gets. One method does some manipulation to make sure the higher rate members don’t get all the rewards and the lowest get enough to make it worthwhile. For our purposes, we will use the standard method to explain it.
When the puzzle is finished, the number of correct pieces placed by everyone this round is totaled up. For our example, we’ll say all together the pool placed 1000 pieces(shares) correctly and represents the work done by the pool as a whole(round). During that time you correctly found the place for 50 of those pieces(valid shares). Lets say the random reward(coins) was 500,000. Now taking the reward and dividing by the work done (500,000/1000) we find that each share is worth 500 coins. Since you placed 50 of those pieces, your share is 50 * 500, or 25,000 of those 500,000 coins.
Hopefully this has helped you understand how a pool divides up the work and rewards. Keep in mind there are a number of factors, including random ones, in determining how much you get for your efforts so you have to look at an average over time. When trying out a pool, it’s usually best to give it at least 24 hours to see what you can average out over that time frame. Anything smaller and you are going to find a greater margin of error.
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