「Zhikuang University Q&A」What are Bitcoin mines and mining pools?

Answer from @OWEN, editor of Zhikuang University:

Although this question is very basic, it is indeed difficult to understand for those who are new to Bitcoin mining, but it is also a very important basic concept to understand mining. Taking this opportunity, let's briefly talk about this issue today.

01
Bitcoin Mining Machine

The iterative history of Bitcoin mining equipment reflects the magnificent development history of Bitcoin. The original Bitcoin mining equipment was the CPU, that is, the personal computer. As the price of Bitcoin rose, people were no longer satisfied with the efficiency of CPU mining, and gradually evolved more efficient mining equipment. Mining equipment has mainly gone through four stages: CPU (computer), GPU (graphics card), FPGA (field programmable gate array), and ASIC (professional mining machine), and the mining efficiency has been higher and higher.

Professional ASIC mining machines have attracted widespread attention in the mining industry since 2012. In January 2013, the veteran mining machine manufacturer Avalon delivered the first commercial Bitcoin ASIC mining machine. After eight years of continuous iteration, the chip process size of ASIC mining machines has become smaller and smaller, from the initial 55nm to the current 7nm, with higher and higher computing power and lower energy efficiency (energy consumption per unit computing power).

▲Research report from Jingzhun and Node Capital

The above is the evolution history of Bitcoin mining machines.

02
Mining

With the rise in Bitcoin prices and the rapid development of ASIC mining machines, the disadvantages of mining at home have gradually emerged. In addition to the inconveniences caused by noise and heat dissipation, there are also unfavorable factors such as electricity consumption and disturbing others. In this case, it is necessary to provide a special place for the mining machines, and mining farms came into being in this context.

A mining farm is a place where mining machines are managed and maintained on a large scale and professionally. In simple terms, a mining farm is a place where mining machines are centrally managed and maintained for normal operation. Compared to mining with mining machines at home, mining farms have obvious advantages, which are mainly reflected in the following aspects:

The first is cost advantage. Large-scale mining farms are generally located in places with abundant power resources and cheap electricity prices. This is because the largest cost expenditure of mining farms is electricity bills, and cheap electricity will bring huge cost advantages to mining farms. In addition, the large-scale management and operation and maintenance of mining farms are also conducive to reducing various labor and service costs. Scaling can also bring stronger bargaining power, so that you can get cheaper electricity and enjoy more favorable services.

The second is to form subdivided industries and improve professional capabilities and service levels. From a micro perspective, mining machines are hosted in mining farms. When a failure occurs, not only is the response speed greatly improved, but there are also professional personnel to repair it. From a macro perspective, large-scale mining farms promote industry division of labor, quickly improve the professional skills and experience accumulation of practitioners, and professional skills in turn act on mining farms, improving the level and capabilities of industry services.

The third benefit is that mining does not interfere with daily life. The emergence of mining farms not only avoids the interference of mining on daily life, but also avoids potential legal risks such as illegal use of electricity and disturbance of residents.

03
Mining Pools

After talking about the mining farm, let’s introduce the mining pool.

As we have introduced in the article “Bitcoin Mining: A Fair Issuance Mechanism”, mining is equivalent to a coin tossing competition. Whoever gets the result that meets the system requirements first wins the right to keep accounts and the corresponding block rewards.

With the rapid expansion of mining computing power, the probability of mining a block with small computing power has become extremely small. It is very likely that small miners will mine for several years in a row, invest a lot of mining machines and electricity costs, and finally mine nothing. In order to avoid this risk, mining pools came into being.

In order to avoid the risk of long-term no income, miners adopt the method of "banding together for warmth" and "concentrating computing power to do big things". The scattered computing power is connected to the mining pool according to a certain network protocol. The mining pool assigns computing tasks to the computing power connected to the mining pool. The previously "separate" scattered computing power is coordinated and arranged by the mining pool, and the computing power is concentrated to mine together. The scale effect of the mining pool can ensure a relatively stable output every day, and the longer the time, the closer the income is to the mathematical expectation.

Simply put, the mining pool is equivalent to the project manager. The computing power connected to the mining pool according to the agreement is the project team member who obeys the work arrangement of the project manager. The project is mining, and finding a solution that meets the requirements of the Bitcoin system as soon as possible. All project team members advance their work tasks according to the arrangement of the project manager and submit their work results. The project manager rewards the project members according to the specific situation of completing the tasks in the way of "more work, more pay".

The emergence of mining pools also benefits miners in many ways:

First, miners have relatively stable output every day, avoiding the risk of long-term no income from independent mining and reducing the uncertainty and volatility of income.

Second, after connecting to the mining pool, small miners no longer need to run a full node for mining. They can get mining rewards by simply executing the computing tasks assigned by the mining pool and submitting the calculation results as required.

▲Symbol of the relationship between mining machines, mining farms, and mining pools

Miners can choose different mining farms to host mining machines and can connect their computing power to different mining pools.

04
Summarize

Mining farms and mining pools are the inevitable products of the development of the cryptocurrency mining industry, and are also a sign of the development and maturity of the mining industry.

The emergence of mining farms has greatly improved the professionalism of mining machine operation and maintenance and significantly reduced the cost of mining machine operation and maintenance; the emergence of mining pools has reduced the uncertainty and volatility of miners' income and avoided the risk of long-term no income from independent mining. After connecting to the mining pool, small miners no longer need to run a full node for mining. They only need to execute the computing tasks assigned by the mining pool and submit the calculation results as required to get mining rewards.

What questions do you have about Bitcoin mining and halving? Feel free to ask questions to Zhikuang University.