Bitcoin was designed to eliminate the need for a trusted third party. However, the mining ecosystem has evolved towards a structural concentration that contradicts that principle. The root of the problem is not the hardware, but the reward distribution model.

How PPLNS works

Pay Per Last N Shares distributes the block reward among miners who contributed shares during the last N shares before the block was found. The pool decides the value of N, accumulates shares, validates the block, receives the full coinbase into its wallet, and then makes individual payments to each miner. In that process, the pool acts as a custodian: it receives first and pays later.

How PPS works

Pay Per Share pays the miner a fixed amount for each valid share, regardless of whether the pool finds a block or not. The pool assumes variance risk. This turns the pool into a financial service: it is a counterparty that guarantees payments and absorbs losses. To operate this way it needs reserves or prior capital to absorb unlucky periods. The relationship is no longer pool/miner, but debtor/creditor.

How PPLNS and PPS affect pool decentralisation

  • Hashrate concentration: miners migrate to the largest pools because they offer better liquidity and lower variance. This creates a cycle where large pools become larger.
  • Transaction selection power: whoever builds the candidate block decides which transactions to include. If 40% of Bitcoin's hashrate is in a single pool, that pool can materially delay or selectively exclude transactions.
  • 51% attack risk: a pool exceeding 51% of the network's hashrate can reorganise the chain. In 2014, GHash.io reached 55% of BTC. No attack occurred, but the risk was real.
  • Custody and regulation: a pool handling payments to thousands of users is operating as a financial service provider. In many jurisdictions this implies KYC/AML obligations, fund-freezing and regulatory checkpoints.
  • Single point of failure: if a large pool goes down due to an attack, regulation or an operational decision, thousands of miners are left with pending unpaid rewards. The pool is a promise, not a cryptographic certainty.

What alternative exists?

Solo mining eliminates the pool's custodial role completely. There are no shares, no distribution, no deferred payments. The reward is encoded in the block from the moment the miner constructs the work. If the block is valid and the network accepts it, the payment is immutable and irreversible without any operator intervention. The cost is variance: finding blocks is a stochastic process with high standard deviation. But for those who have enough hashrate or accept that variance, it is the option that most faithfully respects the original protocol design.

If you are choosing a pool, combine this analysis with our guides on solo mining, coinbase transactions, and custody to decide how much external trust you actually accept.