Socially Optimal Mining Pools

TL;DR

This paper introduces a formal model for Bitcoin mining pools, demonstrating that the geometric pay pool strategy maximizes social welfare and is optimal under certain conditions, with implications for various pooled computation systems.

Contribution

It provides a formal utility and social welfare model for mining pools and proves the geometric pay pool strategy is socially optimal under specific parameters.

Findings

Geometric pay pools achieve optimal steady-state utility.

The model applies broadly to pooled mining and crowdsourcing systems.

Parameters can be set to maximize social welfare in practice.

Abstract

Mining for Bitcoins is a high-risk high-reward activity. Miners, seeking to reduce their variance and earn steadier rewards, collaborate in pooling strategies where they jointly mine for Bitcoins. Whenever some pool participant is successful, the earned rewards are appropriately split among all pool participants. Currently a dozen of different pooling strategies (i.e., methods for distributing the rewards) are in use for Bitcoin mining. We here propose a formal model of utility and social welfare for Bitcoin mining (and analogous mining systems) based on the theory of discounted expected utility, and next study pooling strategies that maximize the social welfare of miners. Our main result shows that one of the pooling strategies actually employed in practice--the so-called geometric pay pool--achieves the optimal steady-state utility for miners when its parameters are set appropriately. Our results apply not only to Bitcoin mining pools, but any other form of pooled mining or crowdsourcing computations where the participants engage in repeated random trials towards a common goal, and where "partial" solutions can be efficiently verified.