Diversification Across Mining Pools: Optimal Mining Strategies under PoW

TL;DR

This paper develops an analytical model and computational tool enabling miners to optimally diversify their mining efforts across multiple pools and cryptocurrencies, maximizing risk-adjusted earnings and promoting decentralization.

Contribution

It introduces a novel model and tool for miners to optimize portfolio diversification across pools and cryptocurrencies considering risk preferences.

Findings

Diversification increases miners' Sharpe ratio in Bitcoin data.

The model effectively guides miners to improve risk-adjusted returns.

Diversification can enhance PoW network decentralization.

Abstract

Mining is a central operation of all proof-of-work (PoW) based cryptocurrencies. The vast majority of miners today participate in "mining pools" instead of "solo mining" in order to lower risk and achieve a more steady income. However, this rise of participation in mining pools negatively affects the decentralization levels of most cryptocurrencies. In this work, we look into mining pools from the point of view of a miner: We present an analytical model and implement a computational tool that allows miners to optimally distribute their computational power over multiple pools and PoW cryptocurrencies (i.e. build a mining portfolio), taking into account their risk aversion levels. Our tool allows miners to maximize their risk-adjusted earnings by diversifying across multiple mining pools which enhances PoW decentralization. Finally, we run an experiment in Bitcoin historical data and demonstrate that a miner diversifying over multiple pools, as instructed by our model/tool, receives a higher overall Sharpe ratio (i.e. average excess reward over its standard deviation/volatility).