Blockchain mining in pools: Analyzing the trade-off between profitability and ruin

TL;DR

This paper examines how joining mining pools affects profitability and risk of ruin in blockchain mining, using ruin theory to quantify benefits and trade-offs for miners.

Contribution

It introduces a novel application of ruin theory to analyze the impact of pooling on mining profitability and risk, providing explicit formulas and practical insights.

Findings

Pooling reduces variance in miner returns.

Joining pools can lower the risk of ruin.

Explicit formulas quantify pooling benefits.

Abstract

The resource-consuming mining of blocks on a blockchain equipped with a proof of work consensus protocol bears the risk of ruin, namely when the operational costs for the mining exceed the received rewards. In this paper we investigate to what extent it is of interest to join a mining pool that reduces the variance of the return of a miner for a specified cost for participation. Using methodology from ruin theory and risk sharing in insurance, we quantitatively study the effects of pooling in this context and derive several explicit formulas for quantities of interest. The results are illustrated in numerical examples for parameters of practical relevance.