Smoothening block rewards: How much should miners pay for mining pools?

TL;DR

This paper analyzes the economic benefits of smoothing block rewards through mining pools, quantifying how much miners should pay for such services to optimize their reward yield.

Contribution

It introduces a model to quantify the economic advantage of smooth rewards and determines the optimal percentage miners should pay for pool services.

Findings

Quantifies the benefit of reward smoothing for miners

Defines the maximum acceptable fee for mining pools

Provides a strategy for miners to optimize reward yields

Abstract

The rewards a blockchain miner earns vary with time. Most of the time is spent mining without receiving any rewards, and only occasionally the miner wins a block and earns a reward. Mining pools smoothen the stochastic flow of rewards, and in the ideal case, provide a steady flow of rewards over time. Smooth block rewards allow miners to choose an optimal mining power growth strategy that will result in a higher reward yield for a given investment. We quantify the economic advantage for a given miner of having smooth rewards, and use this to define a maximum percentage of rewards that a miner should be willing to pay for the mining pool services.