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

Hansjörg Albrecher, Dina Finger and Pierre-Olivier Goffard ()
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Hansjörg Albrecher: UNIL - Université de Lausanne = University of Lausanne
Dina Finger: UNIL - Université de Lausanne = University of Lausanne
Pierre-Olivier Goffard: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

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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.

Date: 2022-04-14
New Economics Papers: this item is included in nep-isf, nep-pay and nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-03336851v2
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