Bitcoin mining is a tough business. When considering deploying economic resources to traditional goods such as gold, copper, and oil, exploration of these resources on-site is always carried out in advance to ensure that capital invested in mining projects is not wasted. It will be done. However, the nature of Bitcoin's security protocols is precisely that finding blocks is a purely statistical and random event that the miner can't see anything. Only 144 blocks are found per day. As long as miners do not have a substantial amount of hashrate, there is no way to ensure that miners' jobs will be rewarded in a timely manner without any significant fluctuations. Minors require approximately 1.2% of the total hash rate (about 10 exahashes per second at the time of writing) to ensure consistent payments and significantly reduce revenue variances. Capital expenditures required to achieve such a quantity of hashrates are in order of hundreds of millions of dollars. Unless the miners are a huge corporation with a huge asics flock, he has problems with his hands.
Pool mining has been created to address and resolve this issue. Take one miner, small but with considerable mining operations. Of the 52560 yearly blocks, he is expected to find it, as he has 1/52560 of all the hashrates of the network. In other words, he is expected to find one block every 12 months. However, his electricity bills are due every four weeks, and if he waits to pay his bill for a year before he can earn income through the door, he will go bankrupt. Given this discrepancy between ongoing costs and revenue, the idea comes to his mind. He is trying to find 499 other people with similar size operations, and they make a deal. Instead of all mining themselves, miners suggest that they collectively mine to others as if they were part of the same entity, and each time someone finds a block Split mining rewards according to the miner's work. If all miners have 1/52560 of all hashrates in the network, then 500 miners are expected to find blocks about twice a week. The pool mining approach ensures that all miners have paid off much more frequently, all the effort and effort they put into. This way, everyone can pay their bills every month, and by the end of the year, they are all effectively managing to avoid bankruptcy. Nevertheless, those same payments still have diversification sources.
Pool mining ensures miners are paid much more frequently than solo mining. However, we do not guarantee predictable payments based on the hash power that each miner has. This issue is commonly known as a risk of pool luck. Let's go back to the previous example. Of the network's total hashrate of 1/52560, 500 miners, each expected to find 500 blocks in a year. Nevertheless, they may find a 480 or 497. Pool luck is calculated by dividing the number of blocks found by the number of blocks expected to be found based on the total hashrate of the pool. If the pool mined 480 blocks when it was expected to mint 500, the pool's luck was 95%. Pool luck can cause significant fluctuations in revenue over a short period of time. However, luck tends to be even over time, and ultimately, the expected distribution and payments match based on the pool's hashrate. Two additional factors contribute to the overall variance in the payout rewards of miners, with the first factor being more important than the second. The first is transaction fees. These tend to differ widely as seen in the last few years. Transaction fees from blocks mined shortly after the last half represent more than 50% of total block rewards for the first time in Bitcoin history. As of the date of writing this article (block height 883208), several non-full blocks have been mined over the past week. A great jump in such a short time. The second factor is related to the time-related variance between blocks found in the network. When blocks are discovered one after another, the members will spend less time on transactions, reducing transaction fees on that block. Conversely, as more extended periods between blocks pass, more transactions will be broadcast, increasing transaction fees in the process.
Uncertainty hurts. Especially when a significant amount of capital is at risk. Therefore, most miners find value by lowering more predictable, stable, and unstable payments to regain a substantial amount of capital deployed. This is where the per share payment scheme comes out, paid by the pool. FPPS functions as a traditional insurance product. Pure risk transfer. Regardless of how many blocks the miners in the pool collectively find and how many blocks the transaction fees pay, miners are paid in the pool based on their hash power expectations. The pool assumes all of that risk. The predictability that FPP offers to miners is unparalleled in any other way. So, while FPPS is not without significant costs when it comes to paying for pools, it should not be surprising to learn that it is almost standard these days.
FPPS is not a free lunch. The pool requires a large fat pocket to withstand all the risks associated with bad luck periods and FPPS payout schemes. These high capital requirements cost money. Pools are not charity. These high costs will be paid by the miners at a higher pool fee. As mentioned earlier, miners need to note the fact that the FPPS payout scheme acts as an insurance contract. Insurance relies on counterparties. Also, as witnessed during the global financial crisis of 2008, counterparties are unable to respect commitments when they need them most. Miners must trust that the pool will fulfill its insurance contract obligations. Certainly, if the pool size is very large, the risk is actually very small. Pools can also develop ways to offload this risk from operations. But isn't Bitcoin all about minimizing trust, minimizing the risk of counterparties and eliminating it if possible? It appears that the spirit of Bitcoin has yet to arrive at the pool mining side of the protocol.
Additionally, miners who receive FPPS compensation for their work will inevitably need to confiscate the proceeds related to the transaction fee spike. FPPS Payout Formula determines the rewards of miners by analyzing previous trading fees n Blocks the expected value for transaction fees and calculates it. The pool then uses this calculation to determine the amount to pay the miner for the trading fee portion of the stock. As a result, if trading fees rise sharply, payments will be made according to what happened in the past where there is no trading fee at all. In this scenario, you do not need to earn a doctorate in mathematics to understand that all these rewards fall into the pocket of the pool, not the miner. Furthermore, even if transactions have skyrocketed recently, the pool cannot take this into account in payment calculations. It is almost unclear whether such a spike is not an outlier. In other words, there is no guarantee that the fee spikes will be consistent and frequent in the future. Therefore, you cannot include it in your miner payments without risking bankruptcy.
Sustainability of the FPPS Payout Scheme
If we take a closer look at how the FPPS payout scheme is built, it's easy to see that it is like a modern pension scheme for many governments and is unsustainable by design. Today's FPP will soon collapse on its own weight. Over time, transaction fees represent the majority of total payments to miners. This dynamic, in addition to inherent variability, significantly increases the variance in total payments, and infinitely increases insurance costs for the FPPS pool. In other words, if Coinbase's reward continues to be halved, the variance in rewards within the block increases significantly. Increased variance also increases the associated risk of providing this insurance product to miners. Therefore, the premiums for the insured must also increase. This means that FFPS pools take additional risks when compromising on fixed payments to miners. The more risks, the higher the cost of capital. It is not yet known how long pool fees will have to rise to continue offering FPPS insurance products. Only the insurance operator can determine the exact amount. One thing we already know. It's not cheap because it's already not.
The pool fees for stable, predictable payouts offered by FPPS are much higher, which means that dynamics of the changing and changing configuration of blocks will be regenerated, so for miners looking to maximize profitability. It makes the reward method of the PPLNS method much more appealing. Under this scheme, miners are paid when a block is found by the pool. Once a block is found, the pool will assess the number of valid shares each miner has donated during the period consisting of the last N blocks found in the pool and distribute payments accordingly. This time window is commonly referred to as a PPLNS window. The biggest set-off with this payment method of course may be risks associated with less than 100% of the pool's luck, and there may be periods when the pool cannot find a block, resulting in the miner not being paid. There's a risk that there isn't. However, a pool with only 1% of hashrates has a chance of finding a block within a week, with a chance of about 1.09% of the year.
Is the market for FPPS pool services at a sufficient price to correct the pool for all variances related to the total block reward? No one can know for sure. One thing we know. Pool fees must be huge. The revenue that miners have to confiscate is too great to be valuable to remove the risks associated with not receiving consistent and timely payments. We also hope that as other more mature players enter the Bitcoin mining industry, such as energy companies, other risk management tools will be readily available in the marketplace for miners to hedge all kinds of risks. It must be. As these devices become available to everyone, new and innovative pool payment schemes will likely emerge.
Miners' revenue and profitability are greatly influenced by the dynamics described in this article. Research into alternative pool payment schemes and risk hedging strategies is necessary for miners looking to maximize operational profitability. The FPPS payout method may still be useful for today's miners. However, as explained previously, FPP will soon be buried in Bitcoin history.
This is a guest post by Francis Co Cuadrio Monteiro. The opinions expressed are entirely unique and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
