Blockchain mining in pools: Analyzing the trade-off between profitability and ruin
This addresses risk management for blockchain miners, but it is incremental as it applies existing insurance theory to a specific domain.
The paper tackles the trade-off between profitability and ruin risk for blockchain miners by analyzing whether joining a mining pool is beneficial, using ruin theory and risk-sharing models to derive explicit formulas and illustrate results with numerical examples.
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.