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

Author

Listed:
  • Hansjörg Albrecher

    (UNIL - Université de Lausanne = University of Lausanne)

  • Dina Finger

    (UNIL - Université de Lausanne = University of Lausanne)

  • Pierre-Olivier Goffard

    (UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

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.

Suggested Citation

  • Hansjörg Albrecher & Dina Finger & Pierre-Olivier Goffard, 2022. "Blockchain mining in pools: Analyzing the trade-off between profitability and ruin," Working Papers hal-03336851, HAL.
    • Handle: RePEc:hal:wpaper:hal-03336851
    Note: View the original document on HAL open archive server: https://hal.science/hal-03336851v2
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    References listed on IDEAS

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    1. Daniel Dufresne, 2007. "Fitting combinations of exponentials to probability distributions," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 23(1), pages 23-48, January.
    2. Mazza, Christian & Rulliere, Didier, 2004. "A link between wave governed random motions and ruin processes," Insurance: Mathematics and Economics, Elsevier, vol. 35(2), pages 205-222, October.
    3. Yi Lu, 2010. "“A Direct Approach to the Discounted Penalty Function”, Hansjörg Albrecher, Hans U. Gerber, and Hailiang Yang, Volume 14, No. 4, 2010," North American Actuarial Journal, Taylor & Francis Journals, vol. 14(4), pages 438-441.
    4. Zongxi Li & A. Max Reppen & Ronnie Sircar, 2019. "A Mean Field Games Model for Cryptocurrency Mining," Papers 1912.01952, arXiv.org, revised Jan 2022.
    5. Easley, David & O'Hara, Maureen & Basu, Soumya, 2019. "From mining to markets: The evolution of bitcoin transaction fees," Journal of Financial Economics, Elsevier, vol. 134(1), pages 91-109.
    6. Hansjörg Albrecher & Hans Gerber & Hailiang Yang, 2010. "A Direct Approach to the Discounted Penalty Function," North American Actuarial Journal, Taylor & Francis Journals, vol. 14(4), pages 420-434.
    7. Pierre-Olivier Goffard, 2019. "Fraud risk assessment within blockchain transactions," Working Papers hal-01716687, HAL.
    8. Hansjörg Albrecher & Pierre-Olivier Goffard, 2021. "On the profitability of selfish blockchain mining under consideration of ruin," Working Papers hal-02649025, HAL.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Soria, Jorge & Moya, Jorge & Mohazab, Amin, 2023. "Optimal mining in proof-of-work blockchain protocols," Finance Research Letters, Elsevier, vol. 53(C).

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