Bitcoin Mining is not an easy business. When Before investing in any mining projects, it is important to prospect for the resources. But The very nature of Bitcoin’s security protocol, miners are not able to prospect for anything, since finding a block is a purely statistical and random event. Since there are only 144 blocks to be found per day, there is no way to ensure that a miner's work will be rewarded in a timely fashion without significant variability, unless the miner has a considerable amount of hash rate. The hash rate of a miner is roughly 1.2% (roughly 10 Exahashes It is possible to reduce the variance in revenue by up to ten percent (per second as of this writing). The The CAPEX needed to reach such a hashrate would be in the hundreds of millions. Unless If a miner has a massive flock of ASICS in its operation, then he is going to have some problems.
Pool Mining was developed to solve and address this problem. Let’s take a single miner, with a small but considerable mining operation. Out of the 52560 yearly blocks, he’s expected to find one, since he has 1/52560th of all the hashrate of the network. In other words, he’s expected to find one block every 12 months. But his electricity bill comes due every 4 weeks, and if he was to wait for a whole year paying bills before getting some revenue through the door, he’d go bankrupt. Given An idea occurs when the disparity between his ongoing costs and revenues is noted. He Sets out to find other 499 businesses with similar size operations, and the two strike a bargain. Instead of everyone mining on their own, the miner proposes to the others that they all mine collectively as if they are part of the same entity, splitting the mining rewards according to each miner’s work every time someone finds a block. If Every miner only has 1/52,560th of the entire hashrate on the network. This means that the 500 miners will find blocks approximately twice per week. With With a pool-mining approach, each miner is guaranteed to be rewarded for all their hard work. This By the end of the calendar year, everyone has managed to effectively avoid bankruptcy. NeverthelessThere are sources of variation within the same payouts.
Pool Solo mining is not as profitable for miners. However, it doesn't guarantee predictable payouts based on the hashing power that each miner has. This problem is commonly known as the pool’s luck risk. Let´s go back to the previous example. It is expected that 500 miners each having 1/52560th hashrate will be able to discover 500 blocks per year. NeverthelessThey may discover 480. Or 497. Or 520. There There is no guarantee that the pool mines exactly 500 blocks per year. There is no guarantee that the pool mines exactly 500 blocks per year. Pool’s luck is calculated by dividing the number of blocks found by the number of blocks that was expected to be found based on the total hashrate of the pool. If a pool mines 480 blocks when they were expected to mine 500, the pool’s luck was 95%. Pool The fluctuations of earnings can be dramatic over a very short time. However, luck tends to even out over time, and payouts will eventually align with the expected distribution based on the pool's hash rate. Two additional factors contribute to the overall variance in miners' payment rewards, with the first factor being more significant than the second. The The first thing to consider is the transaction fee. These As seen in recent years, the trends tend to be quite different. Transactions The fees on blocks that were mined after the last half-halving reached 50% for the very first time. Bitcoin’s history. As Since the last few days, the mempool has been cleared on several occasions, there have been several blocks that are not full. Quite A jump so rapid. The The second factor is the difference in time between the blocks that the network finds. When If a new block is discovered immediately, it gives less time to the transactions in the mempool to pile up, resulting to lowered transaction fees for that particular block. ConverselyIf a longer period of time elapses in between blocks, then more transactions are broadcast, increasing transaction fees.
Uncertainty This is a painful experience. Especially Where there are substantial risks to capital. ThusMost miners value more stable, predictable and less volatile payments to recover the substantial amount of capital invested. This Where is a Full Pay Per Share The payout is done by pool. FPPS functions as a standard insurance product. A pure risk transfer. Regardless The pool pays miners based on their expected hashing power, regardless of how many transactions fees are paid and the number of blocks that the collective miners find. The Pool assumes the entire risk. The FPPS is the only method that can provide miners with such a high level of predictability. HenceFPPS has become the industry standard for pool payouts. However, it is not free.
The FPPS program isn’t free. To To withstand any bad period or all risks that come with a FPPS scheme payout, pools must have a lot of money. These Capital requirements are expensive. And The pools themselves are not charitable organisations. These Miners end up paying high costs through increased pool fees. Like Miners should remember, as we have already mentioned, that FPPS is a form of insurance. And Insurance policies depend on counterparties. And In 2008, we saw that counterparties sometimes fail to honour their commitments at the most critical times. Global Financial Crisis. The The miner should trust the pool to fulfill its obligations under their insurance contracts. SureIf the size of the pool is large, this risk is minimal. Pools They can find ways to eliminate this risk. But isn’t Bitcoin All about minimising trust and counter-party risks, or eliminating them if that is possible? Looks Like this Bitcoin ethos hasn't arrived yet at the pool mining side of the protocol.
FurthermoreMiners who earn FPPS must forfeit their revenue if they want to keep the transaction fee increases. The FPPS payout formula determines miner rewards by analyzing transaction fees from the previous n blocks and calculating an “expected value” for transaction fees. The The pool uses the calculation above to determine how much it will pay to miners as a transaction fee on their shares. As When transaction costs spike, payments are made based on what was done in the past when no fees were charged. No need to be a PhD in mathematics to understand that all those rewards end up in the pool’s pockets rather than the miners’ in this scenario. MoreoverPools can’t take into consideration recent increases in transaction volume when calculating payouts. The Probability of this spike being an anomaly is very low. In Other words, pool operators cannot guarantee the frequency and consistency of fee hikes in the future. ThereforeThey cannot include this in the payouts to miners without running the risk of bankruptcy.
The The FPPS payment scheme is not sustainable
Having When we take a close look at the FPPS, it’s easy to see how similar the scheme is to the pension schemes of modern governments. It is unsustainable from the start. FPPS will eventually collapse as is. As Over time, transaction costs will increase as a percentage of all payouts made to the miners. This Dynamic, along with their inherent variability will result in a significant rise of the payout variance. This, combined with the high insurance cost of FPPS pool, can lead to an infinite increase. In Other words, the Coinbase If the reward is halved, then the variation of rewards will be increased. If As the risk associated with this product increases, the insurance premiums for miners will also increase. ThusPremiums will also have to rise for insured persons. This FFPS pools are taking on additional risks by committing to a payment fixed to miners. With Capital costs will increase as the risk increases. The The extent of the increase in pool fees is yet to be determined. Only Insurance actuaries are able to determine this amount. One We already know this. It won’t be cheap, because it already isn’t.
The PPLNS reward system will be more appealing to miners who are trying to maximize profits, due in part because of the higher pool fees and predictable payouts provided by FPPS. Under This scheme pays miners once they find a block by the pool. When When a block has been found, the pool calculates the number of valid shares that each miner had contributed over a time period consisting of the N last blocks discovered by the pool. It then distributes the payouts according to this calculation. This PPLNS is the common name for this time period. The biggest setback with this payment method is of course the risk associated with the pool’s luck being under 100% and the risk that there might be periods when the pool doesn’t find any block and as a result, miners don’t get paid. However, a pool with only 1% of the hash rate has only a 0.0042% chance of not finding a block within a week, while the odds of the pool’s luck being lower than 90% in a year are approximately 1.09%.
Will There will be a market for FPPS pools at a sufficiently high price to cover the whole variance in the total rewards of each block? No One can be sure. One What we know Pool The fees would have to be huge. The To avoid the financial risk of not being paid on time consistently, it would be unjustifiable to lose that revenue. And As other mature players, like energy companies, enter the Bitcoin mining industry, other tools for risk management will be available on the market to miners. New Innovative pool payment schemes are likely to emerge as more people have access to these instruments.
Miners' revenue and profitability will be significantly impacted by the dynamics described in this article. Exploring To maximize profitability, any miner will have to use alternative payment plans and strategies for risk management. The The FPPS payment method may be useful for today’s miners. But as was previously explained, FPPS will soon be buried in bitcoin’s history.
This This is a post written by a guest. Francisco Quadrio Monteiro. Opinions BTC does not endorse the views or opinions of any third parties. Inc The following are some examples of how to use Bitcoin Magazine.
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