Bitcoin mining is a tough business. When considering inserting financial resources to make my traditional raw materials such as gold, copper or oil, investigation for these resources in the field is always in advance to ensure that any capital invested in a mining project is not in vain. But because of the nature of Bitcoin’s security protocol, miners are not able to prospect of anything, as finding a block is a purely statistical and random event. Since there are only 144 blocks found per day. Day, there is no way to ensure that a miner’s work will be rewarded in a timely way without significant variation, unless the miner has a significant amount of hash frequency. A miner needs approx. 1.2% of the total hash rate (about 10 exahashes per second at the time of writing) to guarantee uniform payments and significantly reduces its income variance. CAPEX required to achieve such a amount of hash rate is in order of hundreds of millions of dollars. Unless a miner is a gigantic business that has a huge bunch of Asics, he will have a problem in his hands.
Pool mining was created to solve and solve this problem. Let’s take a single miner with a small but considerable mining. Out of the 52560 annual blocks, he is expected to find one as he has 1/52560. of all the network’s hash rate. In other words, he is expected to find a block every 12 months. But his electricity bill is due every 4 weeks, and if he had to wait for a whole year to pay bills before he got some revenue through the door, he would go bankrupt. Given this discrepancy between its ongoing costs and its revenue, an idea comes to his mind. He tries to find 499 other people with a similar size surgery and they hit an appointment. Instead of all mining on their own, the miner of the others suggests that they all gather, as if they are part of the same unit, and divide the mining according to the work of each miner every time someone finds a block. If each miner has 1/52560. Of all the hash rate of the network, 500 miners are expected to find a block about twice a week. With a pool mining approach, each miner guarantees that all the efforts and hard work they put in will be rewarded much more frequently. In this way, everyone gets to pay their bills every month, and by the end of the year they have all effectively managed to avoid bankruptcy. Nevertheless, there are still sources of variance within the same payments.
Pool mining ensures that miners are paid much more frequently compared to solo mining. However, it does not guarantee predictable payments based on the hashish power of each miner. This problem is commonly known as the pool’s full risk. Let’s return to the previous example. 500 miners with 1/52560. of the total hashrat on the network is expected to find 500 blocks in one year. Nevertheless, they can find 480. Or 497. Or 520. There is no assurance that the pool will mines exactly 500 blocks in one year. A pool good luck is calculated by dividing the number of blocks found by the number of blocks expected to be found based on the total hashret of the pool. If a pool mines 480 blocks, as they expected my 500, the pool’s luck was 95%. Pool luck can cause significant fluctuations in earnings over short periods. However, happiness tends to level out over time, and payouts will eventually adapt to the expected distribution based on the pool’s hash rate. Two additional factors contribute to the total variance of the miners’ payment payments, where the first factor is more significant than the second. The first is transaction fees. These tend to vary considerably as a witness in the last few years. Transaction fees from the blocks that were extracted just after the last halving represented more than 50% of the total block winning for the first time in Bitcoin’s history. From the writing date of this article (block height 883208), there were several non-full blocks extracted in the last week since Mempool was cleared in several occasions over the past few days. Return a jump in such a short time. The second factor is related to the variance connected with time between blocks found by the network. When there is one block right after another, there is less time for transactions to be built in MEMPOOL, leading to lower transaction fees in this block. Conversely, if a more longer period goes between blocks, more transactions are sent out, increasing transaction fees in the process.
Uncertainty is painful. Especially where there is considerable capital in danger. Thus, most miners find value by having more predictable, stable and less unstable payments to recover the significant amount of capital implemented. This is where a full salary per. Share payment scheme paid for by pools comes into play. FPPS acts as a traditional insurance product. A pure risk transfer. No matter how many blocks that miners in the pool find overall and what the transaction fees paid on them, miners are paid by the pool based on the expected value of their hasching power. The pool assumes all that risk. The predictability that FPPS gives miners is unmatched by any other method. Therefore, no one should be surprised to hear that FPPS is pretty much the standard today when it comes to pool payments, though not at no significant cost.
FPPS is not a free lunch. To resist any unfortunate period and the risks associated with a FPPS payout scheme, pools must have large fat pockets. These high capital requirements cost money. And pools are not charities. These high costs end up being paid for by miners through higher pool fees. Like mentioned earlier, miners have to keep in mind that a FPPS payout scheme acts as an insurance policy. And insurance policies rely on counterparties. And sometimes counterparties fail to honor their obligations when they are most needed, as is witnessed in the global financial crisis in 2008. Mines must trust that the pool will fulfill their insurance contract obligations. Of course, if the pool is very large in size, this risk is actually very small. Pools can also develop ways to relieve this risk from their operations. But is Bitcoin not all about minimizing confidence, counterpartism and removing it if possible? It seems that Bitcoin -Tos has not yet arrived on the pool mining of the protocol.
Furthermore, any miner receiving FPPS rewards for their work must necessarily lose any revenue related to transaction fees. The FPPS payout formula determines miner rewards by analyzing transaction fees from the previous n Blocks and calculation of a “expected value” for transaction fees. The pool then uses this calculation to decide how much to pay miners for the transaction fee of their shares. As a result, when transaction fees waves, the payment is made according to what happened in the past, where there are no transaction fees at all. No need to be a Ph.D. in math to understand that all these rewards end up in the pockets of the pool rather than miners in this scenario. Even if there was a recent increase in transactions, pools cannot be included in payout calculations. The probability that such a spike is not an outlier is almost insignificant. In other words, pools have no guarantee that the spikes of the fee will be consistent and frequent in the future. Therefore, they cannot include it in miner payments without risking bankruptcy.
FPPS Payment scheme unsustainability
When we take a closer look at how the FPPS payout scheme is built, we can easily see that it is like the modern pension systems from many governments, unsustainable by design. FPPs, as it stands today, will soon collapse under its own weight. As time goes on, transaction fees represent a larger percentage of the total payment to miners. This dynamic next to their inherent variation will lead to a significant increase in total payout variance, which increases insurance costs for FPPS pools to endless. In other words, when the coin base reward continues to halve, the variance of the reward in the block will increase significantly. If the variance increases the associated risk of delivering this insurance product to miners. Thus, prizes for the insured must also increase. This means that FFPS pools take on further risk when they compromise on a fixed payment to miners. With more risks, higher capital costs come. The extent to which pool fees should rise for pools to continue to provide a FPPS insurance product to see. Only insurance actuals can determine the exact amount. One thing we already know for sure. It won’t be cheap because it’s already.
A much higher pool fee for stable predictable payouts offered by FPPS will make a PPLN method Reward method much more attractive to all miners who appear to maximize their profitability as the previously described dynamics in the changing composition of blocks are played. According to this scheme, miners are paid when a block is found by the pool. When there is a block, the pool assesses how many valid shares that each mines contributed for a period of time consisting of the last N blocks found by the pool and distributing payments accordingly. This time window is often referred to as the PPLNs window. The biggest setback with this payment method is, of course, the risk of the pool’s luck being below 100%and the risk that there may be periods when the pool finds no block and as a result miners do not get paid. However, a pool with only 1% of the hash frequency has only a 0.0042% chance of not finding a block within a week, while the odds that the pool’s luck is lower than 90% in one year is approx. 1.09%.
Will there soon be a market for FPPS pool services at a high enough price that compensates the pool for all the variance associated with the total block payments? No one can know for sure. One thing we know. Pool fees must be huge. The revenue that miners will need to be lost will just be too big to be worth it to get rid of the risk of not being paid consistently in a timely way. And when other more mature players enter the Bitcoin mining sector, such as energy companies, one should expect other risk management tools to be easily accessible in the miners market to uncover all types of risks. New innovative pool payment schemes are likely to surface when these instruments become more accessible to everyone.
Miners’ revenue and profitability will be significantly affected by the dynamics described in this article. Examination of alternative pool payment schemes and risk deferral strategies will be required for any mines that appear to maximize the profitability of their operation. The FPPS payout method can still be useful for miners from today. But as previously explained, FPPS will soon be buried in Bitcoin’s history.
This is a guest post of Francisco Quadrio Monteiro. Opinions that are expressed are entirely their own and do not necessarily reflect those from BTC Inc or Bitcoin magazine.