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

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.