Risk and Fees in Heterogeneous Mining Pools: Implications for Hash Rate Growth

Abstract

This paper investigates the optimal decision-making problem in blockchain pooled mining. We quantify the risk-sharing effects of mining pools, demonstrating that miners prefer pooled mining rather than solo mining. Then we develop a risk model to minimize the entropic risk measure for miners and pool managers. The research findings reveal that mining risk primarily arises from the heterogeneity across different pools. In the equilibrium, larger pools charge higher fees, attracting disproportionately fewer miners and leading to slower growth for these pools. Numerical simulations further indicate that the emergence of mining pools causes a dramatic increase in the global hash rate.

Keywords: risk analysis, Blockchain, Mining pool, Entropic risk measure, Risk sharing