Bitcoin Mining Challenges

Bitcoin mining is a tough business. When deploying resources to mine traditional commodities like gold or oil, prospecting is done beforehand to ensure that capital isn’t wasted.

However, Bitcoin’s security protocol means miners can’t prospect, as finding a block is purely random. With only 144 blocks available each day, timely rewards are uncertain without significant hash rate. A miner needs about 1.2% of the total hash rate (around 10 Exahashes per second) to guarantee regular payouts and reduce revenue variability. The capital expenditure to reach such hash rate is in the hundreds of millions. Thus, smaller miners struggle unless they are part of larger operations.

The Emergence of Pool Mining

Pool mining was developed to address the aforementioned issues. Consider a miner with a small operation. Out of the 52,560 yearly blocks, they’re expected to find one block a year, but their bills come monthly. To mitigate going bankrupt, the miner decides to collaborate with 499 others, pooling resources as a single entity. With this approach, the collective can expect to mine two blocks weekly, allowing for more regular payouts.

However, pool mining doesn’t eliminate variability in payouts, known as the pool’s luck risk. For example, despite expecting 500 blocks per year, the pool could find fewer or more. The pool’s luck is calculated by comparing blocks mined versus expected blocks. Though luck balances out over time, fluctuations can still occur.

Variances in Miners’ Rewards

Two main factors contribute to earnings fluctuations: transaction fees and the timing of blocks found. Transacti on fees can greatly vary; for instance, post-halving, fees from mined blocks sometimes surpassed the block reward. If blocks are mined immediately after one another, fewer transactions build up in the mempool—leading to lower fees.

During the 2024 halving, it was noted that daily transaction fees had surpassed block subsidies for the first time.

Full Pay Per Share (FPPS) Payout Scheme

Given the unpredictability in mining payouts, many miners opt for a Full Pay Per Share (FPPS) payout scheme. FPPS operates as a risk transfer mechanism, providing miners with predictable payments based on their hash rate allocation. However, this predictability has a cost, leading miners to pay higher pool fees for this insurance-like coverage.

Miners deserve to trust pools to deliver on their commitments, however, as with any insurance, risks prevail if the pool fails. FPPS also means miners miss out on rewards from transaction fee spikes, as payouts are calculated based on past fee performance.

The Unsustainability of FPPS

The FPPS scheme’s model is likened to unsustainable government pension systems. Transaction fee variability implies that as miner payouts become more fee-dependent, insurance costs rise, making FPPS less viable. Moreover, halving block rewards increase payout variance and risk premiums, resulting in rising pool fees altogether.

A shift towards Pay Per Last N Shares (PPLNS) payment methods might emerge as miners seek greater profitability. While PPLNS pays miners whenever a block is found, it carries risks of not finding blocks consistently.

If the PPLNS pool claims over 1% of the total hash rate, risks of not finding a block decrease significantly.

In the evolving landscape of bitcoin mining, miners will need to explore alternative payment methods and risk management solutions to maximize their profits, suggesting the FPPS may not suffice moving forward.

This is a guest post by Francisco Quadrio Monteiro. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.