Bitcoin Mining Pools: A Cooperative Game Theoretic Analysis

Bitcoin is an innovative decentralized cryptocurrency whose core security relies on a “proof of work ” procedure, which requires network participants to repeatedly compute hashes on inputs from a large search space. Finding one of the rare inputs that generates an extremely low hash value is consid-ered a successful attempt, allowing miners to approve new transactions and, in return, to collect rewards in bitcoins. This reward allocation, which provides the incentive for miners to participate, is a random process with a large vari-ance. Miners who desire a steady income thus often par-ticipate in mining pools that divide among their members the earned rewards, and reduce this variance. Mining pools are slightly better at coordinating participants due to lower-latency communication, a fact which implies that they man-age to collect slightly higher rewards. We examine dynamics of pooled mining and the rewards that pools manage to collect, and use cooperative game the-oretic tools to analyze how pool members may share these rewards. We show that for some network parameters, es-pecially under high transaction loads, it is difficult or even impossible to distribute rewards in a stable way: some par-ticipants are always incentivized to switch between pools.