How should the reward functions really work within a single Bitcoin mining pool? Is there room for improvement and could users of the cryptocurrency stand to make better gains?

This research paper proposes the introduction of a game-theoretic model for reward functions within a single Bitcoin mining pool.

The proposed model model consists only of an unordered history of reported shares and gives participating miners the strategy choices of either reporting or delaying when they discover a share or full solution. The authors defined a precise condition for incentive compatibility to ensure miners strategy choices optimise the welfare of the pool as a whole. With this definition they show that proportional mining rewards are not incentive compatible in this model.

Do you want a new take on how a Bitcoin mining pool could achieve better rewards? Download this research report. Its authors introduce and analyse a novel reward function which is incentive compatible in this model. They also show that the popular reward function pay-per-lastN-shares is also incentive compatible in a more general model.

Taking into consideration the difficulty of mining, the authors acknowledge the increased difficulty for smaller miners who might find a block on expectation only every few months or even every few years. They explore the benefits of mining pools, how they can be improved, and why the reward mechanism needs change.