Allocations for a Bitcoin Mining Pool using Risk Measures

Mining Bitcoins is an uncertain activity. By nature of the process, participants take part in the Proof of Work process, where they try to decrypt the hash that the new block added to the Blockchain contains. One may spend months, or even years, without positive cash flows, while still having associated costs. This can often drive participants away from the technology, affecting the network itself, as it cannot survive without their contributions. This study proposes to analyze what has already naturally begun: miners joining forces in mining pools and dividing revenues and costs, thereby reducing risks and generating more positive cash flows. The revenues and costs are modeled and a stochastic optimization problem is proposed to find the optimal allocations that guarantee that all members are still willing to stay within the pool. This group of miners is characterized by a coalition, a sub theory of Game Theory. A monetary risk measure, in the form of CVaR (Conditional Value at Risk) is used to represent the miner's risk profile and consequences to the optimal allocations.