The Unsustainability of the FPPS Payout Scheme

A closer look at how the FPPS payout scheme is built shows that it is like the modern pension systems of many governments, unsustainable by design.

Bitcoin mining is a difficult business. When deploying economic resources to mine traditional commodities like gold, copper, or oil, prospecting for those resources in the field is always done beforehand to ensure that any capital invested in a mining project will not be in vain. However, due to the nature of Bitcoin’s security protocol, miners are unable to prospect for anything since finding a block is a purely statistical and random event.

Since there are only 144 blocks to be found per day, there is no way to ensure that a miner's work will be rewarded in a timely fashion without significant variability unless the miner has a considerable amount of hash rate. A miner needs roughly 1.2% of the total hashrate (approximately 10 Exahashes per second at the time of writing) to guarantee consistent payouts and significantly diminish its revenue variance. The CAPEX required to achieve such an amount of hashrate is in order of hundreds of millions of dollars. Unless a miner is a gigantic enterprise that has an enormous flock of ASICS, he will have a problem in his hands.

Pool mining was created to address and solve this issue. Let’s take a single miner, with a small but considerable mining operation. Out of the 52560 yearly blocks, he’s expected to find one, since he has 1/52560th of all the hashrate of the network. In other words, he’s expected to find one block every 12 months. But his electricity bill comes due every 4 weeks, and if he was to wait for a whole year paying bills before getting some revenue through the door, he’d go bankrupt. Given this discrepancy between its ongoing costs and its revenues, an idea comes to his mind. He sets out to find 499 other people with a similar sized operation, and they strike a deal. Instead of everyone mining on their own, the miner proposes to the others that they all mine collectively as if they are part of the same entity, splitting the mining rewards according to each miner’s work every time someone finds a block. If every miner has 1/52560th of all the hashrate of the network, the 500 miners collectively are expected to find a block approximately two times per week. With a pool mining approach, every miner guarantees that all the effort and hard work they put in will be rewarded much more frequently. This way everyone gets to pay their bills every month, and by the end of the year, they have all effectively managed to avoid bankruptcy. Nevertheless, there are still sources of variance within those same payouts.

Pool mining ensures that miners get paid much more frequently compared to solo mining. However, it doesn't guarantee predictable payouts based on the hashing power that each miner has. This problem is commonly known as the pool’s luck risk. Let´s go back to the previous example. 500 miners with 1/52560th of the total hashrate of the network each are expected to find 500 blocks in a year. Nevertheless, they may find 480. Or 497. Or 520. There is no assurance that the pool will mine exactly 500 blocks in a year. A Pool’s luck is calculated by dividing the number of blocks found by the number of blocks that was expected to be found based on the total hashrate of the pool. If a pool mines 480 blocks when they were expected to mine 500, the pool’s luck was 95%. Pool luck can cause significant fluctuations in earnings over short periods. However, luck tends to even out over time, and payouts will eventually align with the expected distribution based on the pool's hash rate.

Two additional factors contribute to the overall variance in miners' payment rewards, with the first factor being more significant than the second. The first is transaction fees. These tend to vary considerably as witnessed in the last few years. Transactions fees from the blocks that were mined right after the last halving represented more than 50% of the total block reward for the first time in Bitcoin’s history. As of the writing date of this article, (block height 883208), there were several non-full blocks mined in the past week, since the mempool cleared for several occasions during these past days. Quite a jump in such a short amount of time. The second factor is related to the variance associated with the time between blocks found by the network. When a block is found right after another, there is less time for transactions to build up in the mempool, which leads to lower transaction fees in that block. Conversely, if a more extended period elapses between blocks, more transactions will be broadcast, driving up transaction fees in the process.

During the 2024 halving, for the first time in bitcoin’