[Knowledge Mining University Q&A] How does the mining pool settle profits for miners?

Answer from Zhikuang University editor @OWEN:

This topic is also mentioned in the previous article "Zhikuang University Q&A: How to calculate the theoretical output of Bitcoin mining?"

The mining mechanism of Bitcoin is proof of work (PoW), so the mining pool that aggregates the computing power of many miners distributes revenue to miners based on the proof of work. Based on the size of computing power, distribution according to work is the basic framework for the mining pool to settle revenue for miners.

Under this framework, mining pools have multiple settlement methods. Currently, the main settlement methods of Bitcoin mining pools are FPPS and PPS+. In addition, PPS, PPLNS, etc. were also the mainstream distribution methods in the industry. Let's introduce them one by one.

In the early stage of mining pool development, the competition between mining pools was not sufficient, and the proportion of mining fees was low at that time, so the settlement methods at that time were mainly PPS and PPLNS. These two settlement methods only allocate system rewards to miners, and do not allocate transaction fees (also known as mining fees). The specific allocation methods are slightly different.

01
PPS Settlement Method

PPS stands for Pay Per Share, which settles the income according to the effective workload submitted by the miners. The specific calculation method was introduced in the previous tweet "Zhikuang University Q&A: How to calculate the theoretical output of Bitcoin mining?"

Among them, P is the theoretical income of the miner in one day (24 hours), H is the miner's computing power (unit H/s), D is the mining difficulty, and R is the system reward.

For miners who choose PPS settlement, the relationship between them and the mining pool is equivalent to the relationship between workers and the company, and the miners' income is not affected by the fluctuation of the mining pool's luck value. Regardless of the mining pool's luck value, under the PPS settlement method, as long as the miners' computing power, mining difficulty, and system rewards are determined, the miners' income is certain and they can get a stable "salary".

Let's introduce the luck value. Suppose there is a lottery pool with a total of 1,000 lottery tickets, of which 100 can win the prize, and the winning amount of each lottery ticket is the same; the remaining 900 are non-winning lottery tickets, with a winning rate of 10%. If you have 100 lottery tickets, and after the lottery draw, you find that exactly 10 lottery tickets have won the prize, the actual winning rate is exactly equal to the theoretical probability, and your luck value is 100%. If the actual winning rate is higher than the mathematical probability, for example, 12 lottery tickets have won the prize, then your luck value is 120%; if the actual winning rate is lower than the mathematical expectation, for example, 9 lottery tickets have won the prize, then your luck value is 90%.

Simply put, the luck value of a mining pool is equal to the actual system reward/theoretical system reward*100%.

02
PPLNS Mode

PPLNS stands for Pay Per Last N Shares, which settles the income based on the N workloads (Shares) submitted in the past. This settlement method has a certain lag. After the mining pool accepts a total of N shares, it counts how many bitcoins the mining pool has received as system rewards during this period, and then distributes the income based on the proportion of the number of shares submitted by the miners in these N shares.

Under the PPLNS settlement method, the relationship between miners and mining pools is equivalent to the relationship between "company partners and companies". If the mining pool has a high luck value, the miners will have high income; if the mining pool has a low luck value and no blocks are produced in a day, the miners will have no income.

Assume that the mining pool settles the miners' income in the form of PPLNS, and the mining pool receives a system reward of 125 bitcoins on that day. Miner A contributes 10% of the share on that day, so the mining pool will allocate 12.5 bitcoins of income to miner A. Of course, the mining pool charges service fees for providing services to miners, but we do not consider service fees here.

As competition between mining pools intensifies, mining pools hope to attract more computing power. Mining pools not only distribute system rewards to miners, but also mining fees (also called transaction fees). There are also different settlement methods for packaging fees, so PPS+ and FPPS settlement methods have evolved.

03
PPS+

PPS+ stands for Pay Per Share Plus. In this settlement method, the system reward part is the same as the PPS introduced earlier. The mining fee received by the mining pool every day is distributed according to the actual proportion of computing power.

For example, suppose the mining pool settles the income of miners in the form of PPS+. In terms of system rewards, the theoretical income of miner A is 10 BTC per day. Miner A's computing power accounts for 10% of the computing power of the mining pool. The total mining fee received by the mining pool on that day is 2 BTC. Then, ignoring the mining pool fee rate, the mining pool will allocate to miner A on that day:
10BTC+2*10%BTC=10.2BTC.

That is to say, in the PPS+ settlement method, the system reward is not affected by the mining pool's luck value, while the mining fee is related to the total mining fee received by the mining pool, and the mining fee of the mining pool is affected by its luck value. The higher the luck value, the more transactions are packaged, and the more handling fees are received. If the mining pool does not produce a block in a day, the miners will not get any mining fees.

04
FPPS

FPPS stands for Full Pay Per Share, which means that both system rewards and mining fees are settled according to theoretical values.

For example, suppose the mining pool settles the miners' income in FPPS. In terms of system rewards, the theoretical income of miner A is 10 BTC per day. The ratio of the mining fee to the system reward is 1.5% on that day. Ignoring the mining pool fee rate, the mining pool will allocate to miner A:
10*(1+1.5%)=10.15BTC.

Under the FPPS settlement model, miners’ income has nothing to do with the fluctuation of the mining pool’s luck value.

05
SOLO

In addition to the four settlement methods mentioned above, there is another method called SOLO, which means that miners mine independently. This method is equivalent to the mining pool providing technology to miners, and miners paying service fees to the mining pool, and miners are responsible for their own profits and losses. Only miners with a large enough computing power will choose this model. If the mining pool is regarded as a whole, the mining pool itself is a SOLO model. The SOLO model means that miners bear the risk of fluctuations in luck alone.

In the SOLO mode, miners are equivalent to an independent mining pool, and their income has nothing to do with the luck fluctuations of the mining pool that provides the technology.

The differences between various settlement methods are either reflected in the system reward part, or in the mining fee, or in both parts. The following is a summary of the characteristics of each settlement method:

06
Summarize

As competition among mining pools intensifies, mining pool settlement methods are becoming more and more sophisticated. PPS and PPLNS, which only settle block rewards, have gradually evolved into PPS+ and FPPS, which settle block rewards and mining fees. These two settlement methods are currently the mainstream settlement methods of Bitcoin mining pools.

If you were a miner, which revenue settlement method would you choose? Feel free to share your views in the comment section.