Introduction
During the previous bull run of cryptocurrency, I was able to make use of a couple of my old graphics cards to mine cryptocurrency and was able to make a few extra hundred dollars a month. With the underlying knowledge I gained while mining about how the bitcoin mining process works, it becomes clear that it can be viewed from the lens of Game Theory. In this article, researchers from the University of Waterloo went into depth on two strategies cooperative and non cooperative which uses Game Theory to maximize the profit of Bitcoin miners. But before we begin, how does Bitcoin mining work?
What is Bitcoin Mining?
Bitcoin is built on top of the blockchain (you can think of this as the bitcoin database) and requires the computation of complex mathematical problems in order to maintain the blockchain with accurate information about transactions that occur. Bitcoin mining is the process of using the computational power from your PCs and graphics cards to be able to solve these complex problems, and in turn you are rewarded with Bitcoin for helping sustain its system.
Going into more detail, a miner is rewarded Bitcoin only if they are the first to verify a specific transaction on the blockchain. Meaning, those who can produce the most computational power with higher functioning graphics cards and in turn more consumption of electricity will be rewarded with more Bitcoin. The higher a miner invests into maximizing their computational output, directly relates to the amount of Bitcoin they receive as rewards.
As mentioned earlier, Bitcoin mining requires large computational power and also uses a lot of electricity. With the influx of new miners due to its profitability, the amount of electricity used by miners has grown exponentially with mining farms all across the globe. To minimize the consumption of electricity, Bitcoin mining decreases in profitability by 50% every 4 years. Therefore, miners must work strategically to be able to make mining a profitable and long lasting source of income.
Game Theory and Bitcoin Mining
Bitcoin mining can be modelled by a game model, where miners want to maximize their computational power and in turn electricity consumption in order to maximize their profit. This paper analyzes two proposed solutions to maximize the profit for miners under the view of Game Theory:
cooperative – All miners use the same amount of electricity and profit is shared equally which is based off the topic learned in class of the socially optimal option
non-cooperative – All miners act selfishly and want to maximize their own profits which is based off the topic learned in class of the Nash equilibrium
After solving for both the Nash Equilibrium and Socially Optimal profitability rates which required proving many rigorous theorems, the authors plotted the total profit of a miner in both scenarios as seen below.
As seen above, it becomes clear that the social optima provides a better option for all miners.
Conclusion
After analyzing the results from this paper, it becomes evident that it is much more profitable for miners to work together, and mine with an even consumption of electricity. Taking the socially optimal option, it gives a higher total profit than when miners work selfishly. Although this option does increase the total profit of all miners, this option is of course more difficult to implement and thus not sustainable with current cryptocurrency infrastructure.
This completely contradicts what I would assume as a novice miner. With my understanding of the direct correlation between computational power and Bitcoin earned, this provides me with a new perspective on a way to maximize profit while mining.
References
Singh, R., Dwivedi, A.D., Srivastava, G. et al. A game theoretic analysis of resource mining in blockchain. Cluster Comput 23, 2035–2046 (2020). https://doi.org/10.1007/s10586-020-03046-w