Blockchain Mining: Optimal Resource Allocation

Having enabled numerous applications, blockchains have attracted not only much attention, in the past decade, but also huge amount of resources: talent, capital, energy, etc. Focusing on the mining side of the market, in this paper, we aim at understanding how to efficiently use the resources mining and staking pools attract. We start with developing predictions about factors that increase the efficient allocation of pools' resources. We then test our predictions based on a general model for optimal resource allocation that we develop, as well as data we collected on pools' actual resource allocations. We find that pools can increase resource efficiency by mining for more blockchains as well as by increasing the frequency of resource re-allocation. Further, we enroll to mining pools as a miner to understand and comment on how pools can encourage their miners to increase the efficiency of their allocation. While our empirical investigation mostly focuses on the BTC family, we show that our theory and results are general and applicable to the Ethereum family as well as other proof-of-work (PoW) and proof-of-stake (PoS) chains.