A Saga Of Underpaid Miners
Miners are losing out on hundreds of millions of dollars in pay each year. Here's why.
As explained in a previous article, FPPS is not a free lunch. Miners who opt for FPPS payouts essentially pay for an expensive insurance policy that erodes their profitability—a cost that is only expected to rise in the near future. But the story doesn’t end here. Given the dynamics of difficulty adjustments and reasonable future projections, miners will forfeit a portion of their revenue on top of the hefty fees they are already paying. Let’s quickly recap how the difficult adjustment works so that we are able to clearly understand why FPPS is underpaying miners for their work.
Satoshi designed the bitcoin protocol so that a block gets mined by the network every 10 minutes on average. As that process unfolds, new bitcoins get mined and added to the total circulating supply. But as the Bitcoin network experiences continual growth in computational power—thanks to ever-advancing and more affordable technology—how does it uphold its 10-minute block intervals and adhere to its predetermined supply schedule? The early cypherpunks had been trying to find a solution for this challenge for years. Satoshi designed a simple and elegant solution for this problem.
Every 2,016 blocks (roughly every two weeks), the network automatically adjusts the mining difficulty based on how quickly blocks were found in the previous period. If blocks were mined faster than the 10-minute target, the difficulty increases, making it harder to find new blocks. If blocks were found too slowly, the difficulty decreases, making mining more profitable. Although the difficulty adjustment always trails changes in the total hashrate within the Bitcoin network, Bitcoin's difficulty adjustment mechanism ensures that, even as more resources are devoted to mining, the rate of new bitcoins entering circulation aligns closely with its predetermined schedule. This mechanism sets Bitcoin apart from traditional commodities. For instance, increasing energy input can accelerate the extraction of spatially-bound resources like gold. In contrast, Bitcoin's supply is temporally bound; no amount of energy can hasten its issuance. Gold is stuck in the ground. Bitcoin is stuck in time.
Over the past few years, Bitcoin mining difficulty has consistently increased as the network's hashrate continues to grow, making it progressively harder to find a block. Based on the data, the difficulty has increased around fourfold compared to two years ago. This means the network now requires four times the amount of power to mine a block than it did two years ago. While there have been instances where the difficulty decreased, such as during the Chinese Bitcoin mining ban in 2021, the overall trend has been clearly upward. This trend is likely to persist in the near future, as there is still a substantial amount of stranded, low-cost energy worldwide that can be tapped into by bitcoin miners. But how does this affect how miners get paid for their work?
As mentioned earlier, the network continuously adjusts to match the total hashrate, with difficulty updates occurring every 2016 blocks. This means that if someone were to suddenly add enough hashrate to double the network's total hash power, the network would mine a block every 5 minutes until the next difficulty adjustment occurs. Given this dynamic and the fact that there’s no indication the upward trend in hashrate and difficulty will reverse anytime soon, it's reasonable to expect the network will continue to mine blocks faster than the 10-minute average set by Bitcoin’s protocol in the near future. In other words, for a certain period, miners will find more blocks than what is expected. For example, in a four year period, miners will be able to find more than 210,000 blocks. Confused? Let’s have a look at the Bitcoin’s timechain, namely the last completed epoch.
Block 630,000 was mined on May 11, 2020, at 20:23 GMT, and Block 839,999 followed on April 20, 2024, at 01:05 GMT. Over the course of 3 years, 345 days, 19 hours, and 18 minutes, miners completed the 210,000 blocks of Bitcoin's 4th epoch—484 hours and 42 minutes ahead of schedule. This is roughly equivalent to 20 days, 4 hours, and 42 minutes less than the expected 35,064 hours (4 years). Miners used just 98.62% of the time originally allocated to mine find that amount of blocks.
Assuming an average difficulty adjustment of 5% upwards and applying more complex calculations, we can estimate that miners will mine, on average, approximately 212,798 blocks every 4 years—yielding a surplus of 2,798 blocks. This means that, in total, miners will produce about 101.332% of the blocks expected by the network, a delta of 1.332%.
However, we can not forget that the last epoch was notably affected by the Chinese Bitcoin mining ban, which caused a significant disruption in the upward trend of difficulty and hashrate. If we treat this event as an outlier, the previously calculated delta will be even larger.
When examining a period unaffected by this anomaly—specifically, the 105,000 blocks mined between block heights 781,000 and 885,999—we see that the network completed those blocks 13 days and 16 hours ahead of the anticipated two-year timeframe. Over a four-year period, this corresponds to a total time saving of 27 days and 8 hours compared to what was expected by the Bitcoin network. Assuming a 5% difficulty adjustment, miners will find approximately 3,811 additional blocks beyond the expected 210,000 over four years, which is an increase of about 1.8147%. In practical terms, this means that miners will produce roughly 146.61 blocks per day instead of the nominal 144. This is the true expected output of all the work produced by miners across the globe per day.
You might be wondering what this has to do with what miners get paid for their work. Today, the vast majority of mining pools operating in the market use the FPPS (Full Pay Per Share) payout method, where miners receive a fixed reward for their work, regardless of whether the pool finds a block and what the amount of transaction fees collected is. To determine the reward paid to miners, pools look at the network’s difficulty to calculate the expected payout for a given hashrate. However, this doesn’t take into account that as the two-week window passes, additional hashrate is continuously added to the network. This extra hashrate makes each share more “productive” compared to what the network’s baseline expectation would suggest. In other words, the effective difficulty reflecting this dynamic should be lower than the nominal difficulty established by the network. As a result, miners get underpaid by approximately 1.8%, according to the calculations presented in the previous paragraph. Essentially, FPPS pools operate under the assumption that only 144 blocks will be found per day on average, when recent trends and what we can reasonably expect from here on out, indicate that miners will continue to mine blocks than what is expected by the network due to the rising network hashrate and the dynamics behind the difficulty adjustment.
Assuming a Bitcoin price of $100k, transaction fees of 0.05 BTC per block, and a daily delta of 2.61 blocks, miners using FPPS pools are collectively forfeiting roughly $25 million per month—or about $300 million annually. That's an astonishing amount of money left on the table. Unless FPPS pools recalibrate the way they calculate payouts, miners will continue getting underpaid for their work.
In the foreseeable future, as hashrate marketplaces mature, market efficiency is likely to improve, fostering a more competitive environment for hashrate payouts that will ultimately benefit miners. For now, miners seeking full compensation for their efforts should opt for pools that distribute rewards based solely on the actual network payments, rather than relying on “expected” payouts.
Happy hashing!