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I'm trying to understand the following:

There is a limited amount of mining reward for every currency and a precise amount is rewarded for every block a person wins per time. Since most people mine in pools technically the more miners or rigs there are in the world the less money an individual makes? Is this really how this works and if so how can it stay "profitable"?

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Yes. More miners -> Higher difficulty -> Less chance of finding a block with a given hashrate -> less reward.

Long-term, it will only remain profitable for those who are more efficient than others.

  • Please correct me if I'm wrong, but wouldn't that mean that the pool of miners will decrease for it to always be profitable for miners? In this case, this impacts the security of the protocol, and it becomes centralized again doesn't it? – Florian Bourse Aug 6 '18 at 8:25
  • It will always be profitable for some miners. Whether it will be decentralized or not will depend on how many different groups are efficient enough to mine profitably. – Meni Rosenfeld Aug 6 '18 at 9:15
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Your understanding is correct. If it's hard to see how a system like this can be sustainable, just think about what profitability is. Since it's essentially (cost to generate bitcoin - amount of bitcoin received), you get a situation where the people that continue mining are those who find ways to lower the cost of their own mining.

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The second part of this question is technically a purely economic question.

A short and general answer from microeconomics would say that if the market wasn’t profitable, more firms (miners) wouldn’t enter the market. This means that as pools get larger, if the value of bitcoin doesn’t rise fast enough for shared profits to be lucrative we should see a drop in the number of miners.

Here is a parallel example that might help illuminate some the economics with more familiar concepts. Think of high salary jobs that require you to relocate to locations with extremely high costs of living (think Silicon Valley). You get a high paying job (150k - 300k, I suppose), this is something of great value, like the reward of a bitcoin. But, you must relocate to somewhere like Silicon Valley and suddenly the amount you spend on basic necessities sky rockets and you have to share your big reward with higher rent, higher cost of food, higher cost of transportation etc, similar to splitting that valuable bitcoin up with your pool. But then why are people still lining up and eagerly competing for those high paying jobs? Because it is still profitable even after they share their money with every economic firm in Silicon Valley. They have money left over (like profit) and it’s more than they would have otherwise. But it still stings knowing how much they could have if cost of living wasn’t so high in SV. So they get a novel idea: live somewhere else and commute. But now they have exchanged giving up big $$ for giving up big time. Either way, you give up a resource. This would be like if someone said “I don’t want to share my reward with a pool” - ok, then to stand a chance in competition against the pool you have to go out and acquire an unreasonable amount of CPU power! You have to give up resources.

Typically the only way to get something valuable easily w/ little resources given up is to find undervalued things and hold on to them until the value adjusts. This is quite literally the concept of investing. This would be like the first few people to mine bitcoin, there was likely less competition but the value of bitcoin then was also lower, so unless you speculated the rise there would be little motivation to give up the resource if CPU.

  • I think the work market analogy is misguided, because your profits in your job searching example are diminished by your expenses (in the same way that a firm would have to pay suppliers). In the case of bitcoin mining, the reward is shared with other miners performing the same function. In the world of private companies, this would amount to competition from other companies in the field. – dionyziz Aug 2 '18 at 22:15
  • The differences you outline isn’t the crux of the comparison, the point was another example of where something seems like a huge reward, but in order to get it you have to give up a large portion of it. – Prince M Aug 2 '18 at 23:34

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