Why do you want to punish pools?I propose a setting that prevent mining pools AND reduce payoff variance which requires two changes: increasing the block-rate and changing the Bitcoin PoW (but still allowing current Bitcoin ASICs to work (as far as I know)). The block rate must be increased at least 20 times and block must still be near full (e.g. there must be at least 20 more transactions/second than there is today)
BlockPow is kind of PoW that only practically prevents mining pools for certain cryptocurrency settings based on concepts similar to parmacoin, but in a much simple degree. The idea is that if miners try to join a pool, then they incur in overhead of transmitting information and earn less than working solo. Let b (the payload) contain a full block. b must contain all the transactions and the header, and not only the transaction hashes. b should not hide anything. Let h be the block header (which contains the previous block hash and the Merkle tree root of the transactions). Let d be the difficulty. hash-block-length(b) returns the number of blocks processed by the hash function when fed with the block b. The target is divided by hash-block-length(b) so that the difficulty does not depend on the length of the block. Some other function can be used to encourage nodes to add more or less transactions.
Def: Basic BlockPoW concept
For each r in the nonce-range: if H ( H( r || b ) || h || r) ) < 2^-d/ hash-block-length(b) then return r
return null
The header (h) is appended to the hashed message to allow SPV clients to verify the PoW without requiring the full block to be downloaded. Peers can send only (x,r,h) to SPV nodes, where x = H( r || b ), so they can verify the PoW. The verification procedure is obvious, and is skipped here. r is inserted at the beginning of the message to prevent pool administrators from keeping a secret mid-state of the hash function secret in order to prevent block stealing and also to force the miner to know b in the inner mining loop.
So now mining requires the knowledge of the block b to be mined, and b must be received at each block-chain epoch. This could create an incentive not to include any transaction and use an almost empty b, because that way the bandwidth requirements is decreased. But this incentive should not exists normally, since by including transactions the solo miner gets an additional revenue from fees, which is lost if the block is empty. Anyway, to prevent this possible incentive we can append to b a subset of previous blocks (e.g 100 blocks). The block subset to include could be derived from a peudo-random function seeded by the previous block hash. Then a node would still need to download part or all the block-chain in order to mine.
Now if the miner wants to be a dumb node and take part of a pool, then the current working unsolved block (the template) must be sent each time from the pool admin to each miner. If the pool admin hosts 1000 miners, then to serve them with fresh block templates he needs 1000 times more bandwidth that the miners, making this much more expensive. If miners create another network topology to distribute templates, they are incurring in the same overhead as being actively part of the cryptocurrency network, so they gain nothing.
For example, in a block-chain with a 5 seconds block-rate, such as in NimbleCoin, each block can be as large as 200 Kbytes (100 tps are allowed). A miner will require the block template to be ready as fast as possible, say before 3 seconds, so as not to loose more than 60% of the times the transaction fees present in the block template. This means that a pool admin serving 1000 clients must have a upload bandwidth of at least 60 Mbytes/sec, and load balance servers, because all miners will demand the block template at the same time and will compete for it.
The same miner, working solo, will not loose the 60% of block fees. If block fees are 10% of block reward, then solo miners earn 6% more than pool miners. Also, having a block rate of 5 seconds allows solo miners to receive payments more often and so it reduces the payment variance.
This method to discourage mining pools only work as long as time is takes to transmit a block is comparable to the block interval time, e.g. 20%. This seems not to be a problem since if the cryptocurrency becomes popular, then we can expect blocks to be near full, while if is is not, then nobody will care about mining pools.
For this method to work for Bitcoin, Bitcoin should reduce the block rate to at least 1 minute, and keep blocks of at least 10 Mbytes. Or go the NimbleCoin way, and reduce the block interval to 5 seconds. The sole reduction of the block rate from 10 minutes to 5 seconds would reduce notably the mining reward variance, which is the main reason miners don't mine solo.
BitcoinBlockPow
The basic BlockPoW is incompatible with Bitcoin ASICs as is but it can be made partially compatible with some tweaks: The value b is replaced by a a a subset or an integrity check of the block.
Using a subset:
First the hashMerkleRoot and hashPrevBlock fields are replaced by the fields: ChildBlock (32 bytes) and ScatteredBlockBytes (32 bytes). ChildBlock is the hash of a message with stores the old hashMerkleRoot and hashPrevBlock. ScatteredBlockBytes is a pseudo-random subset of bytes taken from the block template being mined. The seed for the pseudo-random function that selects the subset is the hashMerkleRoot plus the block time. When a miner scans all the 32bit nonce space, then a new hashMerkleRoot must be created to increase the extra-nonce field or the time must be updated. When this happens, a new subset of pseudo-random 32 block bytes must be collected. If the miner only stores 10% of the block template (e.g. 100 Kbytes instead of 1 Mbyte), then the probability he can build the ScatteredBlockBytes by brute-forcing the seed is 10^-32. If the miner performs 100 GH/sec, then the 32-bit nonce will overflow every 20 msec and the miner could request the ScatteredBlockBytes from the pool admin using a bandwidth of 1 Kbyte/s. A pool hosting 6 PH/sec (such as Eligious, which has 8%) would need to stream more than 60 Mb/s of ScatteredBlockBytes fields. A mining pool having 50% would need to stream 500 Mb/s, which is quite challenging. So miners will download the block normally, and become active part of the network.
Using an integrity check:
ScatteredBlockBytes is replaced by a field BlockHash defined as H( full-block-with-zero-nonce ). Obviously the header must be at the beginning of the block to force the re-hash.
Best regards,
Sergio.
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