Quote from: Crowex on June 19, 2014, 05:43:35 PM

What if your scheme was implemented and as a result the hosted mining schemes decided to publish the ROI as a way of measuring their honesty. So each week/month they would say that they were paying out a certain percentage according to how much a client had invested.
This would easily be verifiable by the investors by looking at what payout they receive.
Over time we could see who had better returns and a result people would end up moving from the dishonest hosted mining schemes that weren't declaring mined blocks and investing to the schemes that had the consistently better returns.

Mining pools would fail because the miners would cheat the pool so everybody would end up investing in hosted mining and specifically in the top performing hosted miner who would eventually control all of the mining.

This is a really insightful point, and my response to it so far is, at best, sketchy and speculative. This point has been brought up by others including gmaxwell, SDLerner, and zooko.

First of all, suppose that we solve the low-variance problem, and solo individual miners are able to choose whatever sort of risk profile they want, without having to join a pool. Now lower-variance isn't a reason to join a pool or hire a cloud miner.

However, there are still reasons to hire a cloud miner... cloud miners enjoy some economies of scale, and may benefit from vertical integration and custom mining rigs. It may be the case, given this, that cloud mining is inevitable and decentralized proof-of-work is doomed.

I think there's a plausible(ish?) alternate outcome. It's outlined in this post https://bitcointalk.org/index.php?topic=305781.0 but I'll repeat a bit of it here.
- Bitcoin mining is unprofitable, on average. It's so unprofitable, that even vertically-integrated cloud miners are unprofitable or unsustainable.
- Even though it's unprofitable, people are still systematically incentivized to mine, for the same reason that State Lotteries are a big business: in some cases, people actually PREFER a high variance prospect, if there's the *chance* of winning a large jackpot. Bitcoin mining is an occasionally lucky gamble, rather than a reliable profit.

In other words, this is based on a premise that potential miners -- in the future, if not now -- actually have some appetite for variance and luck. Right now there's only one game - the 25btc jackpot. But imagine you can choose a puzzle that has some chance of giving you 0.1 btc, some chance of giving you 1btc, some chance of giving you 10 btc, and so on. Go to any gas station (in the US) and look at the variety of lotto games you can play for inspiration.

If miners choose something with a high-enough-variance component, then they'll be suspicious of a cloud provider that can get away with stealing their "lucky" jackpots, if not their every-day 0.01 btc consolation prizes.

I don't have the tools to really evaluate or justify this hypothesis. For sure it's outside the scope of this present paper. An ASIC resistant puzzle, if there truly is one, may diminish the effectiveness of cloud mining. It's also possible that a nonoutsourceable puzzle is the best we can do, and this gap just has to be tolerated.