bitcoin is the largest, oldest, decentralized and most secure digital currency of all time, but it is far from the first attempt of its kind. We, as a community, would do well to remember that bitcoin builds on previous projects, spanning decades of work. Satoshi drew on the technical foundations of such projects, their successes and failures, and each unique cultural ethos.
Taking a step back and thinking about the network, one of the great attributes of bitcoin is its profound simplicity in monetary policy and its fundamentally clear incentives among network stakeholders. Providing access to sound money without trust is not without risks. Game theory and incentives for miners to behave correctly is one of the most sensitive components of the system. Simultaneously, miners must meet the highest standards of behavior in the present (avoid 2017-style forks, avoid transaction censorship, mitigate reorganization risk, etc.) and the network must also offer miners sufficient visibility about the future of their business models needed to continue. make a huge capital investment and commit to large-scale, long-term operating expenses. Striking the balance between these two forces allows the bitcoin network to offer sound money at the monetary unit level and censorship resistance at the network level; Both are requirements for bitcoin to have any hope of achieving global settlement layer dominance.
Miners and their behavior frequently become the topic of conversation when network updates or new proposals arise. This is because the network has become accustomed to relying on predictable and obedient miners since 2017 who are followers of the nodes in case of controversial proposals. Its primary focus remains the challenging needs of meeting ongoing operations and planned growth rather than campaigning for or against bitcoin software proposals.
To discuss the incentives miners face, we need to understand the core business models they implement and the directional unit economics across the standard set of inputs. In simpler terms, miners aim to produce bitcoins at the lowest possible cost. Today there are several mining methods, each with its own costs, structures and risks. For the purpose of this post, let’s present a basic overview of the inputs that miners must consider and the subsequent capital expenditures involved:
By engaging in mining, miners are, in theory, betting that their operational setup will allow them to produce future bitcoins at below market rates. The initial capital expenditure and ongoing costs dictate the viability or success of the business for miners and therefore directly influence the game theory that underpins bitcoin. Miners only have control over their hashrate, which is governed by the difficulty adjustment every two weeks and is challenged by the halving event every four years.
Satoshi’s fundamental innovation was aimed at eliminating the need for trusted third parties when sending or receiving transactions. This was achieved through the implementation of the proof-of-work system, overseen by difficulty adjustment. This system effectively encourages miners to participate in the fairest competition whereby they exchange hashes for bitcoins. A terahash hour is always neutral on the mining network, regardless of barriers to entry, mining cycles, hash price, and bitcoin price. Additionally, miners must also take market cycles into account, particularly the halving event, which significantly affects their profits by halving them every four years.
Although the network is neutral, companies have been created that support the ongoing network that are restricted on the business side (i.e. regulatory restrictions, business operation decisions, capital availability, costs, etc.). These limitations can introduce distortions when considering any new project.
They proposed incentive structures for broader network participants, creating disparities in some respects. Since each mining company has very different strategies, these trade-offs and nuances are specific to each company. To illustrate this point, consider a scenario where a miner opts for a pool that meets SOC 1 and SOC 2 compliance standards, even if it charges higher fees, rather than choosing a pool with lower fees and no standards. of compliance. In this case, miners are electively making a business decision that aligns with their mandate and goals, something that a miner with a different mandate and goal may ignore. This is an example of an individual business decision that is company-specific.
In addition to the miner’s individual trading choice and running a profitable trade, they must also pay close attention to each and every update that is being introduced to the bitcoin protocol from the perspective of how it could affect their business, both from a short term. and a long-term perspective, which brings us to the concept of proposed transmission chains through BIP300/301. For a full summary of the details of the proposal, read the BitMex research team’s article.
The drive chains themselves are not necessarily the problem. It is the subsequent consequences that can pose challenges and disregard for the network’s current limitations. While they can increase revenue, they also introduce existential risks for companies, putting bitcoin miners on a more challenging trajectory.
The bitcoin mining business is operationally complex and labor intensive. But that is a natural consequence of the limited and well-defined role they have been playing since the inception of bitcoin. Asking miners to resolve disputes on a sidechain, potentially many of them at once, not only adds additional business complexity, but changes the fundamentally neutral role that miners play in validating transactions. Disputes are inevitable and complexity around power, incentives and rules becomes uncertain from the miners’ point of view. From now on, the power of miners is controlled and extended only to ensure that transactions comply with consensus rules, which are known and accepted by all parties. While broadcast chains can generate additional revenue for bitcoin, this judgmental addition to the protocol is deeply risky and is trading short-term revenue for potential long-term consequences that remain largely unknown. This is simply not a smart solution.
Opting out is not actually opting out. Miners have the option not to participate in sidechains, but they will generate income from all sidechain activities and that activity still continues and is linked to the bitcoin mainnet. Simply put, implementing broadcast chains would create additional problems for miners simply executing their standard operations. What if a miner wants to abstain due to regulatory concerns? What if certain sidechains have untrustworthy behavior? Ignoring legal or regulatory issues is not a feasible option for many miners, particularly those operating publicly in the US, which represents more than 34% of the network according to Miner Mag.
To illustrate this point with a hypothetical scenario, let’s consider a private company issuing a token on a sidechain that enables illicit activities. If that private entity then scams investors and users, as has unfortunately happened several times in the broader crypto industry, who is responsible? Can miners claim plausible deniability when they really can’t opt out since the sidechains are tied to bitcoin? They are still miners on the bitcoin network, to which these sidechains are linked, from which they may have collected revenue from a sidechain associated with the project. The notion of being able to ignore something only exists in a world where you can do so until something goes wrong. Like the swim test during the witch trials, miners are presumed guilty by default even if they choose not to participate in sidechains. Given the enormous amount of capital, time and resources that miners invest in their operations, it is a difficult trade-off to consider.
An increase in pool centralization. One could argue that currently, the most centralized aspect of mining is mining pools. While there are numerous options available, only two mining pools maintain substantial control over most of the network. It is important to note that the cost and time associated with changing mining pools is relatively low. Consequently, the idea that a mining pool could take control is a risk that can be addressed in less than ten minutes. In fact, advanced miners typically Maintain backup groups not only to facilitate quick transitions when necessary, but also to address operational downtime or third-party group disruptions.
There have been multiple initiatives aimed at decentralizing the power of pools, with several companies collaborating to allocate time, resources and capital to the development of StratumV2 as one such effort, stemming from Matt Corallo’s Betterhash proposal. But while switching costs are low, a world in which transmission chains require multiple and constant allocations in which pool subminers choose to vote differently from the decision of pool operators would significantly increase operational complexity.
Consider two proposals, A and B, where the miner favors both. If your primary pool chooses to vote against A and for B, then said miner could switch to your secondary pool. But what happens if the secondary group is for A and against B? The miner now faces a choice: jeopardize its revenue and business operations, including employee salaries, to withdraw and self-mine during the vesting period, or proceed with caution. Introducing drive chains at this stage, before we have the tools to meet these challenges, is like installing a roof on a house without first laying its foundation.
In retrospect, the beginning of bitcoin‘s remarkable journey was forged through collaboration with many other projects, which involved a combination of diverse experience and backgrounds, fostering the critical thinking necessary for success. Along the path of adoption, we lost some of our commitment to constructive conversations that possess intellectual honesty. The level of discussion related to transmission chains has drifted toward ad hominem attacks and sweeping generalizations, failing to facilitate the constructive dialogue necessary for informed decision-making.
Innovation within the bitcoin ecosystem is a positive and necessary force. It is something that the community should actively encourage through careful and constructive discussions and debates. We cannot advocate for adoption and at the same time close ourselves to new solutions. However, it is vital to maintain a critical perspective when considering the potential long-term impacts of any network changes, while remaining grounded in the realities of the network’s current state.
This is a guest post by Amanda Fabiano, Harry Sudock and Rory Murray.. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
