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Bitcoin is the largest, longest-running, decentralized, and most secure digital currency of all time, but it is far from the first such attempt. We as a community would do well to remember that bitcoin stands on the shoulders of previous projects, spanning across decades of work. Satoshi built upon the technical underpinnings of said 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 deep simplicity in the monetary policy and fundamentally clear incentives across stakeholders in the network. Providing access to sound money on a trustless basis is not without risk. The game theory and incentives for miners to behave properly is one of the most sensitive components of the system. Miners simultaneously need to be held to the highest behavioral standard in the present–avoid 2017 style forks, avoid transaction censorship, mitigate reorg risk, etc.–and the network must also offer miners sufficient visibility into the future of their business models necessary to continue making the enormous capital expenditure investment and commit to large scale, long duration, operating expenses. Achieving the balance between these two forces allows for 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 the hope of achieving global settlement layer dominance.
Miners and their behavior frequently become the subject of conversation when network upgrades or new proposals emerge. This is because the network has become accustomed to relying on predictable and compliant miners since 2017 who are node followers in the event of controversial proposals. Their primary focus remains on the challenging needs of meeting ongoing operations and planned growth rather than campaigning for or against bitcoin software proposals.
In order to discuss the incentives that miners face, we need to understand the core business models that miners deploy and the directional unit economics across the standard set of inputs. In the simplest terms, miners aim to produce bitcoin at the lowest possible cost. There are various methods of mining in existence today, each with its own costs, structures, and risks. For the purpose of this post, let’s present a basic overview of the inputs 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 bitcoin below market rates. The upfront capital expense and ongoing costs dictate the viability or success of the business for miners and therefore bleeds directly into the game theory underpinning bitcoin. Miners only have control over their hashrate, which is governed by the difficulty adjustment every two weeks and challenged by the halving event every four years.
Satoshi’s fundamental innovation aimed to remove 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 the difficulty adjustment. This system effectively encourages miners to engage in the fairest competition by which they exchange hashes for bitcoin. One terahash hour is always neutral on the mining network, regardless of barriers to entry, mining cycles, hashprice, and bitcoin price. Furthermore, miners must also take into account market cycles, particularly the halving event, which significantly impacts their earnings by reducing them by half every four years.
Although the network is neutral, companies have been created which support the ongoing network that are restricted on the business side of things (i.e., regulatory constraints, business operation decisions, capital availability, cost, etc.). These constraints may introduce distortions when considering any newly
proposed incentive structures for the broader network participants–creating disparities in some aspects. Since each mining company has vastly different strategies, these trade-offs and nuances are company specific. To illustrate this point, consider a scenario in which a miner opts for a pool that adheres to SOC 1 and SOC 2 compliance standards, even if it charges higher fees, rather than choosing a pool with lower fees and no compliance standards. 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 can disregard. This is one example of an individual business decision that is company specific.
In addition to miner’s individual business choice and running a profitable operation, they also have to pay close attention to any and all updates that are being introduced to the Bitcoin protocol from the lens of how it might affect their business both from a short-term perspective and a long-term perspective – bringing us to the concept of drivechains proposal via BIP300/301. For a full rundown on the details of the proposal, please read the BitMex research team’s piece.
Drivechains themselves are not the problem necessarily. It’s the subsequent consequences that can pose challenges and the disregard of current network limitations. While they may increase revenue, they also introduce existential risks to the businesses, placing 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 narrow and well defined role they have been playing since Bitcoin’s inception. Asking miners to adjudicate disputes on a sidechain, potentially many of them at once, doesn’t just add additional business complexity, it changes the fundamentally neutral role miners play in validating transactions. Disputes are inevitable and the complexity around power, incentives, and rules becomes uncertain from a miners point of view. As of now, the power of miners is checked, and extends only to ensuring transactions satisfy consensus rules, which all parties know and agree to. While drivechains can drive additional revenue to Bitcoin, this addition of judgment to the protocol is deeply risky, and is trading short-term revenue for potential long-term consequences which remain largely unknown. This is simply not a wise trade off.
Opting out isn’t really opting out. Miners have the choice to not participate in sidechains, but they will generate income from all sidechain activities and that activity still is happening and tied to the main bitcoin network. Put simply, the implementation of drivechains would create additional issues for miners simply by running their standard operations. What if a miner wishes to abstain due to regulatory anxieties? What if certain sidechains engage in untrustworthy behavior? Ignoring legal or regulatory issues isn’t a feasible option for many miners, particularly those operating publicly in the U.S, which accounts for over 34% of the network according to Miner Mag.
To illustrate this point with a hypothetical scenario, consider a private company issuing a token on a sidechain that enables illicit activity. If that private entity later scams investors and users, as has unfortunately occurred multiple times in the wider crypto industry, who bears responsibility? Can miners claim plausible deniability when they can’t truly opt out since the sidechains are pegged to bitcoin? They remain miners on the bitcoin network, to which these sidechains are linked, of which they may have collected revenue from a sidechain associated with the project. The notion of being able to disregard something only exists in a world where you can do so until something goes wrong. Much like the swimming test during witch trials, miners are presumed guilty by default, even if they choose to opt out of sidechains. Given the massive amount of capital, time, and resources miners pour into their operations, it’s a hard tradeoff 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, a mere two mining pools hold substantial control over the majority of the network. It’s important to highlight that the cost and time associated with switching mining pools are relatively low. Consequently, the idea that a mining pool could gain control is a risk that can be addressed in less than ten minutes. In fact, advanced miners typically maintain backup pools not only to facilitate swift transitions when necessary but also to address operational downtime or outages of the third-party pool.
There have been multiple initiatives aimed at decentralizing pools power, with various companies collaborating to allocate time, resources, and capital to the development of StratumV2 as one such effort, deriving from Matt Corallo’s Betterhash proposal. But while switching costs are low, a world in which drivechains require multiple, constant adjudications where the sub-miners in the pool choose to vote differently from the pool operators decision would significantly increase operational complexity.
Consider two proposals, A and B, where the miner is in favor of both. If their primary pool chooses to vote against A and for B, then said miner could switch to their secondary pool. But what if the secondary pool is for A and against B? The miner now faces a choice: either jeopardize their revenue and business operations, including employee salaries, to withdraw and self-mine during the adjudication period, or proceed cautiously. Introducing drivechains at this stage, before we possess the tools to tackle these challenges, is like installing a roof on a house without first laying its foundation.
Reflecting back, the inception of the remarkable bitcoin journey was forged through collaboration with numerous other projects, involving a blend of diverse expertise and backgrounds, fostering the critical thinking necessary for success. Along the journey of adoption, we lost some of our commitment to constructive conversations possessing intellectual honesty. The level of discussion related to drivechains has veered towards 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’s something that the community should actively foster through careful and constructive discussions and debates. We cannot advocate for adoption while simultaneously closing ourselves off to fresh solutions. Nevertheless, it is vital to maintain a critical perspective when considering the potential long-term impacts of any changes on the network, all while staying grounded in the realities of the current state of the network.
This is a guest post by Amanda Fabiano, Harry Sudock, & Rory Murray. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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