In a previous article, I wrote about the nature of decentralization versus centralization in Bitcoin mining and how to conceptualize that in a mostly qualitative sense. The article broke down the entire mining stack, from pool coordination all the way down to energy production to give a sense of the relationship between different layers of the mining stack and the potential to maximize decentralization, making the point that the further down the stack you go toward energy production, the more difficult and capital intensive it becomes to bring a meaningful level of decentralization to that layer.
In this article, I intend to go deeper into the topic of mining pools and miner coordination to facilitate independently-owned mining operations cooperating in an effort to mine blocks to append to the blockchain.
The Creation Of Mining Pools
Mining has come a long way since the days when you could simply click a button and reliably mine blocks all by yourself on a laptop CPU. Back then, it was effectively an amateur hobbyist endeavor that required no real capital investment or expertise, but nowadays it is a multi-billion dollar professional market with massive capital investment required at scale. It is a whole different ball game.
One of the natural consequences of this shift in the nature of the mining industry was the creation of mining pools very early on. When mining was effectively leaving a laptop running in the corner, the variance and unpredictability of when you would find a block was not really that big of a deal — eventually, you would and the power cost of keeping a laptop running was not really of economic importance.
Once things shifted to GPUs and ASICs, there was a material investment cost up front and a much more significant electricity cost to keep them operating. That unpredictability in when you would find a block became a much bigger issue to miners attempting to make a return on their capital investments and operate profitably. This is where mining pools come into the picture.
They allow miners to cooperate on finding a valid block header working on the same block together, sending the coinbase reward to the mining pool, which then distributes it proportionally among all of the participating miners relative to how much work they have done in helping to find the block. This is proven by turning in “shares” to the mining pool; blocks that do not meet the network difficulty target but are high enough to prove that a miner is not lying and is actually running hardware and trying to find a valid block.
Mining Pool Centralization
Centralized mining pools come with big implications for individual miners. They are a point of centralization in the process of selecting (or, more importantly, excluding) transactions for inclusion in a block. This gives each mining pool operator total control over the transactions that they choose to process on the blockchain, with no ability for the actual owners of the mining hardware to exert a say on that except by leaving the pool if they disagree with the criteria that the operator chooses to set.
They also custody individual miners’ bitcoin until those miners choose to withdraw them from the pool, leaving the pool operator acting as a custodian and central point that could defraud miners using the pool, or be pressured by governments to seize individual miners funds or apply KYC requirements to them.
So, what solutions exist to address this problem?
P2Pool: The Original Decentralized Mining Pool
P2Pool is the original decentralized mining pool protocol. It is a peer-to-peer protocol in which miners coordinate among themselves to split up the mining rewards as they work together to find a valid block that meets the difficulty target. This coordination is accomplished using what the protocol design refers to as a “sharechain.”
Miners in the P2Pool take blocks that do not meet the difficulty target of the network, and effectively mine their own blockchain composed of all of the copies of the single block that the pool is working on. When they meet the smaller difficulty target where the block would be turned into a pool to prove they are mining in a centralized model, they broadcast that block to the rest of the miners. P2Pool’s “share difficulty” was targeted so that miners would find a share roughly once every thirty seconds.
I’m sure readers are wondering how the payout to individual miners works. The coinbase transaction is structured so that an output is created for each individual miner in the P2Pool, splitting up funds directly from the coinbase transaction. Miners in the P2Pool verify that all of the payouts to themselves and everyone participating in the pool is correct, and that each miner who has contributed a share to the sharechain is correctly paid out for their work in each new share added. If some participating miner is not correctly structuring payouts to everyone in their latest share, then all of the other miners in the P2Pool stop including them in their own payouts and effectively “evict” that miner from the pool for not behaving fairly.
This design led to a few scaling problems which is why it is not in use anymore. As the participation in a P2Pool grows, so does the aggregate difficulty target for shares in the sharechain, which target roughly once every thirty seconds. This means that for smaller miners it becomes more difficult to reach the sharechain difficulty within any thirty-second period. This means that for smaller miners the variance, or unpredictability, in their income increases as the aggregate hash rate in a P2Pool increases. This also leads to a larger number of stale blocks as more miners are finding competing shares for the sharechain at roughly the same time as more miners join the P2Pool, leading to “wasted work” from the point of view of the individual miners who only get compensated if their share is included in the sharechain.
The other main scalability issue is in the payouts going directly to individual miners from the coinbase transaction itself. Given that each miner is paid out in proportion to the shares they’ve mined that are included in the sharechain, each miner in the P2Pool requires a new output added in the coinbase transaction.
This has two consequences. First: Miners are being given small, low-value UTXOs in every block the P2Pool finds, which comes with the cost of condensing those outputs later on and/or bearing the cost of much larger transactions when they go to spend their coins because of the numerous individual UTXOs they wind up with, instead of a single one when withdrawing after a period from a conventional pool. Second: Each new coinbase output is taking up blockspace that could be consumed by other people’s transactions and earning the P2Pool more in fee revenue. It’s a double whammy loss for miners participating in the protocol.
These two issues contributed to the protocol slowly dying off and eventually falling into a state of disuse. By all indications from my best effort to track down accurate and recent statistics (many old block explorers tracking mining pool share have shut down over the years), it seems like the last block mined by P2Pool was on February 12, 2019.
P2Pool With Payment Channel Payouts
In 2017, a month after SegWit activation locked in, Chris Belcher made a proposal to improve the scalability of P2Pool with the use of one-way payment channels and a group of hubs handling payouts to the miners.
The core purpose of the proposal is to address the issue of the larger coinbase transactions losing miners’ money in two different ways. At a high level, the idea is simply to pay the entire coinbase transaction out to a hub with payment channels open to the individual miners, and guarantee that the ability to claim the funds from the coinbase transaction is atomically linked to the miners being compensated for their shares over the payment channels.
To accomplish the goal of atomicity between the coinbase transaction and payment channels for payouts, the coinbase transaction output script has to be customized. In Belcher’s proposal, it is structured as a multi-branch script with three spending conditions:
A two-of-two multisig. Key one: the hub (Hc). Key two: miner who found the block (Mc).
A single key and a hashlock. Key: the hub (H). Hashlock: a random value generated by the hub (X).
A single key and a timelock. Key: the miner who found the block (M). Timelock: a CSV relative timelock of six months.
Any one of these spending conditions can be used to unlock the coinbase transaction output. Now, let’s look at the payment channel script to the miners so we can see how the two things interact:
A two-of-two multisig. Key one: the hub (Hc1). Key two: the miner (Mc1).
A two-of-two multisig and a hashlock. Key one: the hub (Hu1). Key two: the miner (Mu1). Hashlock: the random value generated by the hub used in the coinbase (X).
Now, let’s walk through how these two things interact with each other.
As miners are producing shares to add to the sharechain, the hub monitors the progress. For each share, the hub updates the state of the channel with miners who turn in a share to pay them proportionally to the amount of work they are doing. However, they only give them a signature for the second script path that requires the hashlock preimage to spend — this guarantees that by default, without the hub giving them a signature for the first path, they cannot claim those funds unless the hub spends the coinbase output by itself using the script path with the hashlock, which requires them to publish the preimage.
Now, eventually one of the miners in the P2Pool will find a valid block and publish it to the network. At this point, the hub can update all of the payment channels with the miners and provide the signature to the first script path in the channel, allowing each miner to close their channel and collect the rewards they have earned whenever they want without needing the hashlock preimage.
At this point, the miner who found the block signs the first script path in the coinbase, allowing the hub to claim the funds from the coinbase. That miner is given a slight bonus from the mining rewards to incentivize them to sign cooperatively. But remember: if the miner refuses to cooperate, the hub can simply spend by itself using the hashlock path and reveal the preimage, allowing all of the miners to collect their fair share of the reward.
This just has the downside of forcing all of the channels to close on chain, needing to be reopened to continue mining. The last option exists in case the hub operator chooses to stop processing payouts, or disappears. After six months, the miner who found the block can claim the funds entirely for themselves if the hub hasn’t responded to cooperate or has spent the coins with the hashlock path.
This leaves two specific issues in terms of threat model with Belcher’s proposed improvements. Deciding which transactions to include in a block leaves room for variance in how much of the total block reward is based on what individual miners choose to include in the block templates they are mining.
When introducing payment channels, this creates a margin for error, i.e., the actual mined block reward doesn’t equal what a mining hub commits to in the payment channels to miners. In the case that actual fee estimates are smaller than what the block reward was, the hub can simply update the payment channels using the cooperative spend path with the lesser amount, and as long as they do not claim the coinbase output with the hashlock path, the miners have no choice but to accept the lesser payout that matches what the mining reward actually was.
In the case that the mining reward was slightly higher than the estimate, it is still in the hub’s best interest to update the channels to the miners to reflect this, as miners that the hub treats dishonestly can simply leave at any time. The only edge case where it might make sense for the hub to defect and keep the extra reward would be if someone paid an abnormally large miner fee, but aside from that situation, it’s in the hub’s and miners’ interests to adjust to any discrepancy between the reward estimate and the actual block reward.
The second issue is the fact that the hub is a central point that can be DDoS’d and forced to prevent the P2Pool from functioning. Belcher’s proposal involves using multiple hubs, and sending each coinbase transaction from different blocks to different hubs. However, this requires miners to have channels opened from all hubs they are using which, at Belcher’s estimate of a hub needing 50 times the block reward (about 650 BTC) to provide liquidity for miners, becomes incredibly capital inefficient.
Braidpool: Another Iteration
Enter Braidpool (warning: link is a direct PDF download from GitHub). Braidpool is a proposal from Bob McElrath and Kulpreet Singh building on Belcher’s proposal using payment channels. There are two major changes introduced that improve on outstanding issues left with Belcher’s proposal.
The first is an alteration in how the hubs and miners communicate with each other. They propose having miners attach a Tor v3 address to each of the shares they broadcast to the pool. This way, the hub can operate without exposing any network endpoint that is susceptible to DoS attacks.
The hub operator can then connect to miners in order to open and update channels with them, alleviating the need for miners to use multiple hubs in order to avoid a single point of attack. This allows a Braidpool to operate with a single hub, making the entire system more robust and capital efficient.
Source: Braidpool white paper
The second change is the use of a directed acyclic graph (DAG) instead of a sharechain. The problem with the sharechain was that, with the thirty second share-time target, the difficulty required for shares increased as the pool grew in size, making it more difficult for smaller miners. Using a DAG like Ethereum, where it is not a zero sum game of a single share making it into the sharechain and others being orphaned, allows miners to dynamically set a difficulty for shares that can be adjusted based on the hash rate they have and how frequently they can find shares with it.
The DAG structure includes everyone who has participated in it between actual found Bitcoin blocks, distributing the rewards proportionally between everyone based on the work that they have provided to the DAG. This solves the scaling issue of variance for individual miners as the pools grow larger.
Aside from these two changes, the rest of the structure is just like Belcher’s proposal, the coinbase and channel scripts are the same.
Final Thoughts
Some readers might wonder why Betterhash was not touched on in this article. While decentralizing the selection of transactions for inclusion in a block, it does not fully decentralize all of the functions of the pool — most importantly, the custodial nature of pools handling funds. This leaves miners open to coercion through refusals to pay out funds if the miner is selecting transactions that the pool does not approve of. Therefore, I would not consider it a decentralized mining pool, although it does marginally improve the situation in a hostile but not quite fully adversarial environment.
This article has been centered around P2Pool and proposed iterations to improve upon its scaling limitations. For the sake of not writing an entire book, I have not touched on other existing or potential designs. As soon as I am able to get to it, I plan on writing a follow up piece going into other mechanisms to decentralize mining pools.
This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
The founder of the decentralized exchange, dYdX, asserts that individuals involved in cryptocurrency development should direct their efforts toward international markets beyond the United States for the upcoming five to ten years.
Antonio Juliano conveys to his audience of 49,400 on the social media platform X that the prevailing regulatory uncertainty within the United States does not merit the associated challenges or concessions.
Juliano contends that it would be more prudent for cryptocurrency developers to establish their products in alternative countries and subsequently re-enter the United States from a position of strength.
“Cryptocurrency developers would be well-advised to temporarily discontinue catering to the US market and instead seek re-entry in a span of 5-10 years. The complications and compromises involved do not warrant the endeavor. Moreover, a substantial portion of the market exists overseas. It is recommended to innovate in those regions, ascertain product-market fit, and then return with greater bargaining power…
The paramount objective shared among all stakeholders is to secure a significantly more potent product-market fit for cryptocurrency. The pursuit of a robust product-market fit does not necessitate flawless distribution. A multitude of substantial overseas markets present avenues for experimentation.”
Juliano articulates that advocating for more amiable cryptocurrency regulations demands time, although the process could be expedited if developers manage to introduce products that elicit consumer demand.
“However, this perspective does not undermine the importance of efforts to influence US cryptocurrency policy. On the contrary, such endeavors are absolutely vital. Given the protracted timeframe required (in anticipation of re-entry), and considering that much of the world takes cues from the United States, it becomes evident that our progress in shaping policies hinges upon achieving global-scale product usage.”
The dYdX founder proceeds to emphasize that, with time, American citizens will come to realize that cryptocurrency is inherently aligned with US values and principles.
“The tenets of cryptocurrency closely align with American values. What concept could be more quintessentially American and reflective of capitalist ideals than a financial system conceived for the people, driven by the people, and answerable to the people? This, indeed, constitutes the very essence of our endeavor.”
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
Bloomberg Intelligence’s senior macro strategist, Mike McGlone, is conveying a pessimistic outlook for Bitcoin (BTC) in the immediate future.
During a recent interview on Kitco News, McGlone underscored that Bitcoin is currently displaying bearish signals even amidst the ascent of other high-risk assets.
“In the event of a downturn, adhering to a rule prevalent in bear markets, resources across the board could witness a reduction in value, and Bitcoin will not be an exception.
A crucial observation is the necessity for Bitcoin to exhibit divergent strength at a certain juncture, akin to the behavior of treasury bonds and gold in a deflationary economic environment. Regrettably, this pattern has not materialized.
After attaining its peak towards the conclusion of Q1, reaching approximately $31,000, driven by optimism and the influence of exchange-traded funds (ETFs), Bitcoin subsequently retraced to $25,000 or approximately $26,000. Presently, it is manifesting divergent weakness in contrast to the concurrent upsurge in the stock market.”
According to McGlone’s analysis, the ongoing “economic reset” implies a continuation of Bitcoin’s recent downward trend, although he anticipates that the premier cryptocurrency will ultimately attain a six-figure valuation.
“While I believe that Bitcoin will eventually achieve a valuation of $100,000, the onset of a global economic reset, as I anticipate, characterized by a standard deflationary recession leading to a decline in the housing and stock markets, analogous to the conditions of 2008—though arguably exacerbated due to the ongoing removal of liquidity from the system—Bitcoin’s role as an influential precursor comes to the forefront.
This underscores my point that Bitcoin has recently been taking on the role of a harbinger of trends. Its value ascended briefly to around $31,000, only to subsequently trend downwards. From my perspective, it serves as a leading indicator for a majority of high-risk assets.”
As of the time of writing, Bitcoin is trading at $26,079.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
Shiba Inu’s (SHIB) Latest Layer-2 Scaling Solution Nears Public Relaunch Following Recent Technical Challenges
Shytoshi Kusama, the enigmatic lead developer behind the SHIB project, has shared in a recent blog post that significant progress has been made in addressing the technical setbacks that temporarily halted the operation of Shibarium, SHIB’s new layer-2 scaling solution. The initial release of Shibarium encountered network issues that prompted its temporary closure. However, Kusama assured the community that diligent testing and parameter adjustments have led to notable improvements.
Kusama elaborated, stating, “After extensive testing and parameter refinements aimed at achieving a ‘ready’ status, Shibarium has undergone enhancements and optimization. While still undergoing testing, it is now successfully producing blocks.” Additionally, to prevent a recurrence of the past network overload, Kusama revealed the implementation of a new monitoring system and supplementary fail-safe measures. These include rate limiting at the RPC (remote procedure call) level and an automated server reset mechanism in the event of another surge in traffic.
With these advancements in place, the team is on the verge of reopening Shibarium to the public. As part of this progression, more network validators will be integrated into the ecosystem on August 23rd. Kusama emphasized the significance of this step, remarking, “Tomorrow, additional validators will become operational, expanding the options available for staking BONE. This will allow for a distribution of rewards earned through their roles within our community. As testing concludes, we will once again prepare for public utilization.”
Shibarium’s previous technical difficulties were attributed to an overwhelming influx of users and transactions during its initial launch. As of the current writing, SHIB is trading at $0.00000798, marking a 0.4% increase over the past 24 hours.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
FTX’s co-founder, Sam Bankman-Fried, is currently seeking a temporary release from incarceration. The purpose behind this endeavor is to engage in collaborative strategizing with his legal representatives within the confines of the federal courthouse situated in Manhattan.
In a formal letter dispatched to US District Judge Lewis Kaplan on a Friday, Bankman-Fried’s legal team expounded that their client’s capacity to effectively scrutinize the extensive legal documents pertaining to his case has been significantly curtailed during his time spent incarcerated at the Metropolitan Detention Center (MDC) in Brooklyn.
Christian Everdell, the attorney representing Bankman-Fried, divulged that the government recently disseminated a voluminous three-quarters of a million pages of Slack communications. These were originally due several months prior. Expressing the urgency of the situation, Everdell articulated, “Only last week did the government furnish an aggregate of approximately seven hundred and fifty thousand pages of Slack communications that were originally stipulated for release months ago. Given the current timeline, it is a futile endeavor for Mr. Bankman-Fried to endeavor to review these materials.”
He underlined the pivotal necessity for Bankman-Fried to collaborate meticulously with his legal team, emphasizing his dire need to avail himself of an internet-enabled laptop within the courthouse premises. Such a resource would undoubtedly expedite the process of comprehensive document review, an imperative undertaking in light of his impending fraud trial scheduled for the forthcoming October.
In riposte to Bankman-Fried’s plea for reprieve, the prosecuting body voiced apprehensions regarding his adherence to the prerequisites concerning his planned defense strategy. Notably, they underscored that Bankman-Fried is yet to furnish the complete gamut of essential information regarding the counsel upon which he predicated his actions.
The prosecutors proffered caution that unless Bankman-Fried promptly discloses the minutiae regarding the counsel he received and the provenance thereof, any attempt to interject such a defense during the trial should be summarily proscribed.
Although the prosecutors extended an offer to facilitate the transfer of documents onto hard drives for Bankman-Fried’s perusal within the MDC premises, a viable laptop-based solution was deemed unattainable. Initially, the notion of relocating Bankman-Fried to a more compact, upstate correctional facility where he could access an internet-enabled laptop was contemplated by the prosecutors. However, this proposal was met with resistance from prison officials.
Regarded for its starkly onerous conditions, the Metropolitan Detention Center has cultivated a notorious reputation among its inmate population.
Bankman-Fried’s Incarceration Stemming from Unsanctioned Internet Utilization
As documented, Judge Kaplan sanctioned the re-imprisonment of the beleaguered cryptocurrency luminary, citing alleged instances of witness tampering.
In that juncture, Judge Kaplan pronounced that a strong prima facie case existed indicating that the accused had endeavored to tamper with witnesses on no fewer than two separate occasions.
The decision was additionally influenced by Bankman-Fried’s unsanctioned use of the Internet while released on bail under the guardianship of his parents at their abode located in California.
Judge Kaplan discerned that Bankman-Fried had indulged in excessive communication with various individuals via electronic correspondence, even resorting to the utilization of a virtual private network.
Concurrently, the disgraced progenitor of FTX is simultaneously grappling with novel allegations brought forth by the Department of Justice (DOJ). These allegations encompass the misappropriation of customer deposits, including the purported embezzlement of said funds.
An indictment filed on the most recent Monday delineates that Bankman-Fried stands accused of diverting and embezzling customer deposits from the FTX platform. The illicitly obtained funds were purportedly channeled towards political campaign contributions, collectively amassing a substantial sum exceeding one hundred million dollars, in advance of the 2022 US midterm elections.
The indictment further posits that despite Bankman-Fried’s intimate knowledge of FTX’s fiscal insufficiencies, he continued to channel the purloined funds into personal investments, acquisitions, and political campaign contributions.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
The U.S. Securities and Exchange Commission (SEC) is taking significant steps towards pursuing an appeal in their recent legal battle against Ripple, indicating a potential shift in the course of the lawsuit.
James K. Filan, an experienced defense attorney specializing in crypto-related legal matters, has shed light on the latest developments. District Judge Analisa Torres has initiated a structured process for considering the SEC’s request to present an interlocutory appeal—a move that would allow the SEC to contest certain aspects of the ongoing case.
It’s important to note that this preliminary step does not guarantee the authorization of an interlocutory appeal; rather, it signifies that the SEC has been given the opportunity to formally request such an appeal.
Judge Torres has outlined the timeline for this process in her official order. The SEC is expected to file their motion for the appeal by August 18th. Subsequently, Ripple is given until September 1st to submit their opposition papers. If the SEC deems it necessary, they have until September 8th to file a reply.
The news of these developments had an immediate impact on the cryptocurrency market. Following the announcement of the judge’s order, the value of XRP experienced a sharp decline. The price, which had been trading at approximately $0.571, dropped to around $0.499 at the time of writing. This decrease of over 12% aligns with the broader trends observed across the cryptocurrency landscape.
The legal clash between the SEC and Ripple began when the regulatory agency filed a lawsuit against the San Francisco-based payments company in late 2020. The SEC alleged that Ripple had engaged in the sale of XRP without registering it as a security.
In a significant turn of events last month, Judge Torres issued a ruling that had mixed implications for both parties. She determined that Ripple’s automated programmatic sales of XRP, which occurred on the open market, could not be classified as securities offerings—a pivotal point of disagreement between the SEC and Ripple.
However, the judge did uphold a key aspect of the SEC’s argument. She agreed with the agency’s assertion that Ripple’s direct sales of XRP to institutional buyers indeed amounted to a securities offering, reinforcing the complexity of the case.
As the legal battle continues to unfold, the spotlight remains on the actions and responses of the SEC and Ripple, and how their ongoing dispute could shape the future regulatory landscape for cryptocurrencies and digital assets.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Cryptocurrency investments are subject to market risks, and individuals should seek professional advice before making any investment decisions.
