Matt Corallo's back at it, and this time, he’s madder than ever.
Tomorrow, May 8, I’ll be giving a talk at bitcoin++ about MEVPool and the best (but terrible) outcomes if MEVil proliferates on bitcoin. On a seemingly dissimilar but related note, last week, the bitcoin ecosystem was abuzz about another topic: Bitcoin Core standardness rules. I’ll let others dissect moderation policies and the (in)effectiveness of standardness as a deterrent to “bad” uses of bitcoin. Still, it’s worth discussing the impacts of restrictive standardness rules in the context of MEVil and their impact on mining centralization.
In case you don’t know, MEVil arises from bitcoin use cases that drive mining centralization by increasing the fixed costs associated with mining. MEVil might take the form of complicated smart contracts that force miners to become high-frequency traders in order to get competitive revenue (costing tens of millions in upfront costs unrelated to their mining operation), or as technologies that require miners to sign up with centralized parties to access high-value transactions and maximize revenue per hash. These issues are no joke—mining is almost a perfectly competitive global industry with often quite compressed margins. An increase in revenue of 1% might not sound like a lot, but if your margin is only 5 or 10%, that might represent 10 or 20% more profit. In practice, this allows you to expand, increase your hash rate, reduce the margin for all miners, and put your competition at risk of bankruptcy. It should go without saying that mining decentralization is one of the most important features of bitcoin, one which is at great risk, representing a major threat to bitcoin's longevity.
Thus, anything that results in some miners persistently getting a few percent more revenue per hash would represent a significant risk to bitcoin's longevity and its credible neutrality. Today, miners get nearly all the transactions they include in a block from the public bitcoin peer-to-peer network, which provides a nontrivial (though not currently particularly high) portion of their income from the fees these transactions pay. As the block reward dwindles, these transactions will make up a more critical portion of miner revenue.
Some large miners have set up proprietary APIs or run custom software to allow transactions that generally do not propagate through the regular bitcoin P2P network to reach them. MARA's Slipstream product is the classic example of this, where many "nonstandard" transactions can be submitted to them via an HTTP API and, for the right price, can be included in a block that MARA mines. There are also various patches to Bitcoin Core, which some miners have run. These can remove standardness rules and tweak the structure of the P2P network to receive additional transactions.
Luckily, the total revenue change created by these types of activities is trivial, at least at this time. Because few transaction creators wish to use nonstandard transactions, the impact on mining centralization pressure is minimal. Still, the fact that some miners have found it worth the cost to build these systems should highlight their substantial risk to bitcoin.
If Bitcoin Core were to restrict standardness rules further while the ecosystem creates more and more inventive uses for bitcoin (some of which may or may not be good for bitcoin as a currency), driving nonstandard transaction creation, centralization pressure from dwindling block subsidies would become immense. To compete, a small miner would have to hire engineers to build a Slipstream-like system, patching Bitcoin Core where appropriate (without introducing bugs!) and then convincing transactors to use their proprietary system for transaction submission. This would make it all but impossible for a new miner to get off the ground.
Certainly, there are many valid reasons why standardness rules exist. Some prevent DoS against the block creation logic or mempool (e.g., the limit on maximum transaction size and number of dependent transactions ensure that Bitcoin Core can efficiently manage the mempool and create a competitive block template). However, standardness rules to prevent types of transactions that many people want to create only serve to encourage proprietary relay systems. These may not be felt in the form of short-term mining centralization. But as the block subsidy decreases, they certainly would be, all but dooming bitcoin's censorship resistance and neutrality.
In case you don’t know, MEVil arises from bitcoin use cases that drive mining centralization by increasing the fixed costs associated with mining. MEVil might take the form of complicated smart contracts that force miners to become high-frequency traders in order to get competitive revenue (costing tens of millions in upfront costs unrelated to their mining operation), or as technologies that require miners to sign up with centralized parties to access high-value transactions and maximize revenue per hash. These issues are no joke—mining is almost a perfectly competitive global industry with often quite compressed margins. An increase in revenue of 1% might not sound like a lot, but if your margin is only 5 or 10%, that might represent 10 or 20% more profit. In practice, this allows you to expand, increase your hash rate, reduce the margin for all miners, and put your competition at risk of bankruptcy. It should go without saying that mining decentralization is one of the most important features of bitcoin, one which is at great risk, representing a major threat to bitcoin's longevity.
Thus, anything that results in some miners persistently getting a few percent more revenue per hash would represent a significant risk to bitcoin's longevity and its credible neutrality. Today, miners get nearly all the transactions they include in a block from the public bitcoin peer-to-peer network, which provides a nontrivial (though not currently particularly high) portion of their income from the fees these transactions pay. As the block reward dwindles, these transactions will make up a more critical portion of miner revenue.
Some large miners have set up proprietary APIs or run custom software to allow transactions that generally do not propagate through the regular bitcoin P2P network to reach them. MARA's Slipstream product is the classic example of this, where many "nonstandard" transactions can be submitted to them via an HTTP API and, for the right price, can be included in a block that MARA mines. There are also various patches to Bitcoin Core, which some miners have run. These can remove standardness rules and tweak the structure of the P2P network to receive additional transactions.
Luckily, the total revenue change created by these types of activities is trivial, at least at this time. Because few transaction creators wish to use nonstandard transactions, the impact on mining centralization pressure is minimal. Still, the fact that some miners have found it worth the cost to build these systems should highlight their substantial risk to bitcoin.
If Bitcoin Core were to restrict standardness rules further while the ecosystem creates more and more inventive uses for bitcoin (some of which may or may not be good for bitcoin as a currency), driving nonstandard transaction creation, centralization pressure from dwindling block subsidies would become immense. To compete, a small miner would have to hire engineers to build a Slipstream-like system, patching Bitcoin Core where appropriate (without introducing bugs!) and then convincing transactors to use their proprietary system for transaction submission. This would make it all but impossible for a new miner to get off the ground.
Certainly, there are many valid reasons why standardness rules exist. Some prevent DoS against the block creation logic or mempool (e.g., the limit on maximum transaction size and number of dependent transactions ensure that Bitcoin Core can efficiently manage the mempool and create a competitive block template). However, standardness rules to prevent types of transactions that many people want to create only serve to encourage proprietary relay systems. These may not be felt in the form of short-term mining centralization. But as the block subsidy decreases, they certainly would be, all but dooming bitcoin's censorship resistance and neutrality.