Regardless of a pleasant few months this summer time after Burak, notorious slayer of the Lightning Community, dropped his proposal for the brand new second layer protocol Ark the place individuals had a variety of dialogue round totally different covenant proposals, drivechains are as soon as once more changing into a dominant subject of debate. There are a lot of issues with drivechains, from the rationale for supporting them, to claims about how they do not have an effect on incentives being inaccurate, and even causes for why they could really harm miner earnings as an alternative of accelerating it. On this piece I’ll focus solely on the problems relating to incentives for brevity’s sake.
In case you are not aware of the precise technical workings of BIPs 300 and 301, you may learn a succinct abstract of that right here.
Separation of Considerations: Mainchain Miners and Sidechain “Miners”
One of many core claims from drivechain proponents is that the activation of this BIP introduces no new necessities or prices for miners who take part in securing these sidechains. Whereas that is strictly technically true, it doesn’t require or mandate something new from miners, the incentives of the design naturally create a funnel motivating miners to tackle full accountability for operation of those sidechains themselves to maximise revenue. Over time as a result of aggressive nature of mining, this could ultimately make miners operating sidechain nodes and dealing with block building themselves to take care of their financial competitiveness.
The design of blind merge mining (BMM) in BIP 301 specifies a mechanism for customers who don’t interact in Bitcoin mining to overtly bid within the mempool for miners to pick out their sidechain block for affirmation. For miners to just accept a selected bid from some sidechain “miner” they need to embody an identical dedication to deciding on their block of their coinbase transaction. The consensus guidelines of the proposal make any bid transactions from sidechain miners invalid until the corresponding message is included within the coinbase. This each ensures that miners can’t declare funds from a sidechain miner until they really affirm their sidechain block. It additionally prevents them from claiming funds from a number of sidechain miners whereas solely commiting to one among their sidechain blocks.
The proposal is designed this manner with the aim of permitting miners to gather income from sidechains with out having to really validate them or contain themselves in setting up blocks for the sidechains. Based on proponents, sidechain miners will merely bid the charges paid to mainchain miners as much as be virtually the whole thing of the sidechain’s earnings, and miners will seize ~99% of the worth with out having to do something. This assertion fully glosses over the truth and nuances of the incentives concerned on this association.
It’s often claimed that “anybody can take part in setting up sidechain blocks.” This isn’t true. Whereas it’s an open course of to take part in, it is not free. It requires capital within the type of bitcoin to really be a sidechain miner, and this capital requirement grows in proportion to the expansion in charge income generated by a selected sidechain. So if a sidechain generates solely 0.0001 BTC per block, it is going to be a really open course of that just about anybody can take part in. However for instance that sidechain generates 1 BTC in charges every block, that could be a very totally different sport. Additionally, the withdrawal interval for a drivechain is three months; that is roughly 90 days earlier than you may really withdraw something you’ve got earned, so at 1 BTC per block with 144 blocks in a day as much as 12,960 BTC are required to pay miners for confirming sidechain blocks. Take into account in principle it is a aggressive factor, in order that price will likely be cut up between all of the profitable sidechain miners, however that’s nonetheless an enormous quantity of capital (only for one sidechain). Even a extra modest 0.1 BTC continues to be 1,296 BTC in that interval.
This brings me to the crux of the issue. Do you actually suppose that almost all of the charges collected on a sidechain are going to be paid to miners? Folks will collectively half with and put in danger over 1200 BTC in a 3 month interval simply to have a shot at incomes a bit of 12 BTC? Your entire rationale for miners by no means having to do something is that ~99% of obtainable income will likely be given to miners as a consequence of aggressive pressures, and it’ll not be well worth the 1% reward to mine the sidechain’s themselves. That 12 BTC represents the 1% left over. Over 1200 BTC is in danger for the potential reward of 12 BTC. If that assumption is incorrect, and sidechain miners that aren’t additionally mainchain miners won’t spend that quantity of capital for that low of a return, then there’s a a lot larger % that mainchain miners aren’t capturing on the desk. The one solution to seize it in that state of affairs will likely be to grow to be a sidechain miner themselves too. Miner’s whole incentive is to maximise revenue, leaving important revenue on the desk will encourage them to seize it. And here is the ultimate kicker: miners need not have and spend that BTC capital up entrance in an effort to mine the sidechain, they simply have to stay a dedication to a sidechain block of their coinbase. For the miners themselves that is free.
The belief of how a lot of the charges will likely be paid to mainchain miners being incorrect primarily creates an incentive spiral that results in the very same kind of mining centralization strain conventional merge mining or one thing like a blocksize enhance would create. In different phrases, it means the declare about BMM fixing mining centralization is fake.
Second Layer Payment Sniping
One of many sport theoretical considerations with Bitcoin long run is a matter known as charge sniping. Publish block subsidy when most of miners’ income comes from charges, when irregular charge spikes happen, miners really do have an incentive to carry out quick reorg assaults and combat over blocks that accumulate these abnormally excessive charges. Proper now if an enormous charge spike happens miners can all the time depend on the block subsidy within the subsequent block even when they missed out on that charge spike. As that subsidy disappears and miners depend upon the variance of the charge market alone to pay the payments, exaggerated sufficient spikes in charges change the equation and make it price reorging (or redoing work) for a time to combat over that exaggerated earnings. It will make sense till the price of redoing work on the identical block time and again with no reward collected approaches the purpose of being an financial loss, after which miners would rationally stop the combat.
The way in which that drivechains BMM specification works modifications the dynamic of this. In conventional merge mining you would need to reorg the mainchain in an effort to reorg a sidechain. In drivechains you do not. The identical approach that mainchain blocks have a pointer again to the earlier block, drivechains do as effectively. The factor is, you do not have to take away a dedication to a sidechain block in an effort to level to a distinct one. Take a look at this instance under, the numbers in parentheses are the blocks the present one is pointing again to:
A sidechain block when utilizing drivechains is simply one thing dedicated to within the mainchain, and whereas the mainchain goes marching ahead with out going again, the sidechain can trip between a number of forks. The sidechain software program continues to be following a longest chain rule (which miners are trusted to respect), however in contrast to the mainchain reorgs these blocks do not simply disappear. The dedication to them nonetheless exists within the mainchain, and nonetheless must be scanned.
So what does this must do with charge sniping? Every little thing. For miners to charge snipe on a sidechain it would not require redoing work, it would not require giving up the mainchain charges (and even charges from different sidechains). So when that sidechain miner collects twice the charges as regular and solely pays the mainchain miners what they usually do, a mainchain miner can come alongside and reorg that block on the sidechain and accumulate the sidechain charges whereas the miner who acquired cash on chain for the unique model of that sidechain block nonetheless retains that charge. So the unique sidechain miner earns nothing, and loses what they paid in mainchain charges. So one miner can feesnipe with out the primary miner shedding what they earned. If a miner will get fortunate, the identical miner may even double accumulate the unique charge on the mainchain and the sidechain charges by reorging it in the event that they mine two blocks in a row. Solely the sidechain miner who would not mine on the mainchain loses cash on this state of affairs, and since they don’t even have hashrate there may be nothing they will do about it.
Now to ensure that the mainchain miner to efficiently pull this off, the sidechain miners must construct on their block as an alternative of the unique. If a pool is large enough, they’ve respectable odds of simply discovering the subsequent block themselves, the place in fact they are going to construct on their very own block. They may even overtly bid like a sidechain-only miner to extend their odds. This could require paying an precise mainchain charge, however the preliminary reorg was free. Different miners may even simply construct on the reorg block as an alternative of the unique as a result of it’s more moderen, these particulars come all the way down to how the precise software program implementation swimming pools deploy is constructed.
General although there’s a giant asymmetry in danger between sidechain-only miners and mainchain miners in terms of sidechain reorgs. Mainchain miners who’ve a sidechain block reorged from them undergo the chance price of shedding further potential income, sidechain-only miners really lose cash they already had. And all of this happens with no reorg disruption to the mainchain itself. It is a huge drawback, and disincentive, for sidechain-only miners to take part on this course of.
Even eradicating sidechain-only miners from the image, this dynamic change nonetheless exists in a state of affairs with solely mainchain miners. If we take a look at mainchain miners doing this to one another although, the truth is it can probably fall into equilibrium the place everybody is not reaching optimum earnings, however better than they’d with out sidechains. Some may query whether or not that might prevail on condition that 26% of miners can cease all pegout transactions from sidechains, and that the tail finish of swimming pools may accomplish that in protest of disproportionate advantages for bigger swimming pools. All that might accomplish is to create an natural incentive for almost all of miners who stand to realize from the withdrawal going by means of to orphan the mainchain blocks of the miners stalling it. So whereas this nonetheless disproportionately advantages bigger swimming pools who will statistically discover a number of blocks in a row extra typically, smaller swimming pools have an incentive to just accept it. This dynamic is one more centralizing strain for miners by itself, and in addition one more reason the incentives push the association in the direction of miners validating and mining these sidechains themselves.
MEV
Miner Extractable Worth is changing into a giant downside, significantly within the ETH ecosystem. MEV is any kind of technique to revenue the place the miners/stakers/and many others. have an uneven benefit over everybody else in gathering that revenue. Usually that is accomplished by means of controlling the order of transactions in a block, reminiscent of trades interacting with a DEX contract, however in summary that’s not strictly crucial. The revenue margin that sidechain-only miners preserve for themselves mentioned above is itself a really fundamental type of MEV, it’s worth sitting on the desk that miners have a bonus in with the ability to declare. This type of MEV will not be very sophisticated, costly to research, and is well extractable by mainchain miners merely operating fundamental sidechain software program.
Let us take a look at a transaction ordering type of MEV, like a DEX on ETH. Decentralized Change protocols permit non-custodial buying and selling of belongings between buying and selling events utilizing a wise contract as a mediator. It atomically fulfills either side of the commerce, or none. The factor is although, if you may make a revenue in making such a commerce, the one solution to accumulate it’s if miners embody that transaction in a block. And the straightforward truth of broadcasting that transaction offers miners the within scoop on obtainable revenue earlier than it is really confirmed in a block. This provides them the chance to entrance run you and accumulate these earnings for themselves. A sidechain-only miner partaking in such actions would probably be capable of bid a lot larger than different sidechain miners, getting a lot nearer to 100% of the charge rewards immediately obtainable in that block. Nonetheless, in doing in order that they sign to mainchain miners that a chance for even better revenue exists. On condition that F2Pool is at present taking part in MEV video games entrance operating different Stacks contributors, Luxor bought and is constructing out Ordinalshub, miners seeking to generate new streams of income is a truth of actuality and never a hypothetical. That is one more incentive for miners to grow to be sidechain miners themselves.
However the MEV danger would not cease there with simply extra miner centralization danger. There are conditions the place miners can’t simply simply seize the MEV worth themselves. Say an organization or group ran a entrance finish for an enormous DEX to make it simpler to make use of (virtually each DEX on ETH has such gamers), and sourced the person orders earlier than they even hit the mempool and privately constructed a block to bid for to mainchain miners. Mainchain miners would not be capable of examine the contents of this block till after it was confirmed and propagated between sidechain nodes, so they are going to be incapable of frontrunning within the mempool to extract this worth, they must really reorg and feesnipe the sidechain. This clearly would harm the sidechain miner working the DEX entrance finish and the mainchain miner will be double paid, however the mainchain miner can by no means really extract this worth himself entrance operating the mempool as a result of the precious transactions by no means enter it. And by reorging and placing the sidechain miner/DEX entrance finish operator out of enterprise, they’re destroying that supply of worth. That is a extra concerned effort, and extra divergent from their fundamental enterprise of simply operating nodes, or selectively changing issues they see of their mempool.
There are additionally conditions the place mainchain miners extracting MEV is basically not possible. Think about a sidechain spun up particularly to facilitate funds for items on Amazon, or combine with some Amazon cloud service. The oblique new income this sidechain’s existence may generate is actually solely capturable by Amazon. For miners to extract that worth, they’d actually must construct an organization that might out of date and substitute Amazon. That is simply not occurring.
So in the long run not solely do MEV dangers on drivechains exacerbate incentives for mainchain miners to immediately take part in them, it additionally has the potential of introducing exterior affect into mining incentives. What if Amazon solely shared its MEV worth with the few largest swimming pools? It will incentivize miners to modify to them to earn a lower. It offers them a level of direct affect over miners income streams.
However Merge Mining Already Exists
That is the widespread response to those considerations: merge mining already exists. Sure, it does, however for freely valued shitcoins. Namecoin is the widespread instance introduced up, however Namecoin represents primarily nothing in share phrases of miners earnings. Quite a few SHA256 cash have been merge mined with Bitcoin, virtually none of them are anymore as a result of their worth crashed to the purpose of it not being well worth the effort. That’s the empirical historic development right here. These programs observably don’t pose anyplace close to the identical incentive danger as a coin pegged to Bitcoin, that can’t merely independently crash in worth to the purpose that it isn’t price involving your self with.
Some individuals may deliver up federations, however the actuality is nobody appears to have curiosity in utilizing federated sidechain pegs. They generate no demand, the place there appears to be loads of clambering for a drivechain hashrate escrow peg. That might essentially alter the equation right here and create demand giant sufficient to trigger damaging incentive distortions the place they in any other case would not exist. On the opposite facet, mining swimming pools organising a federation would provide no actual dynamic membership to who controls the cash (as the present keyholders must explicitly add new members and switch cash), and positive factors no actual worth from being merge mined. It is usually one thing mining swimming pools that begin it may run independently of precise miners, i.e. if 100% of hashrate left mining swimming pools that began a federation, the swimming pools with no hashrate may nonetheless function it. They may signal blocks, and any prior merge mined scheme is basically meaningless as a result of the swimming pools management the cash on chain. It is primarily only a federation like Liquid that has some phantasm of an overlap with mining at that time.
So, the large claims relating to drivechains are that mainchain miners would not have to care about them, and that they don’t alter mining incentives in any approach. I’ve laid out the most important (however in no way all) of the arguments exhibiting they do in actual fact alter them in very substantial methods. These prices needs to be one thing significantly thought of when considering this proposal, as regardless of the declare by many drivechain advocates, they’re very actual.
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