Bitcoin mining is a fundamental part of the network; it provides security, ensures attacks are hard to perform, eliminates the chances of a rollback or double spend, and ensures we have a reliable network that constantly churns out new blocks.
Bitcoin holds onto its decentralised nature through the tireless efforts of miners. These precious blocks filled with fees and block rewards are forged in the fiery furnace that is a hash power race; every miner competes to produce as much computational power as possible in order to increase their chances of securing the next block.
As Bitcoin has matured and new users are onboarded, block space has changed dramatically; gone are the days of simple transactions filling up blocks; today, it’s filled with Lightning channel creation and closure, CoinJoins, and, as of late, Ordinal transactions.
With new transaction types comes a review of how blocks are constructed; some miners are happy to chug along, selecting transactions that pay them the most in fees, while others feel certain transactions should be considered spam and are therefore ignored. As miners take a stand on how the blocks are created, it turns a fairy standard process into an intricate block creation process, poised to reshape the game theory of Bitcoin mining.
Building the blocks
Imagine a blank page, your canvas for the next Bitcoin block. To fill it, you need to gather transactions from the mempool and fit as many into your block as possible with a limited capacity. The obvious way to construct a block would be to look at the transactions that net you the most fees; since miners are spending money on energy and sunk costs into their machinery, they want to earn as much Bitcoin as possible.
The more fees they can cram into a block, all the better.
Once a block is prepared, it’s all about the race to solve a complex mathematical puzzle and validate everyone’s work. This is the essence of mining: A competitive game to scramble for transactions and become the first miner to create a valid block, add it to the chain and reap the block reward.
So, where do these transactions come from? Well, they come from you, me and all the users of Bitcoin, institutions, and exchanges. Anyone with a UTXO and a set of private keys can interact with those funds on-chain.
When you broadcast your transaction, it gets added to the mempool either by your full node or the third-party node you use, depending on the wallet provider.
Once transactions are pending, miners get to work, scouring the mempool and adding transactions. Enter the block template: a pre-formatted structure provided by mining software, including crucial information like the version number, timestamp, and a space for transactions.
Bitcoin block policy matters
But who dictates what goes into these templates?
Ideally, miners are meant to construct blocks, which is how it started, but as mining became more competitive, this process migrated towards mining pools instead.
Instead, most miners generate hashes and send them off to their mining pool while the pool handles the rest of the technical aspects of mining, centralising how blocks are created around a few large operators.
That’s where block template policies come in.
These are sets of rules implemented by individual mining pools or individual miners, determining which transactions get included in the template and how. Think of them as filters, sifting through the transaction pool to select the most profitable or desirable ones.
For instance, a policy might prioritise larger transactions to maximise fees or exclude certain controversial transactions. These choices directly impact the block’s composition and, ultimately, the mining landscape.
Ocean and its block template Game theory
OCEAN Mining, a new mining pool, has updated its pool software, allowing miners to choose between three block templates.
- OCEAN Recommended (most real financial transactions and less spam/inscription transactions based on Bitcoin Knots)
- Bitcoin Core with the “Ordisrespector” spam filter
- An unmodified Bitcoin Core would be an unfiltered standard block composition.
The OCEAN team have made no secret of their disdain for inscription transactions. Still, under the current landscape, these transactions generate considerable fees for miners, so asking them to ignore an additional payout will be a tough sell.
This is why OCEAN has created an incentive structure where miners who filter inscriptions can enjoy payout with 0% fees taken by the pool, while any miners who opt for the default Bitcoin Core template will incur a 2% fee.
The templates have been made available immediately to anyone mining with OCEAN, and it will be up to those miners to decide which policy they feel is best based on economic and ideological incentives.
A change in block formation
Previously, block competition was a simple process based on fees, but with the introduction of templates, it has increased complexity. As templates roll out, it could encourage more intervention with even more policies down the line.
- Strategic targeting: Miners can tailor their policies to focus on specific transactions, potentially influencing network fees or controlling the flow of certain assets like inscriptions.
- Decentralisation dynamics: Divergent policies across different miners and mining pools could lead to a more distributed and resilient network, reducing the power of centralised mining entities.
- Emergent behaviours: As policies evolve and adapt, we might witness the emergence of unforeseen consequences and strategic interactions within the mining ecosystem. We could see pools avoid processing CoinJoin transactions while others might not engage in MEV.
- Volatility in the cost of block space: As block templates affect the way transactions are ordered and processed, but mining remains random, it could drive more volatility in fees as certain transactions find it hard to get into blocks and will naturally look to increase fees to attract attention from miners.
Block templates and the case for censorship
Block template policies could usher in a new era of strategic mining, where mining pools could be subject to regulatory pressures. Since a large portion of mining pools operate under KYC, these businesses could be encouraged or forced to use templates that are OFAC compliant or templates that exclude known addresses from certain companies or regions.
Additionally, if transactions like Ordinals are deemed unregistered securities, these mining pools might have to forgo their current practices and exclude these transactions in blocks for fear of penalties.
If KYC mining pools are subject to restrictive mining templates, it might reduce their earning potential and make them less attractive to miners looking for the best yield, while certain miners might leave as they look for pools that don’t engage in aggressive policies.
The rise of out-of-band transactions
In the game of Bitcoin, money talks, and despite what happens in the mempool and on-chain, miners can actively ignore that should there be an incentive to do so.
If a user broadcasts a transaction and miners ignore it for whatever reason, the user could approach the miner directly to conduct an out-of-band transaction to get their UTXO added into the next block the miner wins, or they could do it through a third party like a transaction accelerator.
In both instances, funds change hands off-chain; this could be through Lightning, Liquid, Altcoin chains (normally Stablecoins) or even cash payments to get the miner’s blessing.
If more transactions are restricted due to enforcement of specific block template policies, it could see a rise in these types of transactions, reducing fee-earning potential on-chain and even allowing mining pools to do backhand deals and stiff their miners or pay them a fraction of what was agreed.
The future of mining unfurls
The game of Bitcoin mining is undergoing a fascinating transformation with the introduction of block template policies and the emergence of Stratum V2, which adds a new layer of complexity and strategic depth, promising to redefine the relationship between miners and the network fundamentally.
While the full impact remains to be seen, one thing is certain: the Bitcoin blockchain is far from static, and its evolution will indeed have downstream effects.
Let’s discuss it!Â
Share your thoughts in the comments below. What do you think the rise of block template policies will mean for the future of Bitcoin mining? Will it democratise the network or lead to unforeseen problems? Join the conversation and contribute with your comments.
