Regardless of a pleasant few months this summer season after Burak, notorious slayer of the Lightning Community, dropped his proposal for the brand new second layer protocol Ark the place folks had numerous dialogue round totally different covenant proposals, drivechains are as soon as once more changing into a dominant subject of dialogue. 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 revenue as an alternative of accelerating it. On this piece I will focus solely on the problems relating to incentives for brevity’s sake.
If you’re 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 may ultimately make miners working sidechain nodes and dealing with block development themselves to keep up their financial competitiveness.
The design of blind merge mining (BMM) in BIP 301 specifies a mechanism for customers who don’t have interaction 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 particular bid from some sidechain “miner” they have to embrace 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 verify their sidechain block. It additionally prevents them from claiming funds from a number of sidechain miners whereas solely commiting to considered one of their sidechain blocks.
The proposal is designed this manner with the purpose 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 nearly 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 usually 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 price income generated by a particular sidechain. So if a sidechain generates solely 0.0001 BTC per block, it will likely be a really open course of that nearly anybody can take part in. However for instance that sidechain generates 1 BTC in charges every block, that may be a very totally different recreation. Additionally, the withdrawal interval for a drivechain is three months; that is roughly 90 days earlier than you may really withdraw something you will have 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 accout in principle this can be a aggressive factor, in order that value shall be break 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 piece of 12 BTC? The whole rationale for miners by no means having to do something is that ~99% of accessible income shall be given to miners because of aggressive pressures, and it’ll not be definitely 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 unsuitable, and sidechain miners that aren’t additionally mainchain miners is not going to spend that quantity of capital for that low of a return, then there’s a a lot greater % that mainchain miners will not be capturing on the desk. The one solution to seize it in that scenario shall be to develop into a sidechain miner themselves too. Miner’s complete incentive is to maximise revenue, leaving important revenue on the desk will inspire them to seize it. And here is the ultimate kicker: miners needn’t 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 shall be paid to mainchain miners being unsuitable primarily creates an incentive spiral that results in the very same kind of mining centralization stress conventional merge mining or one thing like a blocksize improve would create. In different phrases, it means the declare about BMM fixing mining centralization is fake.
Second Layer Charge Sniping
One of many recreation theoretical issues with Bitcoin long run is a matter referred to as price sniping. Publish block subsidy when most of miners’ income comes from charges, when irregular price spikes happen, miners really do have an incentive to carry out quick reorg assaults and struggle over blocks that accumulate these abnormally excessive charges. Proper now if an enormous price spike happens miners can at all times depend on the block subsidy within the subsequent block even when they missed out on that price spike. As that subsidy disappears and miners depend upon the variance of the price market alone to pay the payments, exaggerated sufficient spikes in charges change the equation and make it value reorging (or redoing work) for a time to struggle over that exaggerated revenue. This can 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 struggle.
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 properly. 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 commute 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 price sniping? All the things. For miners to price 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 obtained cash on chain for the unique model of that sidechain block nonetheless retains that price. 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 dropping what they earned. If a miner will get fortunate, the identical miner may even double accumulate the unique price 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 scenario, and since they don’t even have hashrate there’s 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 sufficiently big, they’ve first rate odds of simply discovering the following block themselves, the place after all they’ll 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 price, however the preliminary reorg was free. Different miners would possibly even simply construct on the reorg block as an alternative of the unique as a result of it’s newer, 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 threat between sidechain-only miners and mainchain miners with regards to sidechain reorgs. Mainchain miners who’ve a sidechain block reorged from them undergo the chance value of dropping further potential income, sidechain-only miners really lose cash they already had. And all of this happens and not using a reorg disruption to the mainchain itself. This can be 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 scenario with solely mainchain miners. If we take a look at mainchain miners doing this to one another although, the truth is it is going to probably fall into equilibrium the place everybody is not attaining optimum earnings, however larger than they might with out sidechains. Some would possibly query whether or not that may prevail on condition that 26% of miners can cease all pegout transactions from sidechains, and that the tail finish of swimming pools would possibly achieve this in protest of disproportionate advantages for bigger swimming pools. All that may accomplish is to create an natural incentive for almost all of miners who stand to achieve from the withdrawal going by 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 stress for miners by itself, and likewise one more reason the incentives push the association in direction of miners validating and mining these sidechains themselves.
Miner Extractable Worth is changing into an enormous downside, notably within the ETH ecosystem. MEV is any kind of technique to revenue the place the miners/stakers/and so forth. have an uneven benefit over everybody else in accumulating that revenue. Usually that is completed by controlling the order of transactions in a block, reminiscent of trades interacting with a DEX contract, however in summary that isn’t strictly obligatory. The revenue margin that sidechain-only miners hold for themselves mentioned above is itself a really primary 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 isn’t very sophisticated, costly to investigate, and is definitely extractable by mainchain miners merely working primary sidechain software program.
Let’s take a look at a transaction ordering type of MEV, like a DEX on ETH. Decentralized Change protocols enable non-custodial buying and selling of belongings between buying and selling events utilizing a sensible contract as a mediator. It atomically fulfills either side of the commerce, or none. The factor is although, if you can also make a revenue in making such a commerce, the one solution to accumulate it’s if miners embrace that transaction in a block. And the straightforward reality of broadcasting that transaction offers miners the within scoop on accessible 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 to bid a lot larger than different sidechain miners, getting a lot nearer to 100% of the price rewards straight accessible in that block. Nonetheless, in doing in order that they sign to mainchain miners that a chance for even larger revenue exists. On condition that F2Pool is presently enjoying MEV video games entrance working different Stacks individuals, Luxor bought and is constructing out Ordinalshub, miners trying to generate new streams of income is a reality of actuality and never a hypothetical. That is one more incentive for miners to develop into sidechain miners themselves.
However the MEV threat would not cease there with simply extra miner centralization threat. 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 (nearly 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 to 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 could be double paid, however the mainchain miner can by no means really extract this worth himself entrance working the mempool as a result of the dear 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 major enterprise of simply working nodes, or selectively changing issues they see of their mempool.
There are additionally conditions the place mainchain miners extracting MEV is actually 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 might generate is actually solely capturable by Amazon. For miners to extract that worth, they might actually must construct an organization that may out of date and exchange Amazon. That is simply not taking place.
So ultimately not solely do MEV dangers on drivechains exacerbate incentives for mainchain miners to straight take part in them, it additionally has the opportunity of introducing exterior affect into mining incentives. What if Amazon solely shared its MEV worth with the few greatest swimming pools? It might incentivize miners to change 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 frequent response to those issues: merge mining already exists. Sure, it does, however for freely valued shitcoins. Namecoin is the frequent instance introduced up, however Namecoin represents primarily nothing in share phrases of miners revenue. Quite a few SHA256 cash have been merge mined with Bitcoin, nearly none of them are anymore as a result of their value crashed to the purpose of it not being definitely worth the effort. That’s the empirical historic pattern right here. These programs observably don’t pose wherever close to the identical incentive threat as a coin pegged to Bitcoin, that can’t merely independently crash in value to the purpose that it isn’t value involving your self with.
Some folks would possibly convey 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 good points no actual worth from being merge mined. Additionally it is one thing mining swimming pools that begin it might 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 might nonetheless function it. They may signal blocks, and any prior merge mined scheme is actually 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 do not need to care about them, and that they don’t alter mining incentives in any approach. I’ve laid out the most important (however under no circumstances all) of the arguments exhibiting they do the truth is alter them in very substantial methods. These prices must be one thing significantly thought-about when considering this proposal, as regardless of the declare by many drivechain advocates, they’re very actual.