Drivechain enhances Bitcoin incentive mechanism bringing profits to miners

Drivechain Enhances Bitcoin's Incentive Mechanism, Increasing Profit Potential for Miners

Source: LayerTwo Labs

Miners shoulder the daily operation and security barrier of the Bitcoin network, and what encourages them to participate is the incentive mechanism of the Bitcoin network: investing computing power to build blocks, verifying and packaging transactions, in exchange for Bitcoin’s block rewards and transaction fee income.

Drivechain, through BIP-300 and BIP-301, brings breakthrough opportunities for Bitcoin miners to increase TPS and earn more transaction fee income. And for miners, it is simpler than the merged mining method that has been widely accepted by miners.

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Miners have not fully recognized the incentive mechanism brought by Drivechain, as proven by the article “DRIVECHAINS: FROM A BITCOIN MINERS’ PERSPECTIVE” by Amanda Fabiano, Harry Sudock, and Rory Murray on the Bitcoin Magazine website.

The main points in their article are as follows:

1. Drivechain itself is not a problem, but changes in the incentive mechanism may bring challenges, and the uncertainty of sidechain revenue will affect the strategies of enterprise miners.

2. Drivechain brings additional complex work for miners, which may influence their neutral position.

Specific Changes that Drivechain Brings to Miners

A new Drivechain article appeared in the Bitcoin Magazine, unfortunately, it is not very accurate.

Especially this incorrect paragraph:

“Requiring miners to arbitrate disputes on sidechains (possibly many disputes at once) not only adds extra business complexity but changes the fundamental neutral role that miners play in validating transactions. From a miner’s perspective, disputes are inevitable, and the complexity surrounding power, incentives, and rules becomes uncertain.”

Drivechain does not require miners to arbitrate disputes on sidechains. It only requires them to copy/paste a single hash from the sidechain to L1’s Coinbase every 3 months, and the sidechain hash is the same for everyone.

The only judgment is: “As miners, do we all want to steal and terminate this idea from all Drivechains; or do we decently copy/paste it?”

I hope you can see that this is not important. If miners do indeed “steal,” then we will end up in the same situation as now: no Drivechain. If they don’t, then everyone is happy.

I hope everyone can also see that no new “judgment” is added. The “added Drivechain judgment” is exactly the same as the “added Lightning Network judgment” (because miners can also steal from Lightning Network channels by reviewing just transactions). And just like deciding whether to steal by restructuring L1, the “judgment” is the same every time. Now there are only 3 instances instead of 2.

The only purpose of someone “resolving disputes” is when miners become extremely lazy in searching for this hash value. They won’t even run sidechain nodes; they just copy someone else’s hopeful work and people argue about it. But once someone runs a sidechain node, the dispute is resolved. So, miners get the best of both worlds – they can basically be lazy about anything, and they just need to lift a finger in case someone decides to try lying to them – a stupid lie that can be easily exposed in less than 3 months.

—-All other errors in the article seem to stem from this misunderstanding.

“While Drivechains may increase revenue, they also pose survival risks to businesses.”

No, they don’t. Say it again – the only risk is that we will eventually return to where we are today.

“Bitcoin mining operations are complex and labor-intensive. But this is a natural result of the narrow and explicit role they have played since the birth of Bitcoin.”

No, it’s the difficulty adjustment that’s the reason. DA fires the worst performing 50% employees every two weeks. This ensures continued development, specialization, innovation, etc.

“While Drivechains can bring additional income to Bitcoin, this approach of adding judgment in the protocol carries great risks.”

No new judgment is added.

“What if miners want to abandon Drivechain due to regulatory concerns?… Ignoring legal or regulatory issues is not a feasible option for many miners…”

That “abstaining” miner is actually reviewing Bitcoin transactions, and they’ll lose revenue. What could be better than that! Through blind mining merge, miners can earn income from sidechains without running any sidechain nodes. That should be enough.

“To illustrate this point with a hypothetical scenario, consider a private company issuing tokens supporting illicit activities on a sidechain. If that private entity later defrauds investors and users (unfortunately, this has happened multiple times in the broader cryptocurrency industry), who will bear the responsibility?”

Doesn’t matter. Whether miners steal from that sidechain or ignore it or politely copy/paste the hash value, it doesn’t matter to me. However, if one of those actions significantly increases long-term mining fee revenue, then they’ll be forced to do so.

“In this world, Drivechain requires multiple and continuous resolutions, with sub-miners in the pool voting differently from the pool operator’s decision, which will significantly increase operational complexity.”

However, that’s not the case in reality.

Miner Misconceptions about Drivechain: Amanda Fabiano, Harry Sudock, and Rory Murray’s original text is as follows:

Bitcoin is the largest, longest-running, decentralized, and most secure digital currency in history, but this is not the first attempt of its kind. As a community, we are best to remember that Bitcoin stands on the shoulders of previous projects and spans decades of work. Satoshi Nakamoto built upon the technical foundations of these aforementioned projects, their successes and failures, and each unique cultural spirit.

Take a step back and think about the network, one of Bitcoin’s key characteristics is the highly simple nature of its monetary policy and the fundamentally clear incentives of stakeholders in the network. Providing sound money on a trustless basis is not without its risks. Game theory and incentivization of correct miner behavior is one of the most sensitive components of the system. Miners need to abide by the current highest standards of behavior – avoiding 2017-style forks, avoiding transaction censorship, mitigating reorganization risks, etc. – and the network must also provide enough visibility into their future business models to continue making significant capital expenditure investments and to accommodate the characteristics of being large-scale, durable, and high operational cost.

Achieving a balance between these two forces allows the Bitcoin network to provide robust currency at the unit level and resistance to censorship at the network level – both of which are requirements for Bitcoin to have a shot at becoming the dominant global settlement layer.

When network upgrades or new proposals arise, miners and their behavior often become the topic of discussion. This is because the network has become accustomed to predictable and compliant miners since 2017, and they have become followers of nodes once there is a controversial proposal. Their primary focus remains on meeting the challenging operational and growth requirements and not supporting or opposing Bitcoin software proposals.

To discuss the incentives miners face, we need to understand the core business models deployed by miners and the directional economics of their input sets. In short, the goal of miners is to produce Bitcoin at the lowest possible cost. There are various mining methods exist today, each with its own costs, structures, and risks. For the purpose of this article, let’s provide a basic overview of the inputs miners must consider and the subsequent capital expenditure involved:

	Hosted Miners (non-self-operated)	Self-operated Miners (owned and operated facilities)	Hosting Service Providers
ASIC	High	High	None
EPC (Engineering, Procurement, Construction)	None	High	High
Capacity Deposits (e.g. PLianGuai or holding hosting space)	Medium	High	Medium
ASIC Maintenance	High	High	Low
Facilities Maintenance	None	High	High
SG&A/Back-office	Low	High	Medium
Research & Development	Low	Medium	Medium

By participating in mining, miners theoretically stake their operational setups to produce future Bitcoin at prices lower than the market price. Capital expenditure and ongoing costs determine the survival or success of a miner’s business, directly impacting the game theory that supports Bitcoin. Miners can only control their own hashpower, which is subject to biweekly difficulty adjustments and the challenge of halving events every four years.

Satoshi Nakamoto’s fundamental innovation aimed to eliminate the need for trusted third parties when sending or receiving transactions. This is achieved through the implementation of Proof of Work (POW) under the supervision of difficulty adjustments. The system effectively incentivizes miners to engage in the fairest competition by exchanging hashing power for Bitcoin. Regardless of entry barriers, mining cycles, hash prices, and Bitcoin prices, hashpower remains neutral in the mining network. Additionally, miners must factor in market cycles, particularly halving events, which significantly impact their income by halving it every four years.

Although the network is neutral, companies supporting the ongoing network have been created, but these networks have limitations in terms of business aspects (regulatory constraints, business operational decisions, capital availability, costs, etc.). These limitations may introduce distortions when considering any new issues. The incentive structures proposed for a broader network participation cause differentiation in some aspects. As each mining company has distinct strategies, these trade-offs and subtle differences are specific to each company.

To illustrate this point, consider this scenario: a miner chooses to join a mining pool that complies with SOC 1 and SOC 2 compliance standards, even if it charges higher fees, rather than opting for a lower-cost pool without compliance standards. In this case, the miner makes a selective business decision aligned with their mission and goals – which may be overlooked by miners with different missions and goals. This is an example of a company-specific individual business decision.

In addition to the miners’ individual business choices and operating profitable businesses, they must also closely monitor any and all updates introduced in the Bitcoin protocol, both from a short-term perspective of how it may impact their operations and a long-term perspective through BIP300/301. Let’s delve into the concept of the Drivechain proposal, and for a comprehensive overview of the proposal’s details, consider reading the article by the BitMex research team.

1. BitMEX: Drivechain-BIP300/BIP301 Report

2. BitMEX: Bitcoin-MM Merged Mining Growth

Drivechain itself may not necessarily be the issue. The potential consequences that come with it may bring challenges and overlook the current network limitations. While they may increase revenue, they also pose survival risks to corporations, putting Bitcoin miners on a more challenging track.

Mining Bitcoin is a complex and labor-intensive business. But this is a natural result of the narrow and specific role they have played since Bitcoin’s birth. Asking miners to arbitrate disputes on sidechains (which may involve arbitrating many disputes simultaneously) not only adds additional complexity to their operations, but also changes the fundamental neutral role miners play in verifying transactions.

From the perspective of miners, disputes are inevitable and the complexity surrounding power, incentives, and rules becomes uncertain. So far, miner power has been checked and limited to ensuring transactions meet consensus rules that all parties know and agree on. While Drivechain can bring additional income to Bitcoin, adding judgment to the protocol is very dangerous and is trading short-term income for potential long-term consequences, which are largely unknown. It’s simply not a wise trade-off.

Choosing to opt out is not a true option. Miners can choose not to participate in sidechains, but they will still generate income from all sidechain activities, and that activity is still happening and related to the main Bitcoin network. In short, implementing Drivechain will only bring additional problems for miners through running standard operations. What if miners want to quit due to regulatory concerns? What if certain sidechains exhibit untrustworthy behavior? For many miners, ignoring legal or regulatory issues is not a viable choice, especially those operating publicly in the United States, which accounts for more than 34% of the network’s hash rate, according to Miner Mag.

To illustrate this point with a hypothetical scenario, consider a private company issuing tokens on a sidechain to support illegal activities. If that private entity later defrauds investors and users (unfortunately, this has happened multiple times in the wider cryptocurrency industry), who is responsible? As sidechains are tied to Bitcoin, when miners cannot truly opt out, can they claim plausible deniability? They are still miners on the Bitcoin network, with these sidechains linked to that network, and they may have derived income from sidechains associated with the project. The concept of being able to ignore certain things exists only in a world where you can do so until problems arise. Like swimming tests during the witch trials, even if miners choose to exit a sidechain, they are still presumed guilty by default. Given the significant investment of funds, time, and resources that miners put into their operations, this is a difficult trade-off to consider.

An increase in the centralization of funding pools. Some may argue that the most centralized aspect of mining currently is mining pools. Despite there being multiple choices, just two mining pools have substantial control over the majority of the network. It is important to note that the cost and time to switch mining pools are relatively low. Therefore, the idea that mining pools can gain control is a risk that can be resolved in less than ten minutes. In fact, advanced miners usually maintain backup pools not only to facilitate quick transitions when necessary, but also to address operational downtime or interruptions in third-party pools.

There have been several initiatives aimed at decentralizing mining pool power, with various companies collaborating to develop StratumV2, an effort stemming from Matt Corallo’s Betterhash proposal. However, while the conversion cost is low, Drivechain requires multiple and ongoing arbitrations, with sub-miners in the pool choosing different voting methods than the pool operator’s decision, which will significantly increase operational complexity.

Consider two proposals, A and B, which the miners are in favor of. If their primary mining pool chooses to vote against both A and B, the miner can switch to their backup pool. But what if the backup pool supports A and opposes B? Miners are now faced with a choice: either jeopardize their income and business operations, including employee salaries, by exiting and mining independently during the arbitration period, or proceed cautiously. Introducing Drivechain at this stage without first laying the foundation is like installing a roof on a house without first laying the groundwork.

In retrospect, the beginning of the extraordinary Bitcoin journey was formed through collaboration with many other projects, involving different areas of expertise and backgrounds that fostered the critical thinking necessary for success. Along the way, we have lost some of the commitment to constructive dialogue based on knowledge and honesty. Discussions related to Drivechain have turned to personal attacks and sweeping generalizations, failing to promote the constructive dialogue necessary for wise decision-making.

Innovation within the Bitcoin ecosystem is a positive and necessary force. The community should actively foster this through careful and constructive discussion and debate. We cannot advocate for adoption while refusing to accept new solutions. Nevertheless, maintaining a critical perspective is crucial when considering any changes’ potential long-term impact on the network, while also being grounded in the current reality of the network.

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