The Heartbeat of Cardano.

Bitcoin KYC Mining and the Parallels to Cardano Contingent Staking

An Apolitical, Financial, and Historical Applied Outlook

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The Bitcoin Mining Pool Landscape

I read an interesting article recently, Does Foundry have too much Bitcoin hashrate? By: William Foxley, expressing concerns that the North American Bitcoin mining pool Foundry* has a dangerous 40% hashrate majority. Me being a decentralization enthusiast (read maxi), I had to dive in.

First, an independent check of what the current bitcoin mining pool landscape looks like. Foundry only actually has 33% majority, still not good, and the Bitcoin MAV (Minimum Attack Vector of 51% Hash) is 2 pools. Yikes!

Reading between the lines of the article

In short, the article’s author was not as concerned about the 51% majority attack potential, but rather something more subtle… a Social Contract Concern:

“But it’s key to remember it’s not necessarily about the possibility of Bitcoin ‘dying,’ but rather its social guarantees withering on the vine as public miners cater to Washington, D.C., mandates.

North American public miners have a history of appeasement to authority and increasingly make up a large percentage of the network.” (Ref 1)

Interesting, but what does this mean? I couldn’t help but to dig deeper.

Marathon Goes Full “Contingent Staking” KYC Mining

Ah yes, now we’re getting somewhere.

Ref 2: Press Release, Marathon Digital Holdings Inc, May 05, 2021

Marathon, a publicly traded North American (NA) bitcoin miner figured it out and implemented “KYC Mining” as the first! The fears came true.

(Okay, well clarification, not KYC outright, but rather AML & OFAC Compliant Blocks, that is, “black-listed” addresses from entities frowned upon by the US were omitted from the block’s mempool**.)

Per Marathon’s statement: “The mining pool refrains from processing transactions from those listed on the U.S. Department of Treasury’s Specially Designated Nationals and Blocked Persons List (SDN), therefore ensuring all bitcoin mined by the pool is compliant with U.S. regulatory standards.” (Ref 2)

Bitcoin Community Backlash

Alas, there was grievance and gnashing of teeth in debate from the Bitcoin Community regarding the compliant and filtered blocks!

The Block actually had a great article that covered the controversy and story well.

Ref 4: An ‘OFAC-compliant’ bitcoin miner revives debate about transaction censorship, by Kollen Post, May 8 2021, The Block

In summary from reading articles at the time, Marathon was trying to balance bitcoin politics with US regulations. Bitcoiners were not having it:

“As a result, the crypto industry was quick to dogpile on MARA Pool and its newly minted block.” (Ref 4)

So what happened, did the Bitcoin Community backlash win? Did the pressure and ruckus work?

Ref 5: Marathon says its mining pool will stop censoring transactions following bitcoin community outcry, By Kollen Post, June 2, 2021, The Block

Hooray, it looks like it did, Community for the win! Marathon CEO Fred Thiel retracts the OFAC Compliant “KYC” mining in a press release:

Ref 6: CEO Fred Thiel comments on migration to standard Bitcoin core 0.211 node and support for Taproot, May 31 2021, Marathon

But wait, what’s this?

Did the Community really win? By reading between the lines further into The Block Ref 5 article, apparently Marathon took a hit financially from the OFAC Compliant mining:

“Over the course of May, MARA Pool minted 226.6 BTC under this system, which many noted resulted in significantly reduced transaction fees going to the miners, as well as blocks that featured far fewer transactions than peers. With the adoption of Bitcoin Core version 0.21.1, the firm is moving away from “OFAC-compliant” mining.” (Ref 5)

Ultimately, Marathon really folded and recanted their “KYC” mining because they were making less money – It hit their bottom line!

Compliant Mining Makes Less Money

In the end, the OFAC Complaint “KYC” mining made Marathon less money as miners. Why, because there are less transactions and thus less fees to include in a block after filtering out the “bad” transactions. Basically, the compliant blocks are “skinny” and regular blocks are “fat” for miner rewards.

Of course, this was an entirely predictable scenario from the plebs. As explained by witcher_sense

Ref 7:

No rational player will ever join a mining pool that deliberately tends to decrease the revenue of the miners. I mean, bitcoin mining implies certain economic incentives for miners such as block subsidies and transaction fees. If some of the pools start to require KYC from miners, miners can always join other pools that don’t. KYCed pools will therefore have fewer miners, less hash power, and less revenue. Moreover, the senders of “suspicious” transactions can always pay more fees to propagate transactions through non-KYC mining pools and thus increase the profit of those. Non-KYC mining pools will always be more profitable, more attractive, faster, and freer.” – witcher_sense, Nov 12, 2020

Takeaways for the Cardano Community

From an apolitical, financial, and historical perspective, this play-out is probably the same fate for complaint Cardano Contingent Staking, that is, compliant pools will probably have less rewards from “skinny”, filtered, compliant blocks. Delegation will probably move to other global and more profitable pools.

Global economic incentives may trump all local feelings.

Reference & Notes

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*Foundry is a subsidiary of Digital Currency Group, Inc. which is a private company, with Debt Financing from US Private Equity Firms. So yeah, they’ll be compliant to regulation for sure.

**The mempool is where unconfirmed, valid transactions wait to be included in a block.

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