Coin Metrics’ State of the Network: Issue 226

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By Parker Merritt & Kyle Waters

On this week’s State of the Community, we return with our quarterly mining information particular, the place we offer an in depth examination of the present Bitcoin mining panorama by way of the lens of Coin Metrics’ information.

Regardless of a flat BTC market in the again half of Q3 as spot ETF chatter quieted, hashrate continued to speed up all through the quarter, just lately hitting a brand new excessive of round 400 EH/s from 250 EH/s at the starting of 2023. Hashprice circumstances stay difficult, but savvy miners proceed so as to add operational hashrate. 

Source: Coin Metrics Network Data

Since the 2021 mining ban in China, the United States has emerged as the clear point of interest of a maturing Bitcoin mining business. Financed by the energy of US capital markets, publicly-traded mining corporations and their required disclosures are an important place to gauge US hashrate developments. Lately, US-headquartered miner Marathon (NASDAQ:MARA) reported that its operational hashrate grew to 17.7 EH/s by way of Q2 ‘23 (almost 5% of the total network hashrate), up from 11.5 EH/s in Q1. On a total installed basis, the company also reported 23 EH/s installed in the US, with a target of 30 EH/s of total anticipated hashrate. Riot Blockchain (NASDAQ:RIOT), another US-based miner, similarly reported growth in deployed hashrate from 4.8 EH/s in August 2022 to 10.7 EH/s as of August 2023. Across all North American operations that are self mining (e.g. non-hosted mining), operational hashrate stood at around 93 EH/s per Compass Mining’s aggregations, representing simply near 25% of the community hashrate. 

After a punishing 2022, mining shares have principally rebounded in 2023 alongside BTC. One other optimistic development for US miners is subsiding inflation pressures, with US vitality costs falling YoY nationwide (per US EIA data ending in June). In miner-friendly Texas, the common industrial fee fell to $0.0674 / kWh, from $0.0749 / kWh the 12 months prior. Whereas political motion nonetheless stays a threat, US miners additionally notched a win with the White Home’s proposed tax on mining (the “DAME” tax) being tossed out in the Debt Ceiling settlement earlier this 12 months.

With the subsequent halving lower than a 12 months away, US miners are ramping up manufacturing whereas additionally managing their fleets forward of the inevitable decline in block rewards come subsequent spring. We will see this in the information on the common community extensive effectivity, which has continued to development in the direction of a extra environment friendly general community (per Coin Metrics Labs’ MINE-MATCH). Typically talking, US miners are deploying extra trendy machines, resulting in a continued enhance in community extensive effectivity. The stakes can even be raised subsequent 12 months with the anticipated launch of the state of the artwork Antimer S21. ASIC producer Bitmain just lately announced the S21 will begin delivery in Q1 and Q2 of 2024. The arrival of a vastly extra performant machine (with reported specs of a 200 TH/s hashrate and 17.5 J/TH effectivity) will additional add to the complexity of the mining panorama in 2024.

The maturation of the mining business has implications elsewhere, although. For instance, focus of hashrate in the palms of a number of huge mining swimming pools stays a serious concern for the Bitcoin neighborhood. Since January 2023, Foundry and Antpool have collectively managed north of 50% of Bitcoin’s hashrate, posing ever-greater centralization threat. Although Foundry’s dominance has softened to 29% from the excessive of 34% in February, Antpool is inching ahead, gaining 5% share over the identical interval to succeed in 23%.

Source: Coin Metrics ATLAS

Whereas the Foundry and Antpool are in style targets of ire in the case of centralization threat, a current incident with F2Pool— the Third-largest mining pool with 13% share—has invited a contemporary wave of introspection about the function of mining swimming pools and their affect over transaction settlement. 

Based in 2013, F2Pool’s fundamental declare to fame is being China’s “first mining pool.” Whilst rival mining swimming pools have come and gone, F2Pool has maintained a powerful foothold in the high 3 mining swimming pools, raking in $900M in block rewards and $40M in transaction charges up to now in 2023.

Source: Coin Metrics ATLAS and Reference Rates

F2Pool’s destiny is tied to the daring character of founder Chun Wang, who isn’t any stranger to controversy. On September 10, on-chain analysts spotted an awfully giant transaction charge paid to F2Pool. From the very starting, the transaction was acknowledged as a fat-finger overpayment error, shelling out a document $510,750 in charges for an in any other case unusual switch of 0.074 BTC. Chun Wang publicly acknowledged the charge was undoubtedly paid in error, assuring that F2pool would solely redistribute the ~20 BTC sum to miners “if nobody comes to claim it after three days.”

Source: Coin Metrics ATLAS

At first, social media speculated the switch originated from a PayPal deal with. Finally, Paxos issued an announcement claiming duty for the mistake. Although F2Pool founder Chun initially agreed to refund Paxos, he later expressed remorse about his determination, crowdsourcing opinions on Twitter (a.ok.a. X).

In the finish, Chun honored his dedication to refund Paxos, reimbursing the full 19.821 BTC charge from their huge pool pockets. The transaction got here lumped with a chunky 750 BTC change output (credited instantly again to the pool’s fundamental deal with), and was mined by F2Pool themselves with a privileged “zero-fee” switch.

Source: Coin Metrics ATLAS

Although the F2Pool founder’s response to the incident earned him the goodwill of a possible enterprise companion (and probably an under-the-table finder’s charge), the determination to refund Paxos stoked division and outrage in the mining neighborhood. Many onlookers sided with Wang, applauding the “humane decision” to nullify a really human mistake. Others equated F2Pool’s refund to “stealing from their own miners.” 

In any case, the lack of transparency on coverage & course of provides to a mounting sense of skepticism in the direction of mining swimming pools.

On the different finish of the charge market excessive, F2Pool is but once more an outlier. Financial incentives dictate that miners ought to choose the highest-paying transactions for inclusion in a block, maximizing the potential reward in an atmosphere of increasingly-scarce blockspace.

Nonetheless, every now and then some swimming pools will mine zero-fee transactions. These transactions are “free riders,” filling up treasured blockspace with out paying the commensurate sat/vB charge. In Q3 2023, practically all of these zero-fee transactions had been mined by F2Pool, displacing round $25,000+ in potential charge income— a significant sum in a interval of razor-thin mining margins.

Source: Coin Metrics ATLAS

So why would a mining pool waste treasured blockspace on transactions with zero charges? Many of these zero-fee transactions are linked to “internal operations” of the mining pool. As soon as per day, a single F2Pool-mined transaction takes up 10% of the obtainable blockspace. These are mining pool payouts, initiated from F2Pool’s personal deal with to hundreds of miners contributing hashrate to their pool. 

Different “internal” transactions are modest in measurement, taking over simply 0.5% of blockspace. These transactions are merely shuffling F2Pool funds between pool-controlled addresses for accounting & charge administration functions.

Source: Coin Metrics ATLAS

Nevertheless, the overwhelming majority of zero-fee transactions—notably these in the lowest ‘block capacity’ tranche— don’t match the anticipated format of a typical “internal operation” for F2Pool.

Digging deeper into the transaction metadata, many of these transfers comprise an OP_RETURN output. As soon as extensively utilized for the creation of tokens & NFTs, Bitcoin’s OP_RETURN area permits customers to embed arbitrary information into the blockchain (although Bitcoin Core builders later imposed strict measurement limits). The Stacks blockchain at present leverages the field as a BTC-linked consensus mechanism generally known as Proof-of-Switch (PoX). These “Stacks block commits” may be recognized by any OP_RETURN that begins with a X2[ prefix.

Practically the total “lower band” of zero-fee transactions mined by F2Pool consist of Stacks block commits, indicating the pool is incomes cost-free income on the aspect by taking part in Stacks consensus. What’s extra, the majority of these blocks comprise zero different Stacks block commits, which means F2Pool is the sole winner of the STX reward. This suggests F2Pool is censoring different block commits in an try to maximise their very own STX revenues. Although the co-creator of Stacks claims an upcoming improve will make the protocol extra proof against this manipulation, F2Pool at present retains ultimate authority over all Stacks-coded transactions of their blocks.

Source: Coin Metrics ATLAS

At the second, the Stacks blockchain pays out 1,000 STX per block mined. Primarily based on the quantity of zero-fee Stacks blocks F2Pool solo-mines every day (multiplied by the worth of STX), we are able to make a lower-bound estimate of USD income F2Pool has earned by way of Proof-of-Switch— In Q3, over $400,000.

Source: Coin Metrics ATLAS and Reference Rates

Setting apart pool operations and Stacks block commits, the remaining handful of zero-fee transactions require a extra in-depth inspection to uncover their origins. 

Many of the transactions weren’t ever broadcasted to the public mempool. As an alternative, they seem to have been pushed directly to F2Pool, leveraging the pool’s new Transaction Accelerator service. The Accelerator permits customers to bypass the mempool completely, paying a USDT-denominated charge for a precedence slot in F2Pool’s subsequent block. Whereas the pool doesn’t explicitly reveal their pricing mannequin, quotes seem to fluctuate primarily based on transaction measurement, starting from $30 to $3,000. On-chain flows hyperlink the Accelerator deposit deal with to ERC-20 pockets b80…ec1, doubtlessly managed by F2Pool or a companion change. Whereas it is unlikely all of the deal with’s exercise is linked to Transaction Acceleration, the frequency of USDT inflows hints the pool earns a considerable quantity of income by facilitating out-of-band funds.

As further ecosystems and functions start to anchor themselves to Bitcoin’s proof-of-work, mining swimming pools could have robust incentives to bypass the mempool and pocket the proceeds. Going ahead, miners will likely be compelled to demand the next degree of transparency from their swimming pools. Is the pool brokering under-the-table transactions? Ought to miners get a reduce of the pool’s STX income? The times of merely plugging into the lowest-fee pool are over— simply as the ETH charge market has zeroed in on MEV machinations, the trendy age of Bitcoin mining will likely be more and more infiltrated by off-chain arbitrage.

Be certain to take a look at our previous issues of the mining information particular,  in addition to our June report The Signal & the Nonce: Tracing ASIC Fingerprints to Reshape our Understanding of Bitcoin Mining.

This week’s updates from the Coin Metrics group:

  • Coin Metrics is happy to announce the model 2.9 release of our CM Market Knowledge Feed. This launch incorporates help for information sorts from many extra exchanges, new funding fee metrics, simpler methods to question our information, and lots of extra upgrades and bug fixes.

As all the time, when you have any suggestions or requests please let us know here.

Coin Metrics’ State of the Community, is an unbiased, weekly view of the crypto market knowledgeable by our personal community (on-chain) and market information.

© 2023 Coin Metrics Inc. All rights reserved. Redistribution will not be permitted with out consent. This article doesn’t represent funding recommendation and is for informational functions solely and you shouldn’t make an funding determination on the foundation of this data. The e-newsletter is supplied “as is” and Coin Metrics is not going to be accountable for any loss or injury ensuing from data obtained from the e-newsletter.

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