Miners’ Agency Risk

Author: NEST Enthusiasts_Jiu Zhang Tian Wen

After the birth of Bitcoin, a special industry emerged: "mining". The nodes that complete the nonce calculation and package the blocks are called miners.

Every transaction we make on Bitcoin is recorded on the blockchain by these miners. Since miners have the right to keep accounts, they are naturally very important to the Bitcoin system. This makes us worry: Can they have any impact on our assets, such as transferring them away, disappearing, or preventing us from trading? This kind of impact is the agency risk of miners.

To analyze the agency risk of miners, we need to delve into the mining process and determine which miners can make their own decisions and which are arranged by the protocol or algorithm.

Taking BTC and ETH as examples, during the packaging process, the miners decide which transactions to choose, which data to package (such as timestamps, etc.), which nodes to broadcast to, and which nodes to receive broadcasts from, etc.; and the packaging rules, the HASH after packaging, and the nonce value calculated based on the HASH, etc., are all agreed upon by the protocol and can be verified by the system, and cannot be tampered with by miners at will.

According to this process, without the private key, the miner cannot forge a transfer transaction, and therefore cannot transfer your money away. However, the miner can prevent your transaction from being packaged, or even add your address to the blacklist. As long as it is packaged, it will ignore your transaction. In addition, if there is a need for the order of transactions, the miner can put your transaction at the back, or put other specified transactions at the front.

Since miners can selectively receive broadcasts, this can become an excuse: blacklisting an address can be said to be equivalent to not receiving the transaction. The blacklisted person cannot find evidence of being blacklisted in any data, and thus cannot trace the miner's responsibility.

Of course, for a pure miner, he can do whatever he wants as long as it complies with the agreement. But for miners who entrust mining pools, if they arbitrarily blacklist an address, they should be supervised or explained, because the mining pool and miners are in a principal-agent relationship, and there is no guarantee that the behavior is based on the interests of the miners rather than the interests of the mining pool. For this issue, we will write a separate article to discuss the agency risks of mining pools.

From the above description, the impact of miners on individuals is mainly preemptive trading and exclusion of transactions (blacklist, etc.), neither of which will cause asset loss on BTC (of course, time loss is also a kind of loss); at the same time, considering that the impact of a single miner is small (except for mining pools), and the miners who pack are randomly generated, these two agency risks will decrease with the increase of nodes and the expansion of the system. However, if the development of mining pools becomes more and more centralized, the opposite may be true.

However, on ETH, since smart contracts accommodate more complex logic, especially in the DeFi field, the importance and relevance of a transaction are greatly enhanced, which means an increase in miner agency risk.

Taking 312 as an example, when there is a large-scale run on DeFi, the profit-risk structure of preemptive transactions and exclusion transactions becomes very important. At this time, there is an "external incentive": that is, it is not the ETH generated by packaged transactions that incentivizes miners, but the arbitrage value of various on-chain contracts that incentivizes miners. Under the most open assumption (miners design packaging strategies entirely based on their total incentives), ETH may indeed be in chaos, and miners have become the biggest beneficiaries of DeFi arbitrage interests.

These chaos will affect the decentralized consensus of the public chain, especially if the mining pool does this, the negative impact will be doubled.

Of course, in the real world, miners and mining pools are affected by reputation, external supervision, community boycotts and other factors, so there are still only a few miners who dare to blatantly conduct external incentives. However, this potential risk still exists, especially for mining pools; due to their principal-agent structure that complies with current laws, once the interests of the principal are damaged, they are likely to be accused of traditional legal relationships, which is very costly.