Scaling Noncustodial Mining Payouts with CTV

Mining pools represent a crucial element of the cryptocurrency ecosystem, offering miners the opportunity to combine their computational resources for a better chance at solving blocks and earning rewards. These pools can be broadly categorized based on their handling of mining rewards: custodial and non-custodial. Custodial pools consolidate mined Bitcoin into a single wallet, as evidenced by transactions listed on mempool.space, which typically show a large initial transaction followed by the distribution of funds from that central point. In contrast, non-custodial pools distribute rewards directly to miners' wallets through transactions with multiple outputs, thereby not holding the funds at any point.

The Ocean mining pool stands out as a rare example of a non-custodial operation, facing significant challenges due to firmware restrictions imposed by popular mining hardware like Antminer, which limits the number of outputs in a coinbase transaction. This constraint necessitates complex workarounds, such as hardware fingerprinting and managing multiple work templates, to facilitate the distribution of rewards directly to miners. Open source ASIC firmware, such as Bitaxe's ESP-miner, demonstrates the potential for significantly larger transactions, unhampered by these limitations.

A promising solution to circumvent hardware constraints involves the use of CTV (CheckTemplateVerify), a proposed Bitcoin protocol enhancement allowing for the inclusion of a small, consensus-enforced commitment in the coinbase transaction. This commitment can then expand into a larger transaction, distributing rewards without being hindered by firmware output limits. A prototype environment, Coinbase Playground, was developed to explore this concept further, showcasing the potential to eliminate the influence of restrictive ASIC firmware, enable scalable non-custodial payouts, and optimize fee revenue for mining pools.

Despite its benefits, the CTV approach introduces new complexities, such as the need for additional transactions to claim rewards and ensuring the availability of unroll transaction data. Initial experiments with CTV have explored designs that prioritize usability and cost-effectiveness, including a setup where a minimal coinbase transaction expands into a multi-output payment distribution, taking advantage of Bitcoin’s mempool policies and fee mechanisms to facilitate timely processing.

Further research into nested CTV transactions and innovative use of cryptographic tools like musig keys and CSFS (Commitment Scheme From Signatures) could offer even more sophisticated solutions for non-custodial reward distribution. These approaches aim to reduce on-chain fees, improve privacy through auction-based trading of coinbase outputs, and address coordination challenges among participants. Despite some criticism suggesting a focus on changing firmware rather than the Bitcoin protocol itself, the evolving landscape of mining technology and the historical precedence for protocol innovations underscore the viability and necessity of exploring such advancements within Bitcoin’s infrastructure.