Mempool Incentive Compatibility

Mempool Incentive Compatibility

Original Postby ajtowns

Posted on: February 23, 2024 06:06 UTC

In the examination of transaction selection within blockchain mining, particularly in the context of Bitcoin, an intricate analysis reveals the nuanced economic behaviors and decisions influenced by various factors such as the mempool's inherent uncertainty and future projections.

The discussion delves into hypothetical scenarios to explore the implications of these on transaction fees and miner behavior. One scenario posits the success of Stratum V2, which could potentially lead to a monopolization of hash power by a single pool, consequently affecting miners' expectations regarding their share of future transaction fees. This scenario is compounded by the assumption of Bitcoin maintaining a stable and deflationary nature, influencing the discount rate applied to future transactions.

The analysis further explores the economic rationale behind transaction fee adjustments, drawing upon examples that illustrate the significant disparity between theoretical and practical discount rates. For instance, the consideration of cancelling a transaction with a high expected confirmation time in favor of one with a higher fee but smaller size highlights the drastic discount rates that would be implied in practice. This is contrasted with the minimal fee reduction justified by a mere 2% annual discount rate, despite additional benefits such as advancing the entire mempool's processing time.

Moreover, the competitive dynamics among mining pools are scrutinized for their potential to ease the justification of accepting higher-fee, smaller transactions over those already pending in the mempool. The probability of a mining pool capturing rewards from future transactions plays a crucial role in this deliberation, especially when considering the negligible odds for pools with minimal hash rate shares.

The conversation also touches upon practical considerations and uncertainties that might influence mining pool decisions. These include the logistical challenges of tracking an extensive number of transactions, the potential for errors in mempool management, and strategic decisions by miners concerning their own transactions. Despite these factors, the conclusion drawn suggests that for large mining pools, the economic rationale leans towards maintaining the status quo, particularly in retaining transactions that are pinned for future inclusion, rather than replacing them with higher-fee alternatives. This outcome, reflecting on the complex interplay of economics, technology, and strategy, underscores the sophisticated considerations that underpin the operations of blockchain mining and transaction selection.