About a week ago, a miner and friend mentioned to me that reducing block rewards would require another hard fork. I agreed. I realized only after replying that he meant that it would be a contentious fork.
What he was communicating, I think, is “if the community considers reducing the block reward, I’m going to fight it”. Which is fair enough.
Since then, the price of ether has increased very substantially, and my mind keeps returning to this conversation. So I’m going to share with you the case for reducing the block reward, as far as I see it :)
By the way, the contents of this blog in no way represent the position of the Ethereum Foundation.
Miners pose an ecosystemic risk to the blockchain
Every blockchain has a corresponding ecosystem. It is this community’s responsibility to make sure that the blockchain lives up to its promise. The ecosystem has to guarantee the blockchain’s security assumptions (e.g. 51% of miners are honest) and it has to upgrade the blockchain (to make it scalable, secure, usable).
If it fails to achieve either of these goals, it’s going to have a bad time.
The process by which the community guarantees the protocol’s assumptions and by which it upgrades the protocol is called “blockchain governance.”
The relative ability of members of the ecosystem to participate in blockchain governance is given by surprisingly few factors.¹ Here are the two most important ones, given as questions:
- Can they afford to make participating a priority?
- How much clout can they bring to bear, if they participate in the process?
The first refers to a participants ability to drop other things that they have on their plate in order to focus on the governance problem at hand. The more busy someone is with other things, the less they can afford to participate in governance. The second factor refers to how much power they could potentially have in determining the outcome of the governance process, if they did drop everything else in order to focus on negotiating.
There should be no question that miners can afford to make participating in the governance question a high priority when it affects their block rewards. How much clout miners have depends on how much the rest of the community values their input, but also on how many resources (people and money) they can devote to promoting their agenda.
The increase in the price of block rewards means that miners will have much more incentive and ability to devote resources to participating in governance.
This has implications for the entire Ethereum ecosystem. The miners’ increased willigness and ability to participate in governance means that the rest of the community has a relatively smaller say in the process. The relative clout that participants can justify bringing to bear in the process determines outcomes:
When miners become more powerful, everyone else gets less of a say.
I think this concentration of power poses a systemic risk to all blockchains. I think we’ve seen this play out in Bitcoin. I don’t want to see it happen in Ethereum!
I’d normally also mention how miners are the only actors in the protocol who can double-spend and censor transactions, but you already know that!
Not much security comes from higher block rewards
It’s true that an increase in block rewards leads to an increase in the total hashrate devoted to building the proof-of-work blockchain. More hashrate means more proof-of-work gets into the chain. Conventional wisdom is that this translates directly and unambiguously into more security.
However, this is only true for external attackers who compete with the hashpower that is mining the “main fork” of the blockchain. It is not true for any attack conducted by a majority coalition of miners that are already currently mining on the public blockchain.
External attackers are very naive attackers. Any informed adversary will participate competitively in mining the main blockchain for block rewards (possibly at a slight loss) until they have a majority of the hashpower under their control. Only then will they conduct attacks. Note that this may take a considerable amount of time, perhaps on the order of 2 years, for an adversary who starts without any hashrate and who cannot bribe any existing miners. By attacking in this way, the adversary will have much lower costs than an external attacker, since they are being rewarded by the protocol at every step of the way in exactly the same way as other miners are rewarded for honest behaviour.
The only thing an attacker needs to do is out-compete other miners until they have a majority of hash power. This should be relatively easy if they have external incentives or a tolerance for lower profit margins (which is very likely for an attacker). Attacking a blockchain from within does not become significantly more expensive as block rewards go up.
Moreover, a successful attacker profits more when block rewards are higher. In a censorship attack (or in a double-spend attack) only the attacker’s miners end up with block rewards on the longest chain, while the honest miners end up with orphaned blocks (and higher losses).
An internal attack is much more strategic than an external attack, and an internal attack does not become much more difficult with an increase in block rewards. The attack also arguably becomes more likely with more expensive block rewards, as attacking is more profitable in this case.
The increased security isn’t worth it
The increased security from increased block rewards (if there even is such a thing in practice) does not justify the ecosystemic risk of making miners a more important part of the community.
Remember, the more powerful miners become, the less of a say you have.
This is also a good time to remember that mining is an incredibly concentrated market. There are a very small number of people who internalize the vast majority of the benefit from higher block rewards. Thankfully for Ethereum, these people are not concentrated around the only competitive ASIC manufacturers (as there are even fewer of those than there are big-time miners).
Yes, there are small-time miners who would also be disenfranchised by a reduction in block rewards. These miners are probably not coordinated or resourced enough to pose a threat to the ecosystem. I hope that they aren’t too upset in the (imo unlikely) event that block rewards are reduced. I think the disenfranchisement of small-time miners is regrettable, but is also a much more acceptable outcome than the empowerment of big-time miners.
Even if you do believe that attackers are external rather than internal, I wonder whether you really feel anything close to four times safer with four times more expensive block rewards. Supposing that we are 4X safer with 4X higher block rewards — would this warrant giving miners 4X more incentive and income to participate in governance?
Less issuance is good for coin holders
Finally, I want to add the obvious point: that block rewards are paid for by coin holders. The cost is hard to notice because coin holders do not have to explicitly consent to the cost when it is paid. The cost is one of inflation. Miners get new cryptocurrency which they must eventually sell on the market in order to cover their expenses. The buy orders filled by miners cannot be filled by the other coin holders. The revenue of miners therefore comes at the expense of revenue to coin holders.
Now, I am absolutely not sympathetic to the interests of coin holders. However, I do think that coin holder interests are more aligned with user interests than miner interests are aligned with user interests, and I am very sympathetic to user interests. Many more users are coin holders than are miners.
I believe that if there is even a minor push to lower block rewards, miners will prevent the reduction by participating in the governance process. They have a direct incentive to keep high block rewards, while the other members of the community have only very indirect incentive to participate on this issue and therefore won’t make a priority out of having their position heard.
I would love to be wrong!