Will Mining Pools be First Regulated? — On External Incentive and New Structure

With the continuous development of the blockchain world, the mining industry scale is becoming larger and larger, and the difficulty is getting higher and higher. In the early stage, the SOLO mining mode of traditional small-scale miners withdrew from the market and replaced by mining pools integrated with distributed miner’s computing power: some miners entrusted the mining computer power to professional institutions for management, and settled the mining income regularly.

At one time, the occurrence of the mining pool was questioned by many decentralization fundamentalists. But when you fully understand the meaning of the fork, these doubts will be over.

Although the concern of decentralization has been dispelled, another issue of the mining pool has not been discussed: the external incentives against the interests of miners! This will attract more and more attention to Ethereum.

The so-called external incentive is a concept corresponding to the internal incentive. Before discussing this concept, let’s first make clear the relationship between the miner and the mining pool: This is a very clear principal-agent relationship in the traditional legal system.

The miner is the principal and the mining pool is the agent. In the principal-agent relationship, the agent shall maximize the interests of the principal within the agreed scope, and shall not make use of the convenience of the agent to do any transfer of interests or maximize their own interests (without maximizing the interests of the principal).

Although the principle is clear, it is difficult to implement it. It needs some mechanism design, that is, to solve the problem of incentive compatibility: how to make it consistent for the agent to maximize its own interests and the principal’s interests.

Based on the principal-agent relationship, we will discuss the internal and external incentives of the mining pool. The so-called internal incentive is the value target and its distribution within the scope of the contract agreed by the principal and agent.

In terms of mining, the internal incentive is to maximize the mining revenue, including the ETH dug, as well as the ETH obtained from packaging transaction records. Because the general mining pool obtains a certain proportion of share from the total mining revenue, this contract arrangement is theoretically incentive compatible. The mining pool can maximize its own interests only by maximizing the interests of the miners, or maximize its own interests, which naturally maximizes the interests of the miners. This is the compatibility of internal incentives that we have analyzed at present.

But on Ethereum, things may change. This change is the appearance of DeFi.

As we mentioned in the previous article on miners’ risk, although miners cannot change the transaction, there is the possibility of selecting the order of the package transaction. Some DeFi has a deviation in the priority of transactions. The earlier a transaction is packaged, or only a certain one transaction is packaged, the greater the benefit.

At this time, it is possible for the mining pool to make use of its own computing power to arrange related transactions. This arrangement will not completely damage the interests of the miners, because the miners will still get the maximum mining income, or slightly lower mining income, which means the mining pool perfectly practices the internal incentive. But through arranging the priority of packaging trading, it will get other income in the DeFi. This part of income is not agreed in the miner’s contract, or even cannot be agreed upon, which is external incentive.

Recently, the word “front running” is often mentioned. It refers to the miners packaging

a certain transaction record ahead of time. This behavior has been regarded as a risk by the DeFi industry, and the mining pools are the ones who most likely will make use of this advantage. If the mining pool gains income as a result, how to determine the ownership of the income? As I mentioned earlier, the mining pool and the miner are a traditional principal-agent relationship, and this income should belong to the miner strictly! Now the problem is that if the mining pool does not disclose its packaging strategy, no one can reason if the mining pool has obtained external incentives according to the on-chain data, and the miners can not prove it! It causes distrust.

However, if the mining pool discloses the strategy and strictly implements it, although it can avoid the problem of external incentives, it is easy to be targeted by some malicious attackers. For example, the strategy of blocking attack is obvious, or in turn, the benefits of external incentives are seized by the attackers (indicating that the design of downstream DeFi should avoid the structure similar to front running), and even other more serious attacks scheme, making the on-chain application developers can’t defend themselves.

In this way, there is a contradiction in the mining pool: disclose the strategy — get attacked, close the strategy — distrust.

We put forward a reasonable structure of the mining pool: open random strategy arrangement.

According to the effectiveness of internal incentives, several reasonable packaging strategies are designed and disclosed. These strategies are to maximize the interests of miners, and the difference is the order or combination of packaging. Then, based on some random sources of hardware and random algorithms of software, they are combined into a mixed strategy (the strategy set of the probability distribution), and the original data of random sources are saved for miners to verify at any time.

This scheme makes the attacker unable to effectively capture the packaging strategy, and for all the miners, it greatly reduces the possibility of the pool getting external incentives. Of course, if the mining pool does not strictly implement this process, it can still make profits. Then we can turn to evidence and supervision.

Because the mining pool fully conforms to the traditional legal system, the theoretical basis of its supervision is very sufficient. In the future, it must be the most sensitive module of the public chain system, and also the module that is most easy to be included in the supervision. This is the corollary of the orderly development of the whole public chain. We believe that the mining pool structure we proposed will appear sooner or later.

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