A Bitcoiner’s Security Budget: Hired Hashrate and DATUM Against Tail Emission and Demurrage

What's the Problem?

Many people have voiced concern about the long-term security of the Bitcoin protocol as the block subsidy trends to zero. Eventually, miner compensation will be entirely reliant on transaction fees and the resulting variance in block rewards may create incentives for aberrant mining behavior. The argument is that some incentive other than transaction fees will be needed in order to keep the miners hashing and the network secure.

@peterktodd has suggested a tail emission or demurrage should be added to Bitcoin as a continued funding mechanism for miners. Unfortunately, both of these suggestions present significant problems for Bitcoin and Bitcoiners. A new type of mining that has recently emerged stands to provide a solution to the Bitcoin security problem.

Inflation and Taxation

Tail emission is the idea that there should be some set amount of newly minted bitcoin arriving with every block as a reward to the miner without regard to the 21 million coin cap. Todd suggests a 1% or less tail emission would likely be a neutral change to the total supply of bitcoins when accounting for lost coins.

https://x.com/i/status/1880065537608478892

However, for Bitcoiners the concept of an inflated supply is antithetical to the purpose and ethos of Bitcoin. The hard-coded 21 million coin cap is among Bitcoin's strongest promises. Somehow ∞/(21M+1% per annum) just doesn't have the same ring to it.

Further, to my knowledge there has been no formal proposal as to how the level of tail emission would be set or whether it would ever be adjusted. Presumably there would be some group of people who would meet quarterly, evaluate the state of lost coins, and make a determination as to the percentage of the next quarter's tail emission.

Maybe they could be called the Bitcoin Reserve Board, in keeping with tradition.

Todd's other suggestion, demurrage, is simply a redistributive tax from long-term holders to miners. His proposal involves paying a percentage of your coins in a transaction, with Todd suggesting 0.1%, scaled up based on how long the coins were sitting in storage. This concept takes the current standard of taxation and integrates it into Bitcoin's protocol. Rather than any voluntary activity which could solve this problem, demurrage forces a tax onto savers.

In theory, either or both of these interventions would encourage miners to continue to mine for blocks without trying any reorgs or delayed publications of blocks.

I will venture a guess that most Bitcoiners would agree with me: taxation and inflation are theft. If only there were some voluntary mechanism by which Bitcoiners could engage in the mining ecosystem resulting in consistent fees paid to miners.

DATUM Gateways

This is a good time to talk about Decentralized Alternative Templates for Universal Mining. DATUM is a protocol which allows miners to participate in pooled mining while retaining the right and responsibility of creating their own block templates. Any pool can offer DATUM support, although currently only OCEAN supports DATUM.

The revolutionary aspect of DATUM is in the way it furthers mining decentralization while still allowing the benefits of pooled mining. The critical aspect of mining, what separates miners from hashers, is the ability to determine what goes into blocks and what does not.

https://x.com/i/status/1840408161271890264

Miners using DATUM are not simply taking an order from their pool and working on it. They are actively mining Bitcoin by exercising their discretion in block templates. By extension, DATUM makes significant strides in decentralizing the most important aspects of Bitcoin mining.

Hired Hashrate

The history of hired, or rented, hashrate in the Bitcoin ecosystem is checkered to put it nicely. The risks of cloud mining, such as paper mining, where a "miner" would sell contracts for hashrate they never actually owned, or pre-paid mining contracts getting rugged by outright charlatans have resulted in well-earned skepticism from the Bitcoin community.

With its introduction of Hashpower, Braiins is offering a spot market for immediate hashrate delivery. This provides crucial protections relative to the prior concept of cloud mining.

https://x.com/i/status/2016433103225417802

There are no long-term prepaid contracts beyond the sats a customer deposits with them. This can be as little as the amount required to rent 1 petahash per second for a day (currently about 丰47,000) to as much as the customer feels comfortable putting on the table, allowing pay-as-you-go flexibility.

The counterparty risk is well defined. Braiins states in their terms that only Braiins sells hashrate on their marketplace. There is no doubt about who owes delivery of the hashrate. Braiins also clearly defines what constitutes delivery. A customer is paying for delivered shares. If hashrate is lost the delivery period is extended until the full purchase amount is delivered.

Unlike cloud mining providers, Braiins Hashpower can be directed to the pool of your choice. Braiins does not custody mining rewards. Rewards are paid from the target mining pool through their own mechanisms, meaning customers can receive rewards on-chain or via Lightning.

Some risks remain. Funds deposited with Braiins Hashpower are expected to be used to purchase hashrate. They do not custody customers' coins, meaning customers cannot withdraw bitcoins deposited with them. This also means Braiins could theoretically rug all their customers.

Many people use this service as a gambling mechanism. Put your sats in for a period of high hashrate in an attempt to lotto mine a block. I am sure it would be a great dopamine hit but I have never been one for gambling. Fortunately, @oomahq has pioneered a much more sophisticated use for this market.

DATUM + Braiins Hashpower

By combining DATUM gateways and Braiins Hashpower, @oomahq has been blazing a path into a new era of decentralized mining for a new type of miner. This new miner is not chasing a lotto payout or trying to balance their scheduled downtimes in order to maximize power subsidies from their electricity provider.

https://x.com/i/status/2021361004886503909

Instead, this new miner is a Bitcoiner who understands the value of spending some small amount of their stack in order to secure the protocol, decentralize mining, and have a say in the future of Bitcoin.

Miners who use Braiins Hashpower, or similar spot hashrate markets, will be able to direct a much larger amount of hashrate than many could ever hope to achieve with home mining. This structure will give the average Bitcoiner living in an apartment in the middle of a city with exorbitant electricity rates the ability to deploy industrial levels of hashrate through their own nodes.

The implications are broad. What would have previously taken an industrial setup to achieve can now be done with a modest budget to fund the initial spin-up expense, a DATUM-enabled node, and supporting mining pool. The practice is moderately sustainable; miners strategically using this system can expect to get about 98% of deposited funds back through mining rewards, depending on market conditions.

With that return in the current market Bitcoiners can expect to spend about 丰1,000 per day to deploy 1 petahash per second. By comparison, the purchase price of a used S19 able to mine at 110 TH/s is 丰422,000 which does not include the cost of operation and maintenance.

To put that into perspective, when mining rewards are cycled back into hired hashrate, a Bitcoiner can rent 1 PH/s/day for 422 days and spend the same as they would have spent on a single used S19 while generating nearly 10 times the hashrate per day all without having to maintain a loud, hot, and temperamental mining rig.

Hashers are incentivized to provide hashrate to these marketplaces because buyers are willing to pay slightly over the expected return of the hashrate. This free-market interaction creates a steady income stream for the hashers by replacing inconsistent block reward payouts with consistent hashrate bids, maintains robust security of the network by keeping miners engaged, and provides an incentive for hashers to stay honest.

But why would a Bitcoiner spend money to mine Bitcoin at a loss?

A Bitcoiner's Security Budget

I conceptualize this expense as if I am paying a utility every month. We pay for food, energy, shelter, entertainment and so on. I see this as another service I put in my budget. The sats I spend on this are sustained by mining rewards and, just like my purchase of other utilities, by the value I create in the economy.

https://x.com/i/status/2041722331819561344

In exchange for spending on this utility I get improved miner decentralization, an opportunity to turn KYC coins into non-KYC, to move hash from not signaling for my preferred BIPs to signaling, and, of course, to contribute to the security of the Bitcoin protocol and, by extension, my own personal wealth.

Not a bad return for 丰1,000 per day.

Bitcoin's Security Budget

Peter Todd's concern focuses on long-term miner incentives. Worried that fees alone will not generate sufficient profit to keep miners hashing honestly, he looks to inflation and taxation as solutions. However, it is my hope this article presents an alternative where rational and utilitarian-minded Bitcoiners voluntarily act to secure the network.

One reason there is a discussion about Bitcoin's security budget is that people understand Bitcoin mining may not remain a profitable business forever. A transition to fee-only mining rewards will introduce a variance in payouts that may not sustain large mining operations that are merely profit focused.

This means the primary motivation for mining needs to evolve from hunting massive block rewards to utilitarian self-preservation. Bitcoiners motivated to maintain the security of the protocol will dedicate some small portion of their stack to mining.

This entirely voluntary action will scale to the amount the individual Bitcoiner feels best represents their investment in the protocol.

Hired hashrate spot marketplaces offer a means to get more Bitcoiners involved in mining and allow their sats to go further than many Bitcoiners would have ever been able to achieve previously. DATUM furthers miner decentralization by turning hashers into miners.

Together they present a powerful mechanism by which miners who measure success in protocol security instead of short-term profit are able to keep hashers gainfully employed.

No need for a central planning committee to decide Bitcoin's inflation rates or an ivory tower of developers placing an arbitrary tax on savings.

Just Bitcoiners using their economic power in a free-market to secure their stacks.

https://x.com/i/status/2041642859367895370

Declarations: I am a Braiins Hashpower customer, a DATUM user, and an OCEAN miner. I was not paid or otherwise compensated to write this article.