Stratum V2 News. Are You In the Loop?

By Michael @ CryptoEQ | CryptoEQ | 28 Nov 2023


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Announcement

"DEMAND today launched the first Stratum V2 bitcoin mining pool, which allows individual miners to construct their own block templates, “Stratum V2 gives the power of transaction selection back to the individual miners, to make the mining ecosystem more decentralized and Bitcoin more censorship resistant.”

Mining Basics

Bitcoin “mining” is the process of performing computations to create the next valid block of transactions on the blockchain. A miner that solves for/creates the next valid block that’s confirmed across the network is rewarded with newly issued BTC. However, first, it’s important to understand blockchains, blocks, and transactions.

The Bitcoin blockchain is a global, permissionless, and distributed database that tracks the balances of Bitcoin users. Each "block" contains a collection of transactions representing the transfer of bitcoin between users, with each transaction represented by a unique address. These transactions are broadcast by network users to a shared network resource known as the mempool (memory pool). The network doesn’t recognize transactions until they’ve been added from the mempool to the blockchain. To send bitcoin to an address, the sender must include transaction fees to incentivize miners to select their transactions from the mempool. Blocks have a maximum size, therefore miners choose the transactions from the mempool that will generate the most revenue: those with the highest fees per block space. They then generate a block from these transactions and transmit it across the network so the nodes may validate it.

All of this is done with the goal of achieving global, decentralized consensus without relying on a middleman (i.e., governments or banks) as the sole source of truth.

 

Nakamoto Consensus Source

Miners

Miners are extremely important to the health of the Bitcoin network, and the idea of including the Proof-of-Work (PoW) consensus mechanism (i.e., a network’s process for agreeing on the order of valid transactions) represents a key innovation of the Bitcoin network. Bitcoin miners are responsible for block generation and committing blocks of confirmed transactions to the blockchain. Beyond that, mining aids in: 

  • Securing the network and preventing corruption from malicious actors 
  • Minting new bitcoin into circulation in a predictable, predetermined manner
  • Maintaining a historical record so the chain remains auditable and transparent, allowing global consensus to be reached 

Miners are the global network of computers that:

  • Group bitcoin transactions into blocks. (Bitcoin limits its blocks to a block size of ~1 MB. Therefore, each block can only fit a limited number of transactions. So, if the mempool contains more transactions than can fit into one block, the remaining transactions will be added to the next block).
  • Perform computations to solve a cryptographic puzzle (performing the “Proof-of-Work”)
  • Bitcoin miners combine ‘valid’ transactions into blocks; anyone can run a Bitcoin full-node and act as a ‘validator’ for proposed blocks. These people are typically miners since they have an incentive to invest in the network’s security
  • Send the blocks over the network to be cross-checked and verified by other nodes and miners
  • Propagate approved blocks across the network and move on to the next block of transactions

Miners are the backbone of the Bitcoin network and are invested in the network in a way in which investment funds and hodlers aren’t necessarily. As Bitcoin mining hardware has become highly specialized and economies of scale have facilitated the advent of industrial Bitcoin mining in warehouses, professional miners have emerged, making major capital investments over long time horizons. ASIC mining rigs have 3+ year life cycles and can only be used to mine SHA-256 protocols (almost entirely Bitcoin). 

Mining Pools

Bitcoin mining is fundamentally a probabilistic activity. There’s no guarantee or predictability around solving the next block, which makes running a profitable mining company that much more difficult. However, mining pools can help reduce that uncertainty.

A Bitcoin mining pool is essentially a consortium of miners that pool their computing resources (specifically, hash power) together to collectively perform proofs of work. Pools are composed many individual miners that collaborate to locate the next block and divide the resulting profits (image below). 

Coinbase sharing among individual miners. Coinbase sharing among individual miners. Source: CoinMetrics

Pools have a much larger collective proportion of the network's hashrate and are, therefore, able to mine new blocks much more frequently and at a more predictable rate. When a mining pool discovers a new valid block, it’s rewarded with the new BTC (currently 6.25) plus the transaction fees paid by users for each transaction included in the block. This gives mining pools the benefit of providing a relatively steady revenue stream for small participants. By coordinating and sharing earnings with other participants in the pool, a single miner can significantly reduce payout volatility. In exchange for more consistent revenue, the miner pays a small percentage of revenue to the pool's operator.

The first Bitcoin mining pool, Slush Pool, emerged in 2010. Since then, pools have grown significantly. In its nascent stages, Slush Pool was essentially powered by CPUs and a few early-stage GPU miners, and there was an aggregate hash power of the order of 600 MH/s. This grew to the order of EH/s, representing an increase of almost a factor of 10 billion in less than a decade. 

Stratum V2

Stratum developers are building a second version of the protocol called Stratum V2 that looks to improve upon V1 issues, such as: 

  • Poor documentation
  • Inflexibility
  • Suboptimal security guarantees (unencrypted communication channels)
  • Inefficiencies and complexities due to poor standardization

V2 aims to reduce the physical infrastructure required for mining, increase data transfer efficiency, and improve security around the miner-mining pool dynamic. Its modified architecture would shift the responsibility of transaction ordering to miners to avoid the conflict of interest implicit in the protocol’s first version. With V2, miners construct their own block templates and determine which specific transactions go into blocks. This increases the difficulty for a bad actor trying to censor transactions by applying pressure to pools (like a regulator or government). This results in V2 being able to protect miners from malicious actors/pools and improve Bitcoin’s resiliency and security at the mining pool level.  

Comparing Mining Protocols Comparing Mining Protocols. Source: Braiins.com

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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