Let’s dig into what they’re doing, and how these loans work. They’re the first two-step contract I’ve seen for bitcoin “native” loans, and have a pretty unique bitcoin script design that uses atomic swaps and DLCs (discreet log contracts) to govern the issuance of the stablecoins for your bitcoin collateral and then monitoring the contract price for bitcoin during the loan duration to make sure the price doesn’t slip too far, and let the loan originator take your collateral.

tl;dr: You doing a bitcoin/solana swap for their proprietary, USD backed Solana** coin called LavaUSD. The bitcoin collateral can be liquidated or expired directly via bitcoin transactions thanks to the magic of DLCs.

** Because in theory you could use a different chain, they’re using Solana right now.

How it works

On-chain loans tend to follow the same playbook. You take an amount of a ‘collateral asset’, let’s say $10k of it. This gets locked into a contract. The contract then emits some “loan to value” ratio, let’s say 30%. So you’d get $3k in USD out. That’s the setup or ‘swap’ phase.

During the duration of the loan, if the value of the bitcoin collateral you put up dips beneath a certain loan-to-value ratio, let’s say 50%, your loan gets liquidated. The lender gets all of your collateral and the loan is effectively canceled. You get to keep the USD that you were given, the loan originator gets to keep your bitcoin. If the bitcoin price dips enough such that your bitcoin is now worth $5k, you’d get liquidated. You’d keep the $3k that you got, the lender keeps your bitcoin. (I think my math is a bit inexact math, but the illustration is accurate).

Lava’s v2 loan protocol relies on two bitcoin script contracts and a Solana contract. to make all this work. The general idea is that you take some bitcoin, you do an atomic swap for a USD-backed stablecoin on Solana. You can then trade your Solana stablecoin for the USD equivalent, and transfer that out to a bank account. Once you’ve swapped the bitcoin for LavaUSD on Solana’s chain, the loan originator can move the bitcoin you’ve locked as collateral into a second bitcoin script, one which uses two sets of DLCs to monitor both the duration of the loan and then what to do if the loan hasn’t been paid back before the loan duration expires.

There’s two pieces here. First you execute a cross-chain swap of your bitcoin (to the lender) and the LavaUSD (to the borrower). This is the first bitcoin script listed in the Lava Loans Protocol v2 paper.

How it works: the borrower locks up their bitcoin (the collateral) into a bitcoin UTXO who’s script has two different unlock paths. Either the borrower can wait a certain number of blocks and get their funds back (the time out case) or the lender can move the funds from that bitcoin script into a *second* bitcoin script. (Basically they make a bitcoin transaction that spends the funds out of the first script and locks them into a second script.) The lender can’t move the funds into the second script until the borrower executes an atomic swap and pulls LavaUSD out of a contract on Solana. This exposes a secret that allows the lender to use the second unlock, and move the funds into a second UTXO, which is locked by a “DLC” governed script.

This second script, “DLC” script basically governs the ‘loan during the duration’. From this point on there’s only three ways to get the collateral out. It can be liquidated; it can be returned to the lender after they’ve paid the loan back plus interest on the Solana side; or it gets divvy’d up between the lender and borrower on the date that the loan expires.

Restated more concisely: the basic idea is to do an atomic swap of bitcoin to LavaUSD (bitcoin/solana cross chain swap). After the swap is executed, move the bitcoin collateral into a second DLC bitcoin contract which has three different ways to be unlocked (liquidated, paid back, expired).

The Swap

Cross chain swaps are fairly basic and well understood at this point. The borrower puts their bitcoin into a transaction where they can’t get it back until a timeout. They’ll also put in this transaction a payout clause where the funds can move to the DLC-contract, but only if the lender signs off on it and the lender can prove they know a secret.

Once the borrower’s funds are locked into this swap transaction, the lender should publish on the Solana contract funds to borrow. These funds should only be claimable to the person who knows the same secret that will unlock the funds on the bitcoin contract.

The borrower will publish a Solana transaction that includes the secret only they know, making it public. This will allow them to access the loan funds.

The lender will be watching the Solana chain for this transaction. Once the lender sees the LavaUSD get claimed by the borrower, they’ll have the secret they need to go back to the bitcoin chain and make an onchain transaction that moves the bitcoin collateral from the swap-staging UTXO into a DLC “holding” UTXO.

After the borrower has claimed the LavaUSD on Solana, and the lender has moved the bitcoin collateral into the DLC “holding” UTXO, the swap has been successfully executed and the loan is in effect.

It takes two bitcoin transactions and one* Solana transactions to initialize the loan.

(*I’m guessing one Solana transaction, but there’s no way to verify this with the information the team has put out so far, as the Solana contracts haven’t been published or linked to in the paper).

Managing the Loan

There’s two ‘normal’ exit cases for a loan: paying the loan back or the loan expiring at term. Let’s say that it’s a loan for 90 days.

You can pay the loan back, with interest, any time before the 90 days expires. The borrower does this by sending LavaUSD (loan amount plus owed-interest) to the Solana contract and telling it that you want to do a pay off. You do this with a Solana transaction (guessing here). You then wait for the lender to execute a second Solana transaction which accepts your loan payoff. This loan acceptance transaction carries a secret that only the lender knew, but which can be used by the borrower to get their bitcoin out of the DLC contract.

It’s possible that the lender may not accept your loan payoff, and instead will wait until the loan expires, or possibly gets liquidated. The protocol attempts to prevent inaction on the part of the lender on terminating the loan by requiring the lender to over-supply LavaUSD to the Solana contract. This ‘oversupply’ is called the lender’s Stake. It sits in the Solana contract until the loan is terminated. Its purpose is to incentivize the lender to claim back both their stake as well as the loan payoff.

The other ‘normal’ exit case for the loan is that the 90-days ends and the loan hasn’t been repaid. Let’s say that this is the loan expiring. This is the first use case for the “DLC” portion of the protocol. The other exit case, which also uses DLCs, is for liquidating the loan.

What is a DLC?

DLC is short for ‘discreet log contract’. The basic idea is that two parties agree on a payout schedule that depends on an event’s outcome. They both then pre-generate a large number of signatures for the range of values that the outcome can be within.

You then wait for the event to happen, so you know what the outcome is.

There’s a service that will produce a signed message which ‘attests’ to what the event’s outcome is. The name of this service is called an “oracle”. The oracle can only ever sign one message for the event.

The oracle’s signature can then be combined with one (and only one!) of the pre-generated signatures between the two parties. That signature will validate a bitcoin transaction that pays out the two parties a pre-agreed amount, based on what the oracle says happened.

These contracts are used in two places in the Lava protocol: for liquidation and for loan termination.

Liquidating the Loan

For the Lava protocol, at loan setup, two sets of DLC signatures have to be calculated. One for the liquidation case, and another for the expiration case.

For liquidation, you need a signature that will give the lender the right to claim all of the collateral. This signature is only valid if the oracle signs an event that says the price of bitcoin is below a certain number.

The price oracle that Lava is using produces one new event every day, which says what the BTCUSD price is. This means that at set up time, the two parties will need to make a DLC liquidation signature set for every day that the loan is valid. (Note that the ‘signature sets’ are called CETs in DLC vocabulary).

Why only once a day?

Setup for a DLC contract can be quite time and space intensive. The more oracle events that you need to make CETs for, the more time and CPU and hard disk space you’ll need both to generate and then store the signatures for possible outcomes. By limiting the oracle events to once a day, you cut down on the amount of time it takes to set these up.

I’m guessing here, but I would bet that the expense of DLC setup is a large contributing factor to the oracle only emitting daily events.

Expiring the Loan

Loan expiration has a second, separate DLC setup from liquidation. This will require a second set of CETs. These will be signed to a single oracle event: the price of the BTCUSD pair on the day that the loan expires. This set of CETs will pay out to both the lender and the borrower, depending on what the collateral is worth on the expiration date and the amount of interest owed.

The Lava Loans Protocol v2 paper goes into depth about the tradeoffs of how precise the payout return should be. This again is tied to how computationally intensive it is to generate CETs. The more precise the loan payout, the more CETs you need to generate. The less precise the payout, the fewer CETs, which means much less CPU usage and less storage space on the client’s device.

Potential Drawbacks

Overall I think this is a pretty solid loan contract construction. There’s a few drawbacks however. The first is that you’re relying on an oracle to say what the price is once a day. If there’s big intraday swings in the price, I’m not sure how you’d have confidence that the price the oracle signed is going to liquidate your position or not.

They could switch to hourly oracle price updates, but that would 24x the amount of data and computation time required to setup the DLC contracts for the liquidation portion. You can find their current price oracle feed, with its daily events, here.

Another thing to note is that their swap protocol requires the lender to put up a stake of some amount of USD into the Solana contract in order to initialize the loan. This means that the Lava organization (or whoever’s facilitating these loans) needs to be over-capitalized in USD terms.

Since it’s a USD-backed stablecoin, they’ll also need enough cash on hand to transfer out to customers as requested. Their info on LavaUSD says that they’re holding cash and cash-equivalents, which means that if too many people try to withdraw LavaUSD to their bank accounts at once, the Lava project will need to sell or liquidate their treasuries in order to meet withdrawal demand.

Solana??

In order to make this protocol work, you *have* to have another on-chain USD denominated asset to execute the cross chain swap with. For the initial iteration of this protocol, they’re using Solana.

I found it notable that the bitcoin scripts used for the swaps and loan management portions are included in the paper; the Solana contract is not mentioned or cited, nor is there any trace of it in any of the Lava Github repos.

In fact, the only place where I was able to find mention of where the LavaUSD is issued/supported is on lava.xyz/lavausd in the FAQ.

Based on the lack of a mention of Solana anywhere, in any of the press information or otherwise about the project, I’m assuming this means that they’re planning to move off of Solana as their stablecoin chain (or add others) at some point in the future. Moving to a different chain won’t change the bitcoin portion of the contracts. Any chain that is publicly readable and can use hashes as locks on funds will work for executing the atomic swap.

In exitus

I really enjoyed figuring out what the bitcoin contracts are doing. Notably, the swap bitcoin contract uses an OP_CODESEPARATOR, which is a very niche Bitcoin script opcode. It’s used to make sure that the funds can be transferred only to the DLC contract when the borrower claims the LavaUSD for their loan on the Solana chain. The borrower gives the lender a signature that’s only valid in the if-case where the lender also signs and knows the secret for unlocking the swap collateral. The op-codeseparator prevents this same borrower’s signature from being usable for the timeout clause in the same contract.

As far as I can tell, the most novel part of this project is marrying the swap contract to the DLC contracts. Lava’s protocol lets you swap collateral for a USD-equivalent and then move it into a DLC contract that governs the lifetime of the loan.

It’s pretty nifty to see loan origination costs get cut down to just two onchain bitcoin transactions and some number of Solana ones!

This is a pretty cool project. It’s very cool to see bitcoin-backed loan logic moving into DLCs which determine who gets paid out what directly on the bitcoin chain.

Visa on Chain

Ever had trouble paying your gas fees on an eth contract? Worried about having to top up your chain balance or getting priced out in the next run-up by base layer asset fees?

Worry no more!

VISA’s crypto team is pioneering a first in class solution to this problem: pay for it with your credit card!

That’s right folks. When paying for it with your credit card wasn’t an option, we’d love for you to basically pull the card out and get an auto-extension on your ability to pay fees right away!

Sarcasm and some general bafflement aside, this is actually a pretty cool architecture and some interesting thinking about how credit card companies are thinking that their services (access to credit!) are going to be needed in the future.

Here’s how they’re proposing to make this work.

VISA opens a contract on chain that’s got funds in it. This contract acts as a service to help sponsor your transactions to get into the chain. The contract holds eth that you can buy the usage of via your credit card, with your trad-fi credit account.

Your wallet natively negotiates with the VISA card network (re-named a Paymaster) who gives you a token via a digital signature that you can now present to the VISA contract on-chain that’s got native eth gas available to use on your behalf.

If degen-ing into the next NFT round is on your todo list and you’re worried about needing a flexible spending account and access to easy credit to bolster your ability to make a payment, VISA’s paymaster setup may be for you!

Definitely find it interesting to see how the credit card major is thinking about where they can provide value in an increasingly digital ecosystem.

Paypal launches a shitcoin, PYUSD

Paypal announced the launch of their own stablecoin, PYUSD. Basically it’s an eth ERC20 that lets them own their own accounts on ethereum. I’m not really sure how this works for them or their users, but I’m guessing in theory it means you’d be able to, at some point, pay out to other people via the eth rails instead of using PayPal’s partner rails.

This seems kind of puzzling until you realize that PayPal relies on other people’s rails to make the majority of its payments — most people aren’t paying other users but they are paying external parties. And typically using credit cards to do it.

Credit cards cost money; PayPal’s early history was one of almost not making it because they were tossing investor money toward the 3% interchange fees they were eating on every PayPal transfer that used a card (almost all of them).

I’m not sure what percentage of PayPal costs go to covering card fees but I wouldn’t be surprised if they’re non-zero.

Adding another rail, but one that they sort of own, to their arsenal seems like a puzzling move to an outsider, but a pretty clever one to an insider.

It’ll be interesting to see how much traction this gets. Will they be able to convince people that PYUSD is as good as Shiba Inu? To be determined.

Kinda explains why VISA might be looking for new revenue opportunities though.

Alright! That’s all I’ve got! Stay shitty my coiner friends,

~nifty

PS: Want to learn more about Taproot, Schnorr, FROST, and MuSig2? Come take Base58’s first ever in-person Taproot class in Atlanta at the Atlanta BitDevs this coming Sept 4-5th (it’s Memorial day, make some deep rooted memories!)

Applications for class due Aug 28th!

Apply Today!

We just had our first ever in-person Lightning class last week, at Bitcoin Park in Nashville. There were 6 people in the first ever class, and we had a really great time. Here’s a few reviews we got from people in the class.

Upcoming Classes

We’ve got a whole bunch of new classes coming out this fall! More Lightning, plus our first ever Taproot course which is premiering (at a significant discount!) at TABConf this coming September.

We’ll be running the Taproot TABConf class at Atlanta’s BitLab!

Applications Open!

To keep the classes small and ensuring that everyone has a reasonable chance of keeping up, we’ll be requiring an application for both the Lightning and Taproot classes.

You can find out more and apply now on the website.

• Taproot class schedule + application

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If you haven’t taken the Base58 Bitcoin Developer Basics course yet you can either sign up for our upcoming weekends only class (Saturdays in August + Sept) or check out the first half of the class on Udemy.

What’s coming next?

Currently working on expanding our online offerings, to add the second half of the Bitcoin Developer Basics class to Udemy, as well as building out the Taproot class so I’ll be ready for our September launch.

Hope to see some of you in classes this Fall!

This whole post was kicked off by this excellent thread by @snoopy_mev. They’re a talented ‘searcher’ (there’s a good chance you don’t know what this means, that’s ok) in the MEV space.

Centralized Sequences

The tl;dr is that Arbitrum, an Eth L2 (as explained in my last newsletter) is a semi-private Eth network. There’s only one party that takes all the transactions proposed for the next block and orders them as they’d like, and that’s the Arbitrum project.

MEV, or “miner extractable value”, is the art of paying high miner fees in order for your transaction to be the first or second one in a block. I say “art” because the place that you get the funds to pay miners such high fees is usually from someone other than yourself.

MEV is hunted for by bots that are written by developers who are known as “searchers”. They look for ways to order transactions that gives them a lot more money than they started with. Most of that goes to the miners, or in Arbitrum’s case the sequencer. The difference is almost free money though. Over enough iterations, and winning enough of the block races, it adds up to quite significant sums.

How Arbitrum orders transactions

What this tweet is saying is that Arbitrum decides which transaction to put in the top of a block not by who’s paying the most in fees, but on a “FCFS” or first-come first-serve basis.

This means that speed matters. Which means that getting the last block or the newest transaction data out of the mempool first matters, as that’s the signal your bot will use to create a new transaction to send to the sequencer. It’s a race, and only the fastest searcher wins. A race played out over and over, every single new block. Which I hear on main-net Eth is meant to be every 15s. I’m not sure what it is on Arbitrum.

You want to get the next block that the sequencer picks first. And remember there’s only one sequencer. It’s not like bitcoin where any random miner might find the next block. There’s only one “miner” on Arbitrum. So there’s only one server that knows the next block first every single time. It’s the same server: the sequencer.

Once the sequencer has chosen the next block, they have to tell everyone else on the Arbitrum network about it. They use “peering” connections to do that, which is to say anyone who directly connects to them will get the block first.

So searchers all connect directly to the Arbitrum sequencer node’s connection.

Let’s say there’s now 10 connections to peers from Arbitrum’s node. One of them is going to be sent the next block before any of the other 9 connections will be. How does Arbitrum decide which of these 10 connections to send the block to? They decide randomly.

If you’re a searcher and you want to get the next block first, because that basically determines whether you’re going to be able to win the MEV money in the next block; how would you increase your odds of getting picked? Well, you’d try to have more connections than the next guy. If there’s 20 total connections, and 10 of them are yours, you’ve just increased your odds from 1/10 to 1/2.

How to Stop Connections

Eventually there will be more than one computer that has the next block first. But until that happens, that one computer is overloaded with websocket connections. So they opened a pull request to change what it takes in order to open a connection to the sequencer.

I’m just gonna post from snoopy’s thread, as it’s great.

tl;dr: Arbitrum wants to add a hashcash rate-limiter to connections, so that who gets the next block first is decided by, that’s right, Proof of Work.

I don’t know if they’re going to go through with it. The PR was opened just 2 days ago and hasn’t been merged.

This last line from the PR introduction is pretty good. It explains that if you’re not able to provide a new nonce every 25 hrs that’s still in the “target” range, then you get unceremoniously disconnected.

If a relay client's nonce hash was last computed over 25 hours ago, it gets recomputed and that timer gets reset. If the nonce hash no longer meats the target specified, the client gets disconnected.

This means every 24hrs you had better have found a hash that beats out all the other searcher’s hashes. Which means you’re suddenly in a race to spend money on computers that are finding the next hash for you, but one that’s smaller what you competitors are able to afford hunting for.

Proof of Work is coming baaaaack to eth baby.

Who Gets What and Why

So Arbitrum is proposing to do this. I found what snoopy had to say about this really illuminating, as he’s a top tier searcher. He knows where the money goes.

Basically he’s saying that MEV searchers are going to get squeezed because suddenly their profits have to go towards not just paying the sequencer but also paying for a computer cluster to compute the next hash, so that they can win the next block-race, so they can earn some more eth, so they can pay for their server bills.

snoopy’s point is that if they *didn’t* add this, then they could keep more of the capital that searcher’s find, instead of having it get paid out to the sequencer.

I’m not sure I follow this logic exactly. If you had to pay to get to the top of the block, I would understand this. But if Arbitrum is a First-Come First-Serve by default, then why would you as a searcher be paying anything extra to the miner to include your transaction? They’re already going to be putting up first just based on the time that they received it? Maybe I’m missing something here, I’m not sure.

Point is that while it would cost more to participate in winning the MEV game on Arbitrum, I’m not convinced that this would hurt Arbitrum more than it would hurt the MEV searcher’s profits. In fact, I’d largely expect searching to turn into a marginal business, from something that was quite a money maker.

Negotiating with Pirates

The final part of snoopy’s thread is quite good. It points out how some clever searcher’s have figured out how to ask the HashCash designer to change the algorithm to make the nonce smaller, so that they can re-purpose existing hash machines to hunt for Arbitrum Relay Client Nonces. Feels a bit too Roko’s Basilisk to be comfortable.

in exitus

Proof of Work removes some opportunities for gaining an edge in arbitraging a system, because it makes the next block source random. This randomness makes it hard to figure out who to stalk to get the next block. It could be coming from anywhere.

Centralized systems on the other hand have a lot of issues with mitigating MEV. They’re in one place and the rules about how they operate are well known. It’s interesting to see the randomness re-added back to a centralized system, but pushed onto being the burden of the clients rather than the server’s. Since you’re not randomizing the block source, the only way out is to randomize the source’s client connections. And it seems like the best way to do a random lottery is to involve proof of work.

Ce la vie.

Let’s talk about the latest development in the Ethereum space though. I’m feeling pretty skeptical about Ethereum lately, maybe it’s the new Ordinals launch on bitcoin that’s making that whole chain feel even more Ponzi tastic.

Let’s be clear, Ethereum has *always* been extremely self-conscious of its ponzi nature. Extremely Gen Z of them to be leaning hard into jokes about themselves with a semi doomer-istic outlook on maybe it working out for you. But if not at least you knew where you were when you were there. And that’s something right?

Ok so the big news is that Coinbase launched an Eth layer-2. Let’s speculate about what this means: why would Coinbase do this? Why would they use Optimism to do it?

We’ll start with some very basic basics.

What is an Eth layer-2 (L2)?

So the way an eth layer two works is that a 3rd party writes some contracts and deploys them onto ‘main ethereum network’. Then they also set up a bunch of other computers (which may or may not be their own proprietary stack, or maybe it’s a decentralized bunch of computers) which basically run a whole separate network of Ethereum Virtual Machines.

Then they go and find a bunch of contracts that are popular on mainnet Ethereum and deploy them onto their Not-Mainnet computer cluster.

If you’ve got assets on the mainnet, you send them to the special contracts that the Layer-2 maker deployed in the first paragraph. This locks up your funds on mainnet. The Layer-2 contract then re-issues assets of the same or similar value on the second network they set up. You’ve just ‘bridged’ your funds from the mainnet to the layer-2 network. Now what?

Now you can interact with all the copied over contracts from mainnet on this side-net — making the same trades and earning all the same ponzi scheme participation prizes as you got on mainnet. With the exception that you can only interact with assets that people have also locked up and been re-issued onto this chain. Or maybe you interact with assets that *only* exist on this side-net. Whatever.

You can head back to the main-net by sending your side-net assets back to the issuer. After some lockup period (some are as much as 7 days), the contract on the main-net that you sent your assets to originally sends you back your assets.

(Note that this special two-net contract setup is usually called a ‘bridge’, since it acts like a wormhole to get assets from one -net to the next).

Why use a L2?

Great question. Why the fuck would you do this with your Eth assets? Why wouldn’t you just use your money on the main-net on the main-net chain? Why even bother doing this dumb lockup and re-issue wormhole portal business?

The answer is transaction fees. The side-nets charge pennies to execute transactions, where the main-net can charge tens to hundreds of dollars. You move over to side-nets (more often called “L2”s) so you can actually use your assets and do ponzi things without having to burn hundreds of dollars.

Existing L2s

Most L2s in existence are contracts on the main-net that anyone can send assets to and receive funds on the other side-net back at. The organization that runs all the computers that host the side-net are for-profit startups. I don’t know where they make their money from, or what their business model is. Maybe they get to keep a percent of the transaction fees you end up paying in their network. But they’re kind of like public-ish services.

Anyone can deploy a new bridging contract to main-net and deploy a network of computers running their side-net (or maybe it’s one big computer actually running the side-net thing, who knows). You just have to convince people to send their main-net funds to you.

The two most popular L2’s that I know of are “rollups”:

• Optimism: website

• Arbitrum: website

Arbitrum

Arbitrum is the biggest one with the most marketshare. To date they’ve got pretty impressive stats in my opinion: 3.3B locked into their in-bound bridge; 53% of L2 markeshare, 2.9M users.

Arbitrum had a much smoother rollout than Optimism did, they gained ground quickly by not having a closed “whitelist” beta project. A bunch of ponzi-schemers launched tokens on their network really early after launch which propelled lots of people to lock up capital and move over to Arbitrum to try catching the free money.

Arbitrum was built by a bunch of PhD types from Princeton.

They did pretty good in the VC raising game, but nothing super sexy. Not a sexy project. A successful one, but not sexy.

Crunchbase says they’ve raised 123M.

Optimism

Optimism on the other hand is a smaller chain with less of a footprint in terms of integration. According to DeFi Llama they have all of 0.9B locked into their contract.

Optimism took longer to open up their network to anyone than Arbitrum did, and took a while to reach full compatability with the main-net EVM.

Here’s their milestone timeline; seems like they’re on a 2y release cycle.

They had a much splashier launch with the VC investment. Crunchbase reports that they raised 178M and are at a Series B. Unlike Arbitrum, their investors include a16z and Paradigm, which are typically considered high signal VC firms.

Unlike Arbitrum, Optimism’s founders aren’t listed on their website. Instead you can explore the “governance” model for the side-net. Optimism ended up issuing a “governance token” and choosing to operate in a more DAO-centric way. Maybe this is because their VCs wanted a fast exit and tokenization is an extremely fast way to do that. Good for them.

Coinbase re-deploys Optimism as “Base”

Ok so Arbitrum and Optimism exist. Coinbase decided they wanted to make their own side-net also. One where they ran the computers that the side-net lived on.

So they went out and licensed? copied? borrowed? the Optimism code and re-deployed it. There’s now a Coinbase Optimism contract on main-net and an Optimism Optimism contract on main-net. If you send your assets to the Coinbase one, you’ll get them back on the Coinbase side of things. If you send them the Optimism one, you’ll get them back on the Optimism side of things.

Here’s their announcement tweet.

Why would Coinbase launch an L2?

Great question. The stated goal reads like newspeak: “Our goal with Base is to make onchain the next online and onboard 1B+ users into the cryptoeconomy.”

I don’t really understand how yet another L2, a copy of an already existing one’s tech at that, is particularly well positioned to onboard the next 1B crypto users. You kind of already need to be onboarded to crypto to use an L2?

Here’s a few other theories I found compelling:

1. Running the side-net gives their EVM machines the ability to re-order transactions and extract MEV for themselves from anyone that’s using their L2 to trade. They’re the only party with access to the order-flow and execution of transactions on this side-net, which means that unlike main-net there’s competition with other validators for MEV. Maybe I’m wrong about this? I don’t know how transaction ordering and sandwiching works for side-nets, but it’s definitely there.

2. It gives them the ability to cross list the liquidity in the DEX onto their centralized exchange UIs. This makes your markets deeper for users of your platform. Again, they can do this because they control what transactions get executed and when. They run the side-net EVM machines, they can decide on transaction ordering.

3. They can add KYC to any deposits to the bridge. This allows them to make sure that the assets in their L2 are attributed to a real-world entity and they know who’s transacting inside their side-net. Also has the nice side-effect of having you dox any address that wants to deposit funds.

4. It gives their users access to the liquidity pool contracts and ponzi rewards that they’re used to getting, while still holding them basically in ‘custody’ with Coinbase. Which means that there’s less reason to pull your funds out of the Coinbase ecosystem and lock them up in main-net or a different L2 side-net. You keep them with Coinbase and still can earn liquidity rewards from any contracts that get launched.

5. I’m not 100% certain about this, but it feels like it gives *Coinbase* the opportunity to earn something from the massive amounts of crypto its users custody with them, or at least open up their internal trade ecosystem to a wider set of players that want to keep their assets on chain and not in Coinbase’s wallet.

I’m probably missing some, leave a comment if you think of one I’m leaving out!

Why Optimism?

I have no idea but this one really seems like a “it’s who you know” not the particular strength of your already existing project that leads to strategic partnerships. I’m sure Arbitrum was considered, maybe Optimism struck a better deal than Arbitrum offered because they’ve got more VC money to pay back (178M vs 123M) and their existing deployed L2 is 27% the size of Arbitrums.

On Twitter I called this the “first big Corp move”, and this is what I’m talking about. A 2nd place rollup partnering with a big player in the exchange business, being motivated to fork and re-deploy their existing tech due to what I can only imagine intense pressure from VCs to get even more return on investment than whatever they managed to unload with their OP tokens. This announcement alone made OP token price pop 6% today. ($COIN seems like it’s up about 2%).

We’ll see how it works out for both of them! Seems fairly optimistic for people who like using Coinbase to trade, plus it gives outside bagholders the opportunity to interact with the vast amounts of Eth assets that Coinbase holds on their balance sheet. Maybe. I think? Someone correct me on this.

in exitus

@bertcmiller posed the question to me recently – what is lightning MEV? In thinking about this question, there is a strong requirement to understand first the principles and incentives of MEV, then the structure of lightning as a system. Finally we can see what sort of answers this question “lightning MEV?” gives us.

MEV is an environmental product. That is, it relies on two aspects of transaction environment that have blossomed in the ethereum ecosystem.

First, it relies on access to information. Most commonly, this is information about desired monetary exchanges, or trades. The information must be accessible prior to the monetary exchange is effectuated. In otherwords, information about a desired trade has to be made available before it is recorded in a block.

Access to information about a desired trade before execution provides an opportunity for an intermediary to insert or reorder other monetary exchanges (trades) around the desired one. The addition of these other actions captures some of the desired exchange’s value to the re-orderers account. This intermediary is the one capturing MEV, or the extractable value that’s discoverable by access to information about a desired trade.

In turn, the intermediary relies on sharing the monetary value of this information with the actor effecutating, or recording, the desired monetary exchange. By sharing value that the information access gives to the intermediary, the intermediary improves their own economic position as well as the position of the effectuator of the exchanges. In other words, the intermediary shares the gains that they’ve discovered with the party making the exchanges happen. This is the block maker for blockchain protocols.

Note that sometimes the intermediary identifying the extractable value and the block producer are the same party – in fact it’s the very fact that a block producer is sent desired transactions that gives them access to the actionable information.

MEV Recap

We have identified two steps and three parties as the pre-requisites for MEV.

The two steps are: information about desired trades is accessible before the trade is effectuated or recorded. This information gives rise to the second step, which is the discovery of other, sequential trades which, when paired or batched with the original trade, results in a gain for the actor originating the other trades, otherwise known as the intermediary.

The three actors are: a party making a trade, an intermediary taking other actions around that trade which result in a net-positive balance change for the intermediary, and a party effectuating the trade(s) who has discretion over the order that trades are executed in.

Stated in other words, state updates are available and accessible such that other state updates can be ordered around them. These other orderings create value for the party organizing the state updates.

Where is lightning MEV?

So where does MEV exist on lightning?

First, let’s consider how trades, or monetary exchanges, happen in a lightning channel.

For those of you unfamiliar with lightning channels, the general idea is that two parties commit funds to a shared account. Each party maintains a balance of the funds in the account. Money is moved between various lightning participants by adjusting the balances in accounts on a route between the payor and the recipient.

At the individual channel level, an exchange in lightning works by two parties agreeing to change the balance of funds in their shared account.

An lightning balance update has two steps: first the parties agree to move the balance of the trade into an escrow account. This is a committed proposal to transfer funds. Then, the parties settle the trade, either by moving the escrowed money into the counterparty’s balance (completing the trade) or by moving the escrowed money back into the original party’s balance (canceling the trade).

Channel balances are recorded in unbroadcast transactions (monetary exchanges). As such, the only parties who know the present balance of a lightning channel are the two peers to the shared account, or channel.

Information about pending trades is not available to parties outside of the channel. Let’s see why this is.

MEV and Executing Trades on Lightning

In our discussion of MEV above, we talked about access to information about desired trades. Let’s see how information about trades is propagated in lightning.

Lightning trades, or payments, are typically routed through a series of channels, or shared accounts. The route the payment will take is calculated by the node attempting to make the payment.

The node constructing the payment route knows which channel balances will be updated. It does not know the current channel balance of those channels*, nor does it know the resulting channel balance, after the trade has been made.

*Ignoring probing, for now.

Each node along the path of the payment knows the amount of balance it is being asked to route. It does not know the entirety of the route of the payment. This is because the route path is blinded via an onion packet. Insted, they know which peer of theirs passed the payment in and which peer they are forwarding the payment onto (assuming that they aren’t the final recipient of the trade).

To recap, the information of a desired trade in lightning is only communicated to the actors that are directly responsible for effectuating the trade. These actors are only compensated upon successful execution the desired trade.

In the context of routing payments, there is value to be extracted by the successful completion of trades; there may be an ordering of trades by a single node which enables it to more successfully execute more trades than it would otherwise.

Note that often multiple channels are involved in completing a ‘trade’ on lightning; if any one of the proposed channels along a route is unable to complete the trade (due to a lack of adequate funds, for example), then the trade will fail for all parties on the payment route. It’s impossible to know which other channels a trade’s success depends on, given that lightning routes are blinded. The only party who knows the complete payment route is the party that constructed the route.

MEV and Lightning Onchain

We’ve covered some aspects to which MEV might apply to payments routed on lightning. These are off-chain considerations.

Let’s now consider how MEV may impact on-chain transactions for lightning channels.

Lightning channels only interact with block producers in two contexts: when a channel is being opened or closed.

Channel Opens

Channel opens are typically a slow, multi-block process. As written today, the lightning protocol prescribes a waiting time of a few blocks before commencing trades between two peers. This is so that the on-chain funds are securely committed before any off-chain updates to the balances are negotiated.

A channel open adds an output to the blockchain called the “funding output”. This output is the total of funds in the channel.

Let’s now consider closes. There are two types of channel closures: mutual closes and non-mutual, or unilateral, closes.

Mutual Closes

If both parties agree on the closing balance and are online, they sign a transaction which pays each party its current, respective balance. The closing transaction is then broadcast, or made public.

From a MEV perspective, the information about the desired channel closure is now public. The close transaction depends on no other transaction spending the opening output; the only parties which have the ability to spend the opening output are the channel peers. Once peers have agreed to close a channel, no further payments will be routed over it.

A channel closure is effective once the close transaction has been included in a block.

Non-Mutual Closes

There are also unilateral (non-mutual) closes in lightning. A unilateral close is when the funding output is spent by one of the channel peers.

A unilateral closing transaction locks up the funds of the peer who broadcasts it for a period of time. (On the lightning implementation I work on, the default lock is for 144 blocks). This lock-up period gives the other channel party an opportunity to ‘dispute’ close transaction.

The only thing that is disputable about a close transaction is whether the published balance is the current balance. If a peer publishes a non-current balance to the chain, the other peer may dispute this.

In the current lightning protocol, a dispute about current channel state is resolved by complete loss of funds from the party that published an incorrect, or not presently up to date state.

In other words, publishing an old-balance state to the blockchain gives your peer the opportunity to claim all of the funds from the channel for themselves, minus the fees to process the claim (paid as fees to the miner).

If a peer is successful at publishing an old state, i.e. the old state is not disputed, what is this action worth? Or what is the possible value of publishing an old state?

At most, an old state is worth the difference between their highest historical balance and their present balance. At most, the highest would be 100% of the channel balance, the lowest minimum balance is 1% (due to reserve requirements) of the channel balance.

The highest theoretical gain from an old state broadcast is 99% of the channel balance.

The loss risk of publishing an old channel balance is the total of your current balance, which has a minimum of 1%.

Note that resolving a dispute may be expensive for your channel peer; depending on the magnitude discrepancy between the proposed and actual channel balance it maybe more economical for them to allow the old channel state to stand as the closing balance of record.

Ok, so the only actor that can extract value from a channel close is your channel partner. Their attempt at doing this may be costly to them, depending on their present channel balance and your ability to successfully dispute their close action.

Large channels should be more susceptible to griefing and cheat attempts, as there’s more value at stake.

Finally, the only ordering opportunity granted by a unilateral close is all or none. The transactions for a channel close are already strongly ordered – there is no insertion or re-ordering that isn’t a wholesale replacement of the channel peer’s transaction.

Hm there is a window of time during which a unilateral transaction has been broadcast but not yet mined in which the peer may not know that the channel is in the process of being closed during which more channel state updates could be negotiated to improve the projected gain for the cheating peer.

Closes and Miner Access

Direct access to a miner and a guarantee of effectuation of a transaction before the transaction of your peer is valuable only insofar as you’re able to delay or block your peer from issuing a “correcting” transaction, which ameliorates your attempted cheat (in this case, lightning MEV is a capture of some or all of the balance of your peer and as such is zero-sum).

MEV on lightning is only “capturable” by your channel peer (and a colluding miner) and is limited to a fixed amount, at max the “channel diff”.

(Note that I’ve failed to discuss a class of griefing attacks that will pay out your peer’s balance to a miner as fees – the griefing party gains nothing except what they negotiate to clawback from the miner.)

To recap, onchain lightning MEV is extractable only by one of the two parties in the channel, and constitutes a “cheat” attempt. There are a few cases where unilateral closes can result in large payments to the miner (and none to the peer effectuating the close). The public information that is published is only ever actionable by the channel peer (or a delegates on their behalf).

Some other lightning thoughts. Open market MEV seems to rely on bots, which can react to information faster than than others. It’s an interesting thought exercise to consider what actions might be possible on lightning given fast execution.

The two “MEV” opportunities on lightning that I’ve identified so far are onchain (griefing/cheating your channel peer) and payment routing (successfully routing payments).

If you could know of a payment attempt, before the payment was attempted (and the funds were committed to escrow), what actions would you want to take, as a value/return maximizing node?

• You’d want to have a channel balance available to be used by that payment

• You’d want the router to select your balance for use. Typically this is chosen as the cheapest route (considering the escrow lock that you’ve placed on the funds, as well as the amount you’ve advertised as being charged for use of those funds)

The ideal case would for there not to be any other routes available for completing the payment. i.e. you’d want the payer to have to use your available funds; and that your rates for use of the available funds is set high to reflect this limited availability.

To make this work, you’d need to know:

• The other candidate routes from the destination to source.

• The balance of those channels (can they route the payment, or am I a “must use” hop for the payment?)

• The cost of using any competing route (so you know your relative position in a cost-weighted route finding algorithm)

By design this is hard to determine, as the route is blinded using onion packets and channel balances are not publicly available. You’d have to do a lot of active probing of the network to determine this information, but it’s possible to do. Historically, it’s been difficult to reconfigure your channels and balances in real time, as it takes a few blocks for a channel to become operable, which makes it difficult to take advantage of information of desired payments even when you receive them.

It’s possible the zero-conf channel proposal (sending payments over channels before the funding tx is mined) and splicing (dynamic reconfiguring of channel balances via an on-chain tx) may make this more feasible in the future.

I don’t know where this summer has gone. Surely not into mining shitcoins — my bytom miners failed last week (one won’t power on, the other’s fault light is blinking. I blame unspecified grid problems but wasn’t home when they went offline so *shrugs*) and my chia miner has been down since early June.

The helium miners are still going, though at a much much lower rate than before the summer started. I guess hitting 100k nodes on the network will do that. Good for Helium, bad for my personal profit and loss calculations.

Home mining is hard to sustain, would be my takeaway.

I’m hoping to get the Chia miner back up this week, and I’ve been hearing interesting things about Aarweave (spelling?) which seems like a promising alternative to IPFS. At the end of the day, I’d rather be providing storage to someone with lots of disks rather than just holding disks full of lookup tables (Chia), so from a philosophical perspective it’s likely I’ll move to something more, um, utilitarian with my disks than just Chia mining. To be determined though, hopefully stay tuned! Lol.

As some of you may have noticed, I’ve indefinitely paused the subscription portion of this newsletter, at least until I’ve got some juicy mining content ready to send out to you all. Free content?? Free content!

In the meantime, I’ve got a semi in-depth post coming up later this week. It’s not *necessarily* miner focused but instead is a thought provoking essay on a topic that’s been floating around the more general mining space and how that might (or might not?) apply to lightning.

chainfail is @niftynei’s shitcoin chronicles, it tastes better when shared with a friend!

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Looks like they’re all getting turned off today.

The whole thread is pretty great, but here’s some videos of miners being turned off.

Another video of them crating up miners

Why?

I’m not a Chinese policy expert, my guess is that they’re shutting down bitcoin mining for two reasons: one economic control and the other is energy consumption goals.

Economic Control

I don’t think this is a huge part of why miners in Sichuan are turning off, see below for what I believe is a more accurate depiction of what’s happening politically there.

But I will say that bitcoin isn’t *well loved* by the government of China, and it won’t be protected when push comes to shove. Or, say, if miner’s energy usage comes into conflict with another, bigger and more important state-level goal, namely a reduction in carbon emissions.

Energy Consumption

Historically, there are two big sources of energy that Chinese miners use: coal in the Mongolian plains and hydro from dammed rivers. Most of the coal is in Sichaun; most of the hydro power is in Hubei.

It’s hard to get exact evidence for this, but I strongly believe the Chinese politburo takes global warming, or at least their emissions goals, seriously. Shutting the bitcoin miners is an easy win for them to meet their emissions goals.

Since this is Sichuan only, I kinda think the regulation conversation went a little something like this:

National Politburo: Sichuan! You are burning too much coal! Our emissions goals require you to burn less coal!

Sichuan Government Dudes: Yes National Politburo! We will cut our coal emissions!

Sichuan Government Dudes: Miners! You are now banned!

Miners: Oh no. Fine, ok. *Pack their miners up, head to ???*

What this means for you, Home Miner

If you already have bitcoin miners up and running…

Nice. Your machines are about to start earning you more bitcoin for every kw that you put into them. As the total hashrate drops, every hash produced by your machine has a better chance of finding the winning block.

In the short term, this means the rate of new bitcoin issuance is slowed down, and that it takes longer to get a transaction confirmed. Your earnings rate should stay relatively unchanged.

In the medium term, the difficulty will start dropping. Blocks production will speed up and the issuance will resume its normal schedule: 6.25 new bitcoin every 10 minutes. When this happens, all the remaining miners will start earning more bitcoin per kilowatt spent.

In the long term, I’d expect these miners to find their way back onto the network somehow. Rumors are they’re looking to move out of China, maybe Kazakhstan, which is nearby.

Or maybe, just maybe…

If you don’t have bitcoin miners up and running…

There has probably never been a better time to get on Alibaba and try to buy some bitcoin miners.

This is one of a few free posts on niftynei’s shitcoin mining newsletter. If you enjoyed it, please share it with a friend and consider subscribing!

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This announcement was quickly followed by another, that they’d be looking into using their volcano power plant to host mining facilities.

Here’s the tweet from the president of El Salvador saying as much.

This is going to evolve fast!

It’s also, unfortunately, likely to erode the value of “home” mining rigs.

Let me explain.

Electricity Markets

Historically, electricity market is divided into two “types” of customers: commercial and residential.

Commercial users tend to be big buyers who are using the electricity to power large industrial machines, like the aluminum smelts in Iceland. The energy draw of a commercial project is largely related to their work schedule and what type of machines they’re powering — a large grocery store only needs to keep their lights on when there are customers in the building; an aluminum smelt has to keep the metal hot 24/7 so that it doesn’t turn into an immovable block of metal. Typically the contracts for commercial energy are pre-negotiated.

Residential electricity is households. Household energy usage ebbs and flows with people’s routines and the weather — the summer A/C load ramps up when people start arriving home in the evening from work; evenings tend to be the most-used electricity times. Residential energy contracts vary from state to state depending on the regulations. Texas is deregulated which means there’s an entire industry of middle men that buy electric contracts in bulk from suppliers and then sign contracts with households individually to manage that. Cheap residential energy exists at nights when the usecases all drop off.

Bitcoin introduces a third ‘electricity market’ — digital currency mining. This lets you turn your electricity directly into dollars at a known rate. Typically, bitcoin mining has happened either via small scale players (on the residential grid) or commercial contracts on the larger grid. The volcano news, however, points towards the coming development of the promised 3rd market however, for stranded energy.

Limitations on Electrical Supply

In order to understand what “stranded energy” is, it’s important to know that electricity isn’t as *fungible* as we imagine it.

Specifically, the distance between the point the electricity is generated and the point that it is consumed matters. And it matters a lot.

Energy decays over long distances — electrical substations are one way of re-charging electricity as it moves across long distances. Getting electricity to move a long distance *requires more energy and infrastructure* than supplying energy to collocated or local uses.

In other words, using energy immediately at its source is cheaper than sending the energy elsewhere to be consumed.

Sometimes it’s really cheap to produce energy in one place, say next to a volcano using a geothermal power plant. But the cost to get that energy from the place where it’s generated out to where a commercial or residential use exists that can afford to pay for it doesn’t always exist for every potential energy source.

This is “stranded energy”.

Stranded Energy and Bitcoin

This is the third market of energy that bitcoin mining is uniquely poised to capitalize. Miners are hot and loud and do well far away from residences. They don’t require a lot of maintenance once you’ve got them up and running. In fact, the most infrastructure they require is a power source and an Internet connection.

Satellite communication has been supplying the Internet connection; abundant energy that’s uneconomical to move to other places has increasingly been tapped for the energy.

And here’s the thing about stranded energy — it’s really goddamn cheap. I’m not sure how cheap a “volcano plant” is to run, but it can more than supply enough power for bitcoin miners to more than provide a large return. Much larger than you can get with any other use for it.

Bitcoin miners let you *immediately* convert your electricity into globally exportable and transmissible value. Bitcoin is a global network, it’s cheaper than wiring money. You can set up a bitcoin mine next to a volcano and start exporting that decentralized, secure store of value to anywhere in the world that wants it, no additional infrastructure required.

Yeah, it’s exactly as revolutionary as it sounds.

Death Knell for Residential Mining

When you’re mining at home, you’re (most likely) using the residential electric grid. Residential energy is expensive — typically the energy supply for a residential community is figured out after the fact rather than before it. The power plants had to be added and scoped around an already existing userbase, at whatever cost it takes to get them energy.

Bitcoin mining profitability follows the lowest cost energy it can find, and unfortunately residential energy is not, and rarely will be, as cheap as what’s available in the stranded energy market. Eventually, residential mining will be wholly unprofitable — the power cost will prove unsustainable as it cannot compete with stranded energy pricing.

I think this future is probably a lot closer than we like to admit.

If you want a piece of future bitcoin mining, my advice would be to invest in a company or project that’s building out projects that capture stranded energy rather than getting into bitcoin mining at home. *

Or forget mining bitcoin at home. No time like the present to diversify into that shitcoin miner you’ve been eyeing!!

*If you know of any projects like this, send it my way and I’ll do a write up about it!

I’m going to be honest here. I really wanted to get into mining bitcoin at home. That was the whole point of getting ASICs. Instead, I ended up yolo’ing into mining a shitcoin no-one’s heard of. What was I thin…

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I pay my friend who found the place to put it 1/3rd of the node’s payout.

I pay the friend who’s apartment it lives another 1/3rd of the node’s payout.

I keep the rest.

Doing Node Accounting

Helium makes it incredibly easy to do node accounting w…

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Just know next week’s numbers will be a lot sadder.

Report

Here’s how my ‘home miners’ did last week, Monday to Sunday.

The big winner this…

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Good thing my odds of mining some Chia are real low right now…

Having a dollar value to assign to Chia gives means that I can make pretty meaningful weekly P&L sheets though.

So here’s my first mining earnings update!

This …

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So far we’ve talked about my hunt for bitcoin miners, what to look for for a bitcoin miner, and some updates on my not-so-hot Chia mining attempts.

We haven’t really discussed what mining is though, or how it works.

Understanding bitcoin is a good starting place for branching out to explore the rest of the blockchain-based crypto economy, given that most chains borrowed a lot of ideas from how it works.

Let’s start with “what is a blockchain?”, specifically “what is the bitcoin blockchain?”

What is the bitcoin blockchain?

One good analogy for understanding how the bitcoin blockchain works is by comparing it to a filing cabinet.

In a lot of ways, a blockchain is exactly like a filing cabinet filled with folders. Each of those folders is filled with sheets of paper.

When you want to make a transaction that will live on the blockchain, you write the transaction down on a piece of paper. I

n order for this transaction on a piece of paper to be considered “valid”, you need to get it into a folder.

That folder then gets added to the great stack of other folders full of transactions.

Together this stack of folders live in the filing cabinet. This is the blockchain.

Ordering Folders

The folders in the filing cabinet have a very specific order that they have to be sorted in. Every time a new folder is added, it’s basically put at the top of the stack.

Each folder has a unique id. Each folder contains the id of the folder that came immediately before it.

You can’t calculate the unique id of any folder without knowing the id of the folder that came before it. In this way, the order can’t ever be changed or moved around. If you do, you’d know because the calculation to figure out the folder’s id wouldn’t work.

Getting a Transaction into a Folder

Ok so there are folders and there are papers. The papers are go in the folders, the folders get added to the great big stack of folders in the filing cabinet.

But where do new folders come from? Who decides what papers to put in each of the folders?

The answer is miners.

Miners are the ones who pick out which transactions papers will go into the next folder that’s created. They’re kind of like a big librarian workforce at the filing farm.

People who want to get their transaction confirmed, or included in a folder, put the paper into a little vacuum tube. The vacuum tubes all dump out into a big pile at the base of the librarian’s work space.

The librarians pick through all of the unconfirmed transactions. (An ‘unconfirmed’ transaction is one that hasn’t been included in a folder yet.)

The folders have a size limit — only so many pieces of paper can fit in a folder. The papers also pay a small bribe to the librarian that puts them into a folder.

So most librarians pick through the big pile of transaction papers and find the ones that are the smallest and also pay the best bribes. These are the ones that they put into a folder.

Finding the Folder’s Identifier

Once the librarian has a folder put together that they like, they start running the folder through a … well, a trash compactor.

That trash compactor outputs a unique identifier that goes on the folder.

The identifiers are all numbers. Really really big numbers. If you slightly change what the folder looks like, and run it through the trash compactor again, you’ll get a different number out of the trash compactor.

So let’s say you run a green folder full of transactions through the trash compactor. It says the number of that green folder is 101823182091823.

Then you take a red folder full of the same transactions and run it through the trash compactor again. It says the number of that red folder is 29383812918313847401.

You can do this infinitely. As long as you put a slightly different input into the trash compactor, it’ll spit out a completely different number. There’s no way to predict what the trash compactor will spit out until you put something through it.

Adding a Folder to the Filing Cabinet

Ok so you’ve got a bunch of different versions of the same folder. You’re running them through the trash compactor.

Purple folder, 1038472918374.

Magenta folder, 38472829379928129811.

You’re trying to be the first librarian who finds a folder with an id less than 500000000.

No luck yet. In fact you’re pretty far away so far.

Gold folder, 299999888.

Poppy folder, 103847577388218.

Wait a second. That gold folder. 299999888 is less than 500000000.

You’ve done it. You’ve found the next folder. There’s another special set of tubes that you send “found” folders out on. So you send this shiny gold folder, with all of the papers inside of it, out to all the other librarians and people on the network.

When a librarian gets it, they run it through the trash compactor themselves, and verify that the number that comes out is in fact less than 500000000.

Since it passes the filter, they add it to their filing cabinet with all the other folders.

On average, a folder with a “valid” identifier is found every 10 minutes.

Updating the Search for the Next Folder

Then, every single librarian looks through the papers inside the gold folder and removes them from the big pile of transactions that were waiting to get filed.

This is called “removing mined transactions from the mempool”.

Then they change the folder they’re using to run through the trash compactor. The ‘folder’ has the id of the last ‘mined’ folder on it. So they update it to the gold folder’s identifier, 299999888.

Then, using the remaining pile of unmined transactions plus any new ones that have arrived since the gold folder got created, the librarians go back to running folders through the trash compactor, looking for the next winning folder.

This is mining.

Getting Paid

Miners earn the bribes that are paid on each transaction that’s included in a folder (also known as a block). They add up all the bribes and write down the total on a special piece of paper that they add to the folder before they run it through the trash compactor. This special, “miner addition” transaction is called the coinbase.

The coinbase includes both the librarian bribes plus a special bonus amount. The bonus amount is called the “block reward”. It’s handed out as a special incentive to librarians for doing the work of putting all the different folder colors and combinations through the trash compactor.

For bitcoin, the value of the block reward changes every 210,000 folders. It gets cut in half from whatever the previous value was.

Figuring out the block reward

Let’s figure out what the current bitcoin block reward is.

According to blockstream.info[1], the current block is 681,051[2].

681,051 ÷ 210,000 is 3.24.

The block reward for bitcoin has been cut in half three times.

When bitcoin first started, the block reward was 50 bitcoin. That means that every new folder that was added to the filing cabinet would pay out 50 new bitcoin in the coinbase transaction, to the librarian that found the folder with a valid identifier.

We’ve had 3 ‘halvings’ since then. So the block reward has been cut in half three times.

50 ÷ 2 is 25. That’s one halving.

25 ÷ 2 is 12.5. That’s two halvings.

12.5 ÷ 2 is 6.25. That’s three halvings.

Currently each bitcoin block pays out 6.25 bitcoins to the person who creates the coinbase transaction.

[1] This is a bitcoin ‘block explorer’. It lets you wander through the folders and all the papers in the filing cabinet that is the bitcoin ‘blockchain’.

In Exitus

That's pretty much all of it. You now have a pretty good understanding of how bitcoin mining works.

Footnote about the 500000000 number

I left off the part about where the “500000000” number is determined. It’s updated every 2016 blocks, or about every two weeks. (2016 blocks every 10 minutes is 20160 minutes, or 336 hours, or 14 days.)

Another name for this number is the “difficulty”[1]. If the last 2016 blocks were created faster than 10 minutes, on average, the number gets adjusted down. This means more trash compactor attempts will be required to find a valid folder.

If the last 2016 blocks were created, on average, slower than every 10 minutes, then the number gets adjusted upwards.

This is done to ensure that new folders are found every ten minutes, no matter how many librarians are hunting for new blocks, or how many trash compactors they’re running.

If you want to know more about ‘difficulty adjustments’, you should check out this article on the bitcoin wiki.

[1] Also referred to as the target.

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So I did what anyone would do and I hopped into the Chia support forums on Keybase, specifically the #farming-hardware chat.

Wh…

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Bitcoin was, in no small part, invented so that sovereign individuals could transact digitally without counterparties. Without a trusted middle man that handled the value on your behalf. We’ll get rid of the trusted party, said the bitcoiners. It’ll be like the good old days, when parties transacted man-to-man.

No transaction…

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It’s time to find some *real* miners, miners that might actually (maybe?) earn me some money.

I talked a bit about deciding what to get in my last post on Bitcoin Miners. Let’s talk about where t…

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Would you like to buy some mines?

Yeah? Ok, well. Listen up.

I have some bad news. Finding miners right now is really hard. The ones that are available are very expensive.

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Every saga has its origin story. My mining adventure is no different. Here’s how I got into bitcoin first, then altcoin mining.

Getting in

I got my start in mining crypto by acquiring a used Ebit E9 from eBay in January 2019 for $175. It claimed to mine 6.3Th/s.

Even back in 2019, this wasn’t a very good output for miners — state of the art bitcoin miners were selling for a few thousand dollars. A $175 machine was definitely considered old, not terribly competitive.

I think my original idea was that I’d point it at testnet and see if I could rack up some serious reserves of testnet coins. Testnet faucets were starting to dry up or go dark around this time, so it made sense to have my own source for them.

So I ordered one off of eBay. I got a cheap, used one because putting one toe in at a time seemed like the right way to go.

Awkward Starts

It turns out that bitcoin miners are pretty loud and pretty noisy? Who knew.

I also learned pretty quickly that electricity in the city of SF is absurdly expensive. The cost of a kwh was around 11-12c, but they’d charge almost twice that in ‘delivery fees’, etc. This is pretty pricey electricity.

Once I had the machine, I had a lot of trouble getting it set up. Turning it on and pointing it at a mining pool is pretty straightforward, but I was trying to mine testnet coins and I could not for the life of me figure out how this worked.

Most miners are set up so that they point at a pool. It’s pretty easy to find a pool and get an address and url to use for configuring your miner, then turning it on and watching the sats roll in.

It’s a lot harder to setup a testnet miner.

At some point I invited a bunch of coworkers over to watch Dan Boneh’s cryptography I lectures, and we futzed around with trying to get it online. We weren’t able to get it set up to mine testnet coins, but we did register for a mainnet mining pool and mine some mainnet for a good bit.

I earned a few pennies worth of bitcoin for an hour or two before turning it off. It sounded like a vacuum cleaner and man was it pushing some hot air around.

Digging In

Looking back through my eBay history, I didn’t stop there. Honestly, I’m not sure what I was thinking, because I bought two more absolutely shit miners a few months later. Maybe I was trying to find energy sippers that would let me finally becoming the testnet kingpin I dreamed of.

In for a penny, in for a pound apparently.

I have a distinct memory of badgering Luke-Jr at a nice steakhouse during Consensus 2019 about how to setup a miner to mine on testnet. We didn’t really understand each other; he was like “no, mining in pools is bad, and especially not something to do on testnet”. And I was like “ok but how do I set up a pool to mine testnet coins, I need something to point my miner at, the software doesn’t seem to work any other way.”

This is me making a note to put out a post on “how to mine testnet with a miner” at some point.

Seeking Cheaper Energy

Mining in SF at a residence is not profitable unless you have somehow conned your landlord into paying your electricity bill on your behalf.

Sometime around April 2019 I got it into my head that I wanted to move to Texas and buy a house.

Was the purchase of two more miners a coincidence within two weeks (on either side) of when I placed an offer on a house in Texas pure coincidence?

Kinda embarrassed to say: I think not.

Anyway, I moved to Texas for cheaper electricity, more sunshine, and to get serious about setting some miners up.

I had learned in SF that miners are hot and noisy and require a bunch of cheap energy. So I started calling around local datacenters to see about putting a miner in at someone’s facility.

Phoning It In

I put in a bunch of inquiries at local dataplaces in my new hometown. One of the smaller datacenters that looked like it was trying to grow pretty aggressively ended up giving me a call as a result of my inquiry. I had a great convo about what I was trying to do (mine bitcoin). He let me in on a couple of key secrets, which now I pass on to you.

First of all, miners are really fine out in the garage. Sure, it’s marginally better if you can keep them in a nice, cooled environment and wick the heat away in a useful manner. As long as you’ve got a decent airflow though, they should be fine. In my experience, this has been good advice.

Second, in Texas you can get wholesale electricity prices by signing up for a company called Griddy.[1] They let you pay whatever the current 5-min spot price for electricity on the grid is. Sometimes this goes negative; it definitely drops at night.

Third, you can monitor your home energy usage with a small device called Sense.

I ended up keeping my miners in the garage, switching to Griddy, and installing a Sense.

There’s a lot more to say about Griddy, keep your eyes out for a separate post on that one. As for the Sense, it hasn’t been as useful as my Kill-A-Watt energy monitor, mostly because it’s hard to tag devices. (My mining machines never got broken out, they’ve been lumped into the “Always On” category). But overall this was pretty good advice!

If you’re looking to do some energy intensive mining (there are other types! We’ll get to them at some point!), check your local energy situation first.

This is a lot for one post, so I’m going to hang it up here for now.

To be continued…

[1] Oh ho ho ho.

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