2024-01-28 08:05:55
One of the central elements of Bitcoin BTC Price is that no matter what happens, if you pay a high enough fee, one of the world’s miners will confirm the transaction. In other words, Bitcoin is resistant to censorship. It is no coincidence that we come across the term “censorship resistance” rather than “censorship commissioner” when discussing this topic. Miners have the ability to censor: they can deny any unwanted transaction from being included in one of the blocks they mine. However, they cannot prevent other miners from incorporating any transaction rejected by others into their own blocks.
Bitcoin is resistant to censorship, but it is not immune to it. Any miner can censor whatever they want, and they can do it for free and save money, ignoring of course the loss of revenue if there aren’t enough transactions available that pay a similar fee to the transaction(s) they want to censor. However, this does not prevent the global system from processing the transaction anyway, unless those miners 1) make up the majority of the total network hashrate, 2) decide to take advantage of this reality to orphan the block of any miner who decide to process the transaction(s) they want to censor.
This would cause the majority of miners to lose the money of those participating in the orphan attack, while a smaller group of miners continue to mine the blocks containing the “forbidden” transaction. Finding each such block would essentially increase the time it takes to find the next block in the chain, which on average would reduce the income of the majority of censoring miners. This will remain the case until the minority gives up and surrenders, or until they are forced out of business (they would give up revenue from blocks that also contain the censored transaction).
For now, let’s assume that scenario isn’t in the cards. If it does, then Bitcoin will either fail or have to exist in that state until non-censoring miners are able to quietly enough hash rate gather to defeat the majority. By majority here we mean miners who want to leave certain blocks orphaned because they contain transactions that they do not want to be confirmed in the blockchain.
What happens if a small group of miners decide to use censorship to filter some of the transactions they process? The amount of block space available for transactions decreases. In other words, they have less block space than other classes of transactions. What does this result in? The pressure on fees for this class of transactions will reach saturation faster than fees for other classes of transactions.
Just for simplicity, let’s imagine that only 10 transactions are needed to fill a given block. The regular ones are simply called “regular transactions” and the censored ones are called “forbidden transactions”. On average, five blocks are found per day and there are five miners. Red blocks represent those who do not mine prohibited transactions, and green blocks represent those who do. More than 50 transactions must be pending before regular transactions saturate the available block space and start increasing fees. As a result, the bidding frenzy begins to increase the fees and of course the income of the miners. At this point, the fee income will increase for all miners.
In the case of prohibited transactions, only 20+ transactions need to be pending in order for the bidding fever that results in an increase in fee income to begin among them. However, fee income from prohibited transactions only green miners will collect it.
In a situation where illicit transactions do not saturate the mempools beyond the available block capacity, all miners earn roughly the same amount of revenue.
These banned transactions have to compete with regular transactions to get some guarantee of timely confirmation, so if regular transactions saturate the mempool but banned transactions don’t, the overall fee pressure is spread relatively evenly across all miners, so no one will get a disproportionately high premium income that is unattainable for the others.
However, if forbidden transactions saturate the mempool to an extent exceeding the available block space, then this fee pressure only for green miners increases the fees paid by illicit transactions. Since the red miners decided to censor these transactions, the fee income from illicit transactions will not increase. Regular transactions do not have to compete with illicit transactions in feerates in this scenario, unless they need to confirm in the next block, so the indirect feerate increase of regular transactions due to the fee pressure of illicit transactions does not lead to an equivalent increase in the income of red miners.
Because of this imbalance, green miners earn more per block/hash than red miners. This is clearly unsustainable from an incentive point of view. Over time, two things can happen: 1) the green miners will return the extra income earned and increase the percentage of the hashrate, or 2) the miners will switch from the red side, and thus the percentage of the green miners will increase as a percentage of the hashrate.
The dynamics of higher fees for green miners will result in an increase in the hashrate of green miners – either through reinvestment or migration from red miners – until an equilibrium is reached where the block space demand of illicit transactions equals that of regular transactions and both groups of miners are roughly earns the same income. This equilibrium will last until the demand for blockspace by forbidden transactions exceeds the blockspace available to them, and then the group of green miners will earn more until their share of the network hashrate increases again to an equilibrium point of equal fee income.
This dynamic is what makes Bitcoin resistant to censorship. It’s not that all miners aren’t capable of censoring something, it’s because miners are incentivized through market dynamics to pick up something that other miners censor. If some miners censor a class of transactions, they reduce the block space available to them and increase the fees they are willing to pay. Pure and simple. Unless miners are completely irrational – in which case Bitcoin’s entire security model would be called into question – then some miners will take these transactions and use them to earn extra income.
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