Nakamoto's Impact on Bitcoin MEV

Nakamoto's Impact on Bitcoin MEV

Nakamoto's Impact on Bitcoin MEV

May 15, 2024

General Wallet Use

5 min

Stacks rolled out the first steps in its Nakamoto Upgrade on April 22. This upgrade paves the way for expanding the Bitcoin ecosystem by directly improving the Bitcoin sidechain, Stacks. This upgrade also addresses core problems like longstanding MEV issues.

In this article, we’ll look at how this update can impact Bitcoin MEV and the long-term implications for users and the Stacks L2 network.

What is Nakamoto?

The Nakamoto Upgrade is a hard fork of the Stacks sidechain designed to enhance the blockchain’s performance, security, and integration with Bitcoin.

With Nakamoto, Stacks block production will no longer be tied to direct miner elections. Instead, miners produce blocks at a fixed cadence. The set of PoX Stackers uses a randomness-based selection process (sortition), influenced by miner participation in past elections. This determines when the current miner should stop producing blocks and a new miner should start.

The Nakamoto Upgrade consists of a two-step release following the signer onboarding process. The major improvements Stacks will focus on with Nakamoto include:

  • Improving the transaction speed

  • Improving the finality guarantees for the network transactions

  • Mitigating Bitcoin miner MEV

Nakamoto Upgrade and Its Impact on Bitcoin MEV 

Miner extractable value (MEV) is a major issue which Stacks (and the broader Bitcoin ecosystem) has faced for a long time.

MEV is the profit that a miner generates by selectively ordering/reordering transactions based on screening the UTXOs in Bitcoin’s mempool. As miners have access to transaction information before they are added to a block, they can create unfair conditions that benefit them before block confirmation.

  • Reordering transactions: Miners could order transactions to benefit themselves, such as by front-running profitable trades.

  • Inserting their own transactions: Miners could potentially add their own transactions to a block for added profit.

  • Censoring transactions: Miners could even choose to exclude certain transactions.

Earlier, Stacks used a simple miner election for block production. Bitcoin miners with high hash rates held more voting power, giving them an inherent advantage in becoming Stacks leaders, too.

The Nakamoto Upgrade shifts to a sortition-based system where leader election is semi-randomized. While the Bitcoin hash rate still influences the selection process, this reduces the ability of a single Bitcoin miner or pool to dominate block production in Stacks consistently.

Essentially, Bitcoin miners are required to spend equivalent BTC to earn STX tokens

Many MEV extractions can compound to a large loss over time. Users would also begin to rely less on the network itself. 

Considering the long-term negative impacts that MEVs can cause, Nakamoto will change Stacks’ approach to a manipulation-free mining process. For this, sortition factors are implemented.

What are Nakamoto’s Sortition Probability Factors?

Sortition is essentially a randomness-based selection process weighted by factors like a miner's commitment to the network (BTC spent in Proof-of-Transfer, and other parameters).

The countermeasures to restrict miners from exploiting MEV from users include: 

  • Miner’s Consistent Participation: Nakamoto will reward miners for consistent participation. To be eligible for leader selection, miners must demonstrate a recent history of block production — participation in the last 10 blocks. This encourages a reliable and dedicated miners network.

  • Median of Past Bids: Nakamoto prevents outlier bids from unfairly influencing leader selection. It calculates a miner's probability of selection based on the median of their past BTC commitments in the Proof-of-Transfer process. This ensures fairness and reduces the impact of unusually large or small bids. 

  • Absolute Bid Total: Nakamoto considers the absolute amount of BTC miners commit. This factor and others contribute to a miner's overall probability of being selected as a leader, providing transparency and predictability in the system.

Miners receive rewards for their genuine contribution to the Stacks network without manipulative practices, which encourages other miners to follow this path.

What is Stacks Nakamoto’s MEV Mitigation Strategy? 

The research paper titled “Bitcoin MEV Analysis for Stacks Mining” commissioned by the Stacks Foundation discusses four practical MEV mitigation strategies:

  1. Proportional Coinbase Rewards (PCR)

  2. Minimum Bid Requirement (MBR)

  3. Assumed Total Commitment (ATC)

  4. Assumed Total Commitment with Carryforward (ATC-C)

Proportional Coinbase Rewards (PCR)

This model proposes that the Stacks Coinbase reward amount be adjusted so that the amount a miner receives is proportional to the aggregate Bitcoin commitment to win that block. Rewards are distributed based on each block's relative total Bitcoin commitments.

This method aims to disincentivize miners from making minimal Bitcoin commitments since their reward would be proportionally smaller. Plus, it encourages substantial commitments and consistent mining activity.

Minimum Bid Requirement (MBR)

The Minimum Bid Requirement (MBR) insists on the requirement for a minimum aggregated BTC funds for that particular Bitcoin block. If a miner doesn’t fulfill this requirement, Stacks sortition doesn’t occur.

The introduction of MBR prevents Bitcoin miners from executing opportunistic mining with small commitments. Moreover, if the minimum threshold is high enough, it could discourage an MEV miner from excluding other Bitcoin miners.

Assumed Total Commitment (ATC)

Assumed Total Commitment (ATC) assumes a baseline total Bitcoin commitment for block sortition, regardless of the total committed. This assumed total is often based on historical data, like the median of commitments from previous blocks. The miner's probability of winning a block is their commitment divided by this assumed total.

This method discourages both minimal and opportunistic mining. It makes the rewards less dependent on lower-than-average commitments in a particular block and ensures a more level playing field by normalizing the impact of commitments across blocks.

Assumed Total Commitment with Carryforward (ATC-C)

Assumed Total Commitment with Carryforward (ATC-C) is a variation of ATC where if no miner wins a sortition (because the total commitment does not meet the assumed total), the coinbase reward for that block is carried forward and distributed in future blocks. This model adds a cumulative aspect to the rewards, distributing unclaimed rewards to future blocks.

Like ATC, this model discourages minimal commitments and ensures that the rewards' value is not lost but redistributed, possibly encouraging more consistent participation across multiple blocks.

Nakamoto’s MEV Mitigation and Ecosystem Considerations

ATC-C and PCR are the most viable options based on detailed research and analysis of all four solutions. These solutions have a lesser impact on the miner’s profitability over a longer period. Therefore, we'll discuss these solutions and their potential impact on the Stacks ecosystem.

  1. Mining Process: PCR solution offers better allocation of rewards along with its complexity. Meanwhile, ATC-C will go forward similarly without altering much of the mining process. 

  2. Miner Behavior: ATC-C and PCR solutions won’t significantly alter the miner’s behavior. 

  3. Small vs. Large Miners: ACT-C and PCR solutions don't negatively affect both small and large miners. 

  4. Stacking: Stacking also stays unaffected for both solutions without significant differences. 

  5. Miner Centralization: The distribution of miner profitability and overall miner profitability remains stable with the implementation of PCR and ATC-C. Therefore, the possibility for an increase in miner centralization in either of these solutions is minimal.

Leveling The Playing Field for Miners

Nakamoto provides efficient solutions to Stacks's problems on Bitcoin MEV. As a result, this upgrade limits the possibility of minor manipulations that existed pre-Nakamoto. 

The new reward system will incentivize miners to join an honest mining process, improving security and trust in the Stacks network.

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