09/13/2023 0 Comments

1. What Is The Bitcoin Mempool?

The mempool is the first place a Bitcoin transaction goes after it gets broadcasted to the network and before it is added to a block on the Bitcoin blockchain.

Understanding the Bitcoin Mempool

The mempool, short for “memory pool,” is a temporary storage for unconfirmed transactions in the Bitcoin network. It’s the first stop for all transactions before they are included in a block and added to the blockchain.

Whenever a user initiates a transaction, it’s broadcast to the network first before entering the mempool. Here, the transaction waits to be picked up by a miner for inclusion in a block based on transaction fees. Miners prioritize transactions with higher fees. As such, users who want faster confirmations for their transactions may opt to pay higher fees.

Often, the mempool is a reflection of the Bitcoin network activity. It can become congested with a backlog of transactions during periods of high usage, leading to longer confirmation times and higher fees. The mempool tends to clear swiftly in quieter periods, resulting in faster transaction processing time and reduced fees.

How Does the Bitcoin Mempool Work?

Sending BTC from one wallet address to another initiates a broadcast to the nodes on the network. The transaction is entered into the mempool and joins a queue of unconfirmed transactions. Then, if the transaction is valid, it’s held in the mempool, waiting to be selected by miners for inclusion in the next block to be added to the blockchain.

Bitcoin miners choose transactions from the mempool that they deem economically beneficial, prioritizing those with higher fees.

As miners work to solve complex mathematical puzzles while adding new blocks, they include these chosen transactions in the block they are attempting to create. Transactions are confirmed once a miner successfully mines a block containing specific transactions.

This confirmation marks the completion of a transaction, which then moves from the mempool and is added to the blockchain. The sender’s available balance reduces while the recipient’s BTC increases to reflect the completed transaction.

Why Do Transactions Get Stuck in the Mempool?

Some transactions could get stuck in the mempool because of how miners pick which ones to include in a block.

The mempool can become congested when there is a sudden surge in transactions being initiated. This incentivizes miners to prioritize transactions with higher fees because they stand to earn more by including them in the next block they mine. Therefore, transactions with lower fees may linger in the mempool, waiting to be picked up.

This congestion leads to longer confirmation times for lower-fee transactions and may result in them appearing “stuck” in the mempool until the high network activity subsides.

2. Why did Cambridge revise its bitcoin electricity consumption index?

If you followed bitcoin mining news over the last two weeks, you may have seen social media chatter about how the practice doesn’t actually use as much electricity as you’ve been led to believe.

And that is true, based on the Cambridge University Bitcoin Electricity Consumption Index (CBECI), which gives daily estimates on the network’s energy demands.

Upon revising the popular index on Aug. 31, researchers realized that previous assumptions regarding Bitcoin’s energy consumption had previously been overstated.

For example in 2021, when bitcoin mining was extremely profitable, Cambridge’s previous model estimated that the network sucked up 104 terawatt-hours (TWh) of electricity. The revised model shows that Bitcoin consumed 89 TWh, representing a 15 TWh difference.

Based on data from the US Energy Information Administration, 15 TWh could power over 1.4 million average American homes in a year. Following these revelations, Daniel Batten, the co-founder of climate conscious CH4 Capital, took to X, formerly Twitter, to say “the tide has turned in the narrative around Bitcoin & energy.”

JPMorgan also responded to Cambridge’s downshift of Bitcoin’s energy footprint, lowering its bitcoin production cost estimate to $18,000 from $21,000. But why did Cambridge researchers change the methodology of the CBECI? Alexander Neumüller explains.

Why the sudden pivot?

Neumüller is a research associate at the Cambridge Center for Alternative Finance, where he leads all investigations into the climate impact of digital assets, including Bitcoin.

Neumüller told Blockworks that researchers needed to revise the CBECI to more accurately reflect how different mining machines contribute to the overall hash rate.

The previous model assumed that all miners, no matter how powerful, were contributing equally to the network hash rate. “This doesn’t make sense,” Neumüller said bluntly.

Neumüller explained that the computing power of ASICs — a type of dedicated hardware used to mine bitcoin and other proof-of-work cryptocurrencies — has drastically increased in the last several years.

For example, Bitmain’s Antminer S9 from 2016 had a hash rate of 11.5 terahashes per second (TH/s), whereas the Bitmain S19 XP Hydro from 2022 achieved 260 TH/s.

Additionally, the previous model factored in all mining machines that were profitable, which ended up skewing electricity consumption numbers during times of superb mining profitability.

Neumüller referenced older mining machines like Bitmain’s Antminer S5, released in 2014 with a hashrate 1.155 TH/s, which obviously don’t require as much energy as the current top-of-the-line models.

“Suddenly mining profitability spiked in 2021,” Neumüller told Blockworks. “I think an […] Antminer S5 was still profitable. And what that means is that suddenly, an S5 fueled an equal amount of hash rate as a much newer device.”

“The most recently released devices by that time were already having up to 100 terahashes. So this was the issue,” Neumüller added. Considering this explosion in hashing prowess, the model for calculating electricity consumption had to change.

Now, the CBECI doesn’t consider miners that aren’t profitable at “reasonable electricity rates.” It also takes into account the age of mining equipment and how devices tend to depreciate in value.

Many public mining companies, Neumüller explained, use a five-year depreciation schedule for their hardware. This means that a brand new device’s value drops 20% each year until it’s considered practically obsolete after five years in operation.

Neumüller posits that when a miner’s value decreases, it contributes less to the overall network hash rate and subsequently consumes less energy. So, even if a miner older than 5 years remains profitable, it won’t be accounted for in the CBECI.

That assumption briefly sums up the new model for the CBECI, and according to Neumüller, it avoids the previous trap of old mining machines being erroneously included in the index.  That was what was leading to the overstated electricity consumption, especially since 2021.

“It’s really more […] how can we find an anchor that helps us to account for much older machines being less weighted than the new machines. Because in the end, that helps us to associate the right weight in terms of what drives hashrate,” Neumüller told Blockworks.

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3. Bitcoin Miner, Industrial Users Participated in ERCOT Demand Response Program

Large industrial users can be paid to shutter operations during times of high stress on the power grid — including West Texas cryptocurrency miners, one of which brought in $39 million in July and August.

Riot Platforms, a cryptocurrency miner based in Colorado but with operations in Rockdale and another in development in Corsicana, announced to its shareholders the August 2023 returns that included the credits from the Electric Reliability Council of Texas (ERCOT).

It raked in landmark returns primarily due to its power usage rather than cryptocurrency mining. A mining facility is essentially a giant computer, replete with servers running encryption algorithms that process transactions of the digital currency — an incredibly energy-intensive process.

The Rockdale facility has a total power capacity of 750 MW, enough to power 150,000 homes during peak demand. In order to reduce demand on the ERCOT grid at times of high stress, including this August’s sweltering heat, the facility shuttered or throttled its operations.

“Texas experienced another month of extreme heat in August 2023, causing demand for electricity to spike, in some cases approaching total available supply,” the company wrote in its release. “Riot continued to execute its power strategy by curtailing its power usage by more than 95 percent during periods of peak demand, forgoing revenue from its Bitcoin mining operations to instead provide energy resources to ERCOT.”

“The Company’s curtailment of operations meaningfully contributed to reducing overall power demand in ERCOT, helping to ensure that consumers did not experience interruptions in service.”

This is common among large industrial users and is one of the demand response tools ERCOT uses to provide balance. Factories and other kinds of large users also partake in the program. With ERCOT, they may enroll in a demand response credit program for their usage to be voluntarily curtailed when grid reserves wane.

It’s a financial incentive — one of many, in a system built on them — to reduce demand. Without it, businesses would be hard-pressed to take on a deliberate operations loss. These costs incurred by paying users to go offline are considered by grid operators a worthwhile investment to avoid the implementation of blackouts.

During this recent string of conservation requests, with one emergency alert caused by a grid frequency dip, ERCOT managed to avoid rotating outages by using the various tools at its disposal. According to an ERCOT presentation, there are over 600 “load resources” enrolled in the program with a total capacity of 7,000 MW.

The primary financial incentive during tight conditions is the wholesale market price for electricity — capped now at $5,000 per megawatt-hour (MWh).

Riot’s memorandum in response to media stories about their windfall states that only $7.4 million was in tandem with the ERCOT program.

“The ancillary services program is a competitive bidding process in which certain large customers in ERCOT’s market bid for the grid operator to pay them a fee that is similar to an insurance premium, which then affords ERCOT the right to control the customer’s electrical load to ensure grid stability,” it reads.

“Riot’s premium amounts to less than one percent of the program, which administered nearly $1 billion during this time period.”

The $24 million in power credits is a curtailment agreement negotiated with its retail electric provider, TXU. Those power credits are service guarantees from the utility company, and during curtailment that amount of electricity earmarked for Riot can be redistributed to TXU’s residential customer base.

This happens because it is cheaper for TXU to buy back this electricity service rather than having to purchase power on the wholesale market when prices jump close to the cap.

Last month, Riot reported $8.6 million in net proceeds of Bitcoin sales. Overall in August, Riot says its curtailment provided the ERCOT market with 84,000 MWh.

Some utilities offer demand response programs for residential customers, such as Oncor, in which a homeowner agrees to have their electricity usage throttled during times of need in exchange for some amount of debits on their monthly bill. But there is no formal and robust demand response program with ERCOT for residential users.

The reason demand response for industrial users is more sophisticated and robust is twofold: they represent a larger footprint from a smaller number of users. It is easier to coordinate with a few hundred facilities that have a large level of usage than with over a million homes to reach the same level.

That means fewer parts in motion and actions to coordinate. It’s one of the litany of market mechanisms used by the grid operator to prevent rotating blackouts and the financial consequences that follow.

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