Complex systems operate under conditions far from equilibrium. Complex systems need a constant flow of energy to change, evolve and survive as complex entities. Equilibrium, symmetry and complete stability mean death. Just as the flow, of energy is necessary to fight entropy and maintain the complex structure of the system, society can only survive as a process. It is defined not by its origins or its goals, but by what it is doing. (Paul Cilliers,”Complexity and Postmodernism: Understanding Complex Systems, 1998)
This fundamental principle of complex systems is mirrored in Bitcoin, particularly the Bitcoin blockspace market. This market functions as a dynamic interplay between miners who supply a scarce resource for a fee and users who compete for its consumption. The time-value of blockspace, coupled with varying user preferences, creates a unique commodity market where every block represents a new equilibrium. The consensus layer defines what's allowed by the protocol, while the economic layer determines what users are willing to pay for Bitcoin blockspace.
Like any human-designed system, Bitcoin drifts towards centralization due to economies of scale, network effects, and the natural accumulation of resources and influence over time. As such, we are witnessing an alarming trend towards mining pool centralization, with a single entity now controlling over 50% of block template creation. At the same time, the declining block subsidy is putting pressure on Bitcoin's security budget; as subsidy rewards trend towards zero, there's a risk that incentives for miners to secure the network may become insufficient. Over the long run, Bitcoin faces a trilemma: it may become more centralized, suffer from dried-up liquidity, or require supply growth beyond the originally envisioned 21 million coins.
On the demand side, the era of cheap Bitcoin blockspace is coming to an end. The rise of new meta-protocols like Ordinals, Runes, and Layer 2 solutions is ushering in novel blockspace use cases. The market recognizes the absolute scarcity of the Bitcoin blockspace, driving increased demand and competition for this finite resource.
With these developments, the fundamental market structure persists: users want to minimize the fees for a smooth experience, whereas miners seek to maximize their revenues. While most things stay the same, one thing does change - with transaction fees becoming a key revenue stream for miners, that opens possibilities for new games called MEV (miner extractable value). Using their benevolent powers over transaction ordering, mining pools can choose to insert, re-order and even censor transactions to maximize their profits. As MEV grows relative to the block subsidy, it presents a double-edged sword - it offers a potential solution to the long-term security budget problem and could change the dynamics between miners, pools, and users, but it also introduces new centralization vectors.
At Binding Labs, we recognize that MEV, like any market force, cannot be stopped. While some advocate for its suppression or other egalitarian solutions, we believe those approaches are both impractical and potentially detrimental to Bitcoin's evolution. Instead, we champion the acceleration and embrace of free market incentives to level the playing field in the MEV landscape and this way standardize and streamline Bitcoin’s security budget.
Nice meeting you in Nashville.