Written by: Karim Helmy, Coin Metrics
Compiler: Perry Wang
Coin Metrics authorized Chain Wen to translate and publish the Chinese version of the article.
Point
- This report uses a new method to examine the addresses in coinbase transactions and quantify the miners’ currency holdings and activities . This method improves on previous studies that tracked miner expenditures, which attempted to inadvertently measure the activities of pool operators rather than the behavior of miners.
- In the year before the halving of Bitcoin production, as the price of the currency recovered from its trough in recent years, the number of Bitcoin accumulated by miners increased by 318,000 BTC.
- As the supply of miners gradually decreases and the net capital flow of their addresses stabilizes, the impact of miners on the Bitcoin network seems to be small.
- The forthcoming release of Coin Metrics Network Data Pro 4.8 will provide indicators for miners’ capital flow and supply .
Miners and the market
In addition to their role in protecting network security, miners also have a profound impact on Bitcoin’s market dynamics. Because they can receive newly issued bitcoins instead of buying bitcoins, miners are naturally net sellers of assets . Miners’ operating expenses (mainly electricity and rent) are mainly denominated in legal currency, while their income is embodied in Bitcoin, further enhancing this impact.
The new feature uses account data (previously unavailable) interacting with these addresses to examine the activities of miners and assess their drivers and spending impact.
The data on the chain shows that the influence of miners on the network is gradually diminishing , but they are still key participants in the Bitcoin ecosystem and possess large amounts of funds. To help our readers understand these influencing factors, Coin Metrics provides extensive data related to miners in the upcoming Network Data Pro 4.8 version. Using this data, the function finds that the supply of bitcoin held by miners generally decreases over time , while the flow of funds into and out of miners and mining pools is suppressed by the continuous halving of the network.
Brief description of Bitcoin supply
To calculate the flow of miners’ funds, we first summarize all transactions from the coinbase (chain note: a coinbase transaction is the first transaction in the block, a unique type of bitcoin transaction that can be created by miners, and miners use it to collect The block reward for its work, and any other transaction fees charged by the miner are also sent in this transaction) to receive the payment address, and mark it as the first transfer (0-hop) address. Then, all the addresses in the group and the addresses that have received payment from an address in the group are marked as second transfer (1-hop) addresses.
Since the usual structure of the mining pool wallet is that the mining pool first obtains the reward in the block and then distributes it to the miners, therefore, the 0-hop address usually represents the mining pool , and the 1-hop address usually represents the miner . It can be seen that the existing system that attempts to infer the behavior of miners from the 0-hop address spending habits is theoretically unsound, and therefore cannot accurately measure the intentions of miners. Instead, they measure the activities of the pool operators .
Of course, it must be admitted that marking miners and pools based solely on the distance in coinbase transactions is an imperfect technology. Applying this methodology to the evaluation of Bitcoin’s early network is very effective. In the early network, personal mining and alternative mining pool models are more popular. Since the first mining pool Slush Pool dug its first block in December 2010, especially the measured values before that date are for reference only. In addition, the addresses of miners who have not received funds from the 0-hop address will not be marked. Nonetheless, this heuristic method represents a major improvement over the current state of the art and should accurately capture a wide range of trends.
Miners, especially those who were active in the early days of the network, control large amounts of Bitcoin . In the historical record of the entire Bitcoin network, the total number of Bitcoins owned by 0-hop and 1-hop addresses has generally been on a downward trend. In the second half of 2019 and the first half of 2020 (the year before the production halved), this trend has undergone a major reversal, with miners accumulating 383,000 BTC from the bottom to the peak. This effect is mainly limited to 1-hop addresses, while the 0-hop supply remains roughly unchanged. Therefore, most of this accumulation will not be detected by previous estimation techniques.
As can be seen in the figure, there have been several jumps in the supply held by miners. These spikes are usually caused by the first block mined by an address with a large balance or the first interaction with a previously marked 0-hop address. The most prominent of these spikes occurred on August 16, 2012, when the giant whale holding more than 500,000 BTC received part of the coinbase reward of block 194,256. Before the halving this year, new entrants were also one of the reasons for the higher supply controlled by miners.
Due to inflation, from the perspective of total supply, the gradual decrease in supply owned by miners and pools is even more significant. This decline is consistent with the overall increase in Bitcoin supply dispersion. This is also consistent with the popularization trend of the mining pool model, which means that non-mining addresses are increasingly unlikely to be marked as 1-hop addresses too much.
Despite this trend, even today, miners and mining pools still control a large part of the total Bitcoin supply.
Analysis of mining pools and transfers
The exchange of funds between these groups is another powerful signal on the chain. Because mining pools are usually the direct recipients of coinbase rewards, the 0-hop address capital flow is a useful indicator to measure mining pool activity. Especially the several peak times represented by the activities of the aforementioned giant whales. In addition, since the early days of the Bitcoin network, the inflow and outflow of 0-hop addresses in BTC has shown a downward trend .
Miner income or large reward income accounted for the bulk of the inflow of 0-hop addresses. Although the income of miners will change in the short term due to fluctuations in fees and the number of mined blocks, it is relatively stable in various periods.
Although the inflow and outflow are highly correlated, the outflow is more volatile because it is not supported by the agreement and miners can choose when to withdraw funds from the mining pool’s wallet. The reduction in the two capital flows clearly reflects the impact of the halving of production in 2016 and 2020. Since the 2020 halving, the value of inflows has usually exceeded the value of outflows, which is a reversal of historical normality.
Analyze miner funds
Although 0-hop addresses are useful for tracking payments from mining pool operators, they do not represent transfers made by miners themselves in today’s standard wallet architecture. In most mining pools, block rewards are received by an address controlled by the mining pool operator, who will escrow the funds until the miner is paid at a predetermined time interval or chooses to withdraw tokens.
In the mining pool mining mode, the flow of funds from the 0-hop address of the coinbase transaction is closer to the miner’s expenditure . This report is one of the first studies that attempted to analyze the capital flow of 1-hop addresses. Due to the larger number of research object addresses, lack of underlying support, and fast capital flow, these capital flows are much larger than those corresponding to 0-hop addresses and are more volatile.
In order to analyze the initial capital flow of the Bitcoin network (the mining pool has not yet become the mainstream mining mode), the 0-hop address capital flow may be a more suitable tool. Even today, the 1-hop address capital flow is only an approximation of the miner’s activity , because the wallet structure of the mining pool is different, and these capital flows may incorrectly include the exchange address. But in general, this research model represents a more comprehensive observation of miner expenditures under today’s network conditions.
Like the capital flow of the 0-hop address, the inflow and outflow of the 1-hop address are also closely related. Since the block reward only represents a small part of the inflow of the 1-hop address, the inflow and outflow are very unstable, so the impact of the halving of Bitcoin production on this type of capital flow is not obvious .
In the past year or so, the inflow and outflow of miner addresses has increased slightly, indicating an increase in activity. Because the net capital flow has remained generally stable and the overall volatility has declined, the increase in activity will not be reflected as an increase in the impact on the network.
The close connection between inflow and outflow shows that miners generally tend to move their bitcoins out of their addresses immediately. Given that the derivatives market and legal currency lenders usually require token custody, these capital flows do not exclude miners from using financial instruments to hedge their exposure to bitcoin prices. However, the survey data of the Third Global Encrypted Asset Benchmark Study by the University of Cambridge shows that the adoption rate of these financial instruments is very low , and miners mainly rely on holding and selling Bitcoin to control their risk level to the desired level. Such a high transaction volume seems to indicate that miners are active market participants, habitually selling most of the newly received bitcoins.
The impact of dollar pricing
Due to expenses, profits and losses miners are dollar-denominated, so in order to measure the dollar value of cash flow miners useful. Since the capital flow of the 0-hop address is mainly composed of block rewards, its dollar value curve is very similar to the miner income curve .
Since it is also linked to the price of Bitcoin, the flow of miners’ funds denominated in USD is similar to the flow of funds from mining pools (the latter is larger). Different from the fund flow of mining pools, the fund flow of miners has been on an upward trend , and at the end of 2019 even briefly exceeded the level of Bitcoin’s historical high in 2017. This shows that, in dollar terms, the coverage of miner activities in the entire network is wider.
Comprehensive consideration
Individually, the inflow and outflow of address funds is useful for measuring the amount of economic activity that miners participate in.
In the historical record of the Bitcoin network for most of the time, the net flow of funds from 0-hop addresses has been slightly negative, and spending on these addresses is usually higher than income. Although the net capital flow at the beginning of the network fluctuates greatly, its volatility has gradually decreased over time, which may be due to the halving of Bitcoin production .
In recent years, the fluctuations in the net capital flow of 0-hop addresses have continued to decrease. In the past few months, the historical negative value of net capital flows has reversed, with inflows being slightly larger than outflows since the last halving.
The net capital flow of 1-hop addresses fluctuates more than the capital flow of 0-hop. Like the net fund flow of the 0-hop address, the net fund flow of the 1-hop address is usually negative. These capital flows have also experienced a gradual decrease in volatility, indicating that the impact of miners on liquidity is gradually diminishing .
Another tool for us to analyze the flow of funds is the change in the Bitcoin inventory level held by miners or MRI, which is the ratio of miner outflow to miner inflow. The 0-hop address MRI can be used to measure whether miners deposit funds in the mining pool wallet (less than 100%) or withdraw funds (higher than 100%).
Since the capital flow of the 0-hop address is closely related to the income of the miners, the MRI has remained at a level close to 100% in most historical periods of the Bitcoin network. The volatility of this indicator has gradually decreased as the volatility of the 0-hop address outflow weakened.
Compared with the 0-hop address MRI, the 1-hop address MRI can more accurately understand the relationship between the miners’ spending habits and income. In the entire historical record of the Bitcoin network, the flow of funds from 1-hop addresses has remained relatively stable, and two consecutive halvings have reduced the issuance. 1-hop address MRI has shown a rapid increase. Since the expenditure of the 1-hop address is about an order of magnitude higher than the income of the miners, the 1-hop address MRI has reached the level of thousands of percentage points for many times in the entire network history.
Next thoughts and actions
On- chain indicators such as miner holdings and net transfers show that the influence of miners on the Bitcoin network is gradually weakening. Despite this, they still contribute a lot of activity and control a large part of the total Bitcoin supply. Some indicators, such as total capital flow , also imply an increase in miner activity denominated in U.S. dollars and Bitcoin.
As the only direct recipients of Bitcoin issuance, miners and pools have an impact on the network that is not easy to quantify. The indicators outlined in this article can only touch the surface of the behavior of miners . In the future, we hope to analyze the flow of Bitcoin funds from miners to exchanges, which can more directly measure its impact on the market. We also hope to evaluate the active supply maintained by the miner’s address, which will help filter out the bitcoins lost in the initial stage of the bitcoin network, and take into account the different wallet structures of each mining pool, so as to finally make a more detailed view of the behavior of the miners. Assessment.
Thanks to Celia Wan for his suggestions and editing work.
