What is a mempool? Pre-chain process may attract regulatory scrutiny
More than just a simple blockchain function, some say mempools could be unfairly exploited
What is a Mempool?
To understand the issues surrounding mempools, it is first necessary to understand what they are all about. A bit like a regular bank account, Bitcoin requires a space where pending transactions are stored prior to confirmation. Once a transaction is verified by all nodes participating in the network, it sits patiently in the mempool for a miner to pick it up and add it to the ledger.
The mempool – a portmanteau of memory and pool – is a key ingredient in Bitcoin game theory, since miners can peruse the transactions held in this waiting room and prioritise the ones with the highest transaction fees.
Saying the mempool is a tad misleading. Rather than a singular universal waiting room, each Bitcoin node manages its own mempool, although each mempool should effectively mirror each other since transactions are broadcasted to all active nodes. Times of high congestion will invariably increase the combined size of the mempool, thus keeping track provides valuable insights into network congestion and estimated transaction waiting times.
The term mempool was not actually included in the Bitcoin whitepaper but was introduced following the BIP 35 (Bitcoin Improvement Proposal 35) pitch by Jeff Garzik in 2012.
Bitcoin transactions are measured in weight units, with each block having a maximum weight of four million weight units (equal to 4MB). It should be noted that following the 2015 SegWit soft fork, Bitcoin changed how transactions are measured. SegWit introduced vBytes, with one vByte equal to four weight units. SegWit changed the maximum block size from 1MB to 4MB.
Larger transactions generally take up more vBytes in the block and therefore sustain higher transaction fees (though this is not always the case). Pulling up a confirmed block at random (see block 742483 above), we can see how weighting affects transaction fees. The top transaction weighed 214 vBytes and sustained 0.0005 BTC in fees. In comparison, the bottom transaction weighed 141 vBytes and sustained 0.00028 BTC in fees.
Mempool.space keeps a running count on the mempool size across all nodes. Colour-coded measurements show the spread of transaction sizes that make up the mempool at any one time. As shown in the graph below, the mempool spiked in size on 12 May, exceeding 120 million bytes (120MB). The prevalence of green followed by dark pink suggests that the mempool primarily consisted of transactions costing between 12-15 satoshis per vByte at the start of the spike, to cheaper transactions of between 1-2 satoshis per vByte by the end of the spike.
Since the time frame correlates with the collapse of Terra Labs’ LUNA and UST coins, there is a good chance that the mempool became congested due to panicked holders seeking to exit their positions.
The Bitcoin mempool has a default maximum size limit of 300MB. Reaching the mempool size limit results in low-priority transactions being evicted. Because of this, users may see their transaction cancelled. To counteract this, some Bitcoin wallets allow you to rebroadcast your transaction with a higher fee to gain priority status. On the flipside, if Bitcoin’s hashing power dramatically increases, the mempool could effectively be cleared completely. This last happened in November 2020.
Now that we know exactly what is a mempool, let’s have a look at the controversy surrounding them.
Mempools: Next on the regulators’ watch list?
While the mempools may sound mundane and mechanical, they, like almost everything else in the crypto space, have attracted controversy. Speaking to Politico, Matt Cutler, chief executive officer of pre-chain data analyst Blocknative said that “there are all sorts of predators that lurk in the mempool”.
Cutler explained that the world of decentralised finance (DeFi) has created a race to the bottom between borrowers and lenders. In the event of a liquidation, the former rushes to post more collateral while the latter attempts to liquidate the position and seize the collateral. Cutler calls it “mempool jockeying”, and in some cases, “a savvy liquidator could pay miners an extra fee to ensure that their transaction gets listed ahead of the borrower within the same block”.
It sounds analogous to front-running in the traditional finance space. An illegal form of insider trading, front-running, as defined by Investopedia, “is trading stock or any other financial asset by a broker who has inside knowledge of a future transaction that is about to affect its price substantially”. The US Securities and Exchange Commission (SEC) outlawed front-running in the 1999 Detecting Personal Trading Abuses amendment.
The Bank for International Settlements (BIS) made its position clear on the subject in its 16 June opinion piece, Miners as intermediaries: Extractable value and market manipulation in crypto and DeFi. This report stated: “Miners can extract value by ordering the transactions within the next block in the way that is most profitable to them. In this case, transactions are not ordered based on fees, but based on the profit opportunities they generate for the miner… Regulatory bodies around the world need to establish whether value extraction by miners constitutes illegal activity.”
While this article focused on Bitcoin, mempools exist on all blockchains, and the same issues and concerns apply, including in relation to the Ethereum mempool.
Despite the evidence that mempool jockeying can unfairly benefit powerful miners at the expense of the average user, the regulators have yet to issue an opinion on the matter. But when there is unprecedented scrutiny over crypto assets and blockchain technology, perhaps it is only a matter of time before they catch up. Stay tuned to Currency.com for the latest on Bitcoin, mempools and crypto regulation.
A straight mempool definition is the space where pending blockchain transactions are stored prior to being picked up by a miner and added to the ledger. Rather than being a singular entity, each blockchain node has its own mempool where pending transactions are stored. Mempool is a portmanteau of memory and pool.
Pending transactions in the mempool can be seen at various tracking sites, including mempool.space.
Pending transactions in the mempool are read in the same way as completed transactions. Mempool.space provides graphs showing mempool size over time, fee ranges, and transaction weight divided by fee spread.
Mempool depth, or weight, determines the size of a mempool at a given time. In times of high network congestion, a node’s mempool increases in size. Mempools have a default size of 300MB, but this can be changed.
The Bitcoin mempool was last cleared in November 2020, following a 42% increase in the network’s combined mining power (hashrate). The mempool could be cleared if the hashrate dramatically rises again.