Case Study 2: Marathon and Regulatory Mining — When Miners Choose Which Transactions to Include

Background

On May 5, 2021, Marathon Digital Holdings (NASDAQ: MARA), one of the largest publicly traded Bitcoin mining companies in the United States, mined what it called the first "fully compliant" Bitcoin block. Block 682,170 was produced using Marathon's custom mining pool, MARA Pool, which filtered transactions through a compliance system designed to exclude transactions associated with addresses flagged on the U.S. Office of Foreign Assets Control (OFAC) sanctions list.

Marathon's announcement was framed as a responsible step toward regulatory compliance. The reaction from the Bitcoin community was swift, intense, and overwhelmingly negative. The episode crystallized a fundamental tension at the heart of Proof of Work mining: miners are economically incentivized to follow the protocol rules, but protocol rules do not dictate which valid transactions a miner must include in a block. The power to include or exclude transactions is the power to censor — and censorship resistance is arguably Bitcoin's most foundational property.

What Marathon Did

The MARA Pool Setup

In early 2021, Marathon launched its proprietary mining pool, MARA Pool, rather than directing its hashrate to third-party pools like Foundry or AntPool. At the time, Marathon controlled approximately 0.3-0.5% of the Bitcoin network's total hashrate — a small fraction, but one that was growing rapidly as the company deployed new ASIC hardware.

MARA Pool integrated a transaction filtering system developed in partnership with a blockchain analytics firm (widely reported to be DMG Blockchain Solutions' Blockseer platform). The system cross-referenced transaction inputs and outputs against a database of flagged addresses, including:

  • Addresses on the OFAC Specially Designated Nationals (SDN) list
  • Addresses associated with known darknet marketplaces
  • Addresses flagged by blockchain analytics firms as connected to ransomware, theft, or other illicit activity

Transactions involving flagged addresses were excluded from MARA Pool's block templates. All other valid transactions were included normally.

Block 682,170

The first block mined under this policy, block 682,170, contained 1,262 transactions. Analysis by independent researchers found that the block excluded at least several dozen transactions from the mempool that would normally have been included based on their fee rates. These excluded transactions involved inputs or outputs from addresses on various watchlists.

Marathon publicly announced the block, framing it as a milestone in regulatory-compliant Bitcoin mining.

The Community Response

Censorship Resistance: The Core Objection

The Bitcoin community's primary objection was philosophical and technical: transaction censorship by miners, even well-intentioned censorship, undermines Bitcoin's core value proposition.

The argument, articulated by numerous developers, researchers, and advocates, runs as follows:

  1. Bitcoin's censorship resistance is binary, not partial. Either the network processes all valid transactions without discrimination, or it does not. There is no principled stopping point between "exclude OFAC-listed addresses" and "exclude addresses the government of Country X dislikes" or "exclude addresses belonging to political dissidents."

  2. The precedent matters more than the current implementation. Marathon was filtering against a U.S. sanctions list, which many people consider legitimate. But the mechanism — a miner unilaterally deciding which valid transactions to process — is identical regardless of the filtering criteria. Establishing the precedent that miners can and should filter transactions opens the door to far more problematic filtering in the future.

  3. Regulatory capture risk. If OFAC-compliant mining becomes normalized, governments could expand filtering requirements over time. What begins as sanctions compliance could evolve into requirements to exclude transactions above certain amounts, transactions to privacy-focused services, or transactions from users who have not completed identity verification.

  4. Uneven application. Marathon controlled less than 1% of hashrate. Their filtering had no practical effect on transaction processing — excluded transactions were simply included by the next honest miner. But if a significant fraction of hashrate adopted similar policies, the delay would become meaningful. And if a majority adopted it, the censorship would be effective.

Technical Counterarguments

Technical community members raised additional concerns:

Fee revenue loss. By excluding valid, fee-paying transactions, Marathon was voluntarily reducing its own revenue. In a competitive market, this puts Marathon at a disadvantage relative to non-filtering miners. The economic pressure, in theory, should discourage filtering.

Fungibility implications. If miners begin distinguishing between "clean" and "tainted" bitcoin, it creates a two-tier system where bitcoin from certain addresses is treated differently from bitcoin from other addresses. This destroys fungibility — the property that every bitcoin is interchangeable with every other bitcoin — which is essential for Bitcoin to function as money.

False positives. Blockchain analytics is imperfect. Addresses are flagged based on heuristics and association graphs that produce false positives. Excluding transactions based on analytics means excluding some legitimate users whose addresses were incorrectly flagged, with no recourse for the affected parties.

Defenders of Marathon's Position

A minority of commentators defended Marathon's approach:

Regulatory reality. Marathon is a publicly traded U.S. company subject to U.S. law. OFAC compliance is a legal requirement for U.S. financial services companies, and the question of whether Bitcoin mining constitutes a "financial service" is legally ambiguous. Marathon was arguably being prudent.

No consensus rule violation. Bitcoin's consensus rules do not require miners to include any specific transactions. A miner can mine an empty block if they choose. Marathon was not violating any protocol rule — they were exercising a freedom that the protocol explicitly grants.

Practical irrelevance. At less than 1% of hashrate, Marathon's filtering delayed affected transactions by one block at most (approximately 10 minutes). The practical impact on censorship resistance was negligible.

The Reversal

The backlash was sufficient — and the competitive disadvantage clear enough — that Marathon reversed its policy within weeks. On June 7, 2021, Marathon announced that MARA Pool would return to "standard Bitcoin transaction selection" and would no longer filter transactions based on compliance criteria.

Marathon's CEO, Fred Thiel, acknowledged the community's concerns and stated that the company had "listened to the feedback from the Bitcoin community." The reversal was widely interpreted as a validation of Bitcoin's social consensus layer — the informal but powerful norm that miners should not censor transactions.

MARA Pool was subsequently shut down entirely, with Marathon redirecting its hashrate to third-party pools.

The Broader Issue: Censorship at the Mining Layer

OFAC and Bitcoin: The Ongoing Tension

Marathon's experiment may have ended, but the underlying tension has intensified:

The Tornado Cash precedent. In August 2022, the U.S. Treasury's OFAC sanctioned Tornado Cash, an Ethereum-based mixing protocol. In the aftermath, some Ethereum block builders (under Proof of Stake, the role analogous to miners) began excluding transactions interacting with Tornado Cash addresses. At various points in 2022-2023, an estimated 40-70% of Ethereum blocks complied with OFAC sanctions by excluding Tornado Cash transactions. While the Ethereum community has since reduced this percentage through protocol changes and social pressure, the episode demonstrated that censorship at the block production layer is not merely theoretical.

The Bitcoin analogy. Bitcoin has not experienced OFAC-related censorship at the mining layer since the Marathon reversal. However, the legal and regulatory pressure has not diminished. As Bitcoin mining becomes increasingly dominated by publicly traded U.S. companies and regulated entities, the risk of compelled transaction censorship grows. Foundry USA, which controls approximately 30% of Bitcoin hashrate as of 2026, is a subsidiary of Digital Currency Group — a large, regulated U.S. company.

The Stratum V2 Response

The mining community's most concrete technical response to censorship concerns is Stratum V2, the next-generation mining protocol. Under the current Stratum V1 protocol, the pool operator constructs the block template (deciding which transactions to include) and distributes it to pool members. Individual miners contribute hashrate but have no say in transaction selection.

Stratum V2 includes a mode where individual miners construct their own block templates. The pool still coordinates work and distributes rewards, but transaction selection is decentralized among pool members. This means a pool operator cannot unilaterally censor transactions — they would need the cooperation of individual miners, who may be in different jurisdictions and subject to different regulations.

As of 2026, Stratum V2 adoption is partial but growing, with several major pools supporting the protocol and firmware updates available for recent ASIC models.

The Game Theory of Censorship

Consider a scenario where a government mandates that all miners in its jurisdiction filter certain transactions:

If compliant miners are a minority: Censored transactions are merely delayed by one or a few blocks. The censorship is an inconvenience, not a barrier. The economic cost falls on the compliant miners (who lose fee revenue) rather than on the censored users.

If compliant miners are a majority but not all: Censored transactions are delayed significantly — potentially hours instead of minutes — but eventually confirm. This is a meaningful degradation of service but not a complete denial.

If compliant miners are 100%: Transaction censorship is complete. But this scenario requires global regulatory coordination, which is improbable given the international distribution of mining and the different regulatory postures of different jurisdictions.

The economic pressure: Compliant miners earn less revenue than non-compliant miners (because they process fewer fee-paying transactions). In a competitive market, this creates a disadvantage. The market, in effect, penalizes censorship — which is precisely how Satoshi designed it.

Analysis: Why This Case Matters

The Marathon episode is important not because of its immediate impact (which was negligible) but because of what it reveals about Bitcoin's security model:

1. Protocol Rules vs. Social Norms

Bitcoin's consensus rules are enforced by software. But many of Bitcoin's most important properties — including censorship resistance — depend on social norms about how miners should behave. Marathon's compliance filtering violated no protocol rule. It was the social consensus of the Bitcoin community, expressed through public criticism, that compelled the reversal.

2. The Composition Problem

Any individual miner's decision to filter transactions has negligible impact. But if many miners independently make the same decision, the cumulative effect is significant. This is a classic composition problem: individually rational behavior (comply with local law) can produce collectively undesirable outcomes (network-wide censorship).

3. Decentralization as a Defense

Bitcoin's defense against censorship is not technical but structural: mining is globally distributed, and no single jurisdiction controls enough hashrate to impose effective censorship. Maintaining this geographic distribution is a security priority that may conflict with the economic efficiency of concentrating mining in the cheapest-electricity locations.

4. The Tension Between Legitimacy and Censorship Resistance

As Bitcoin gains institutional adoption and regulatory acceptance, the pressure for censorship compliance will increase. Miners who resist censorship may face legal consequences in regulated jurisdictions. Miners who comply may face community backlash and competitive disadvantage. This tension does not have an easy resolution — it is a fundamental conflict between Bitcoin's design philosophy and the regulatory frameworks of nation-states.

Discussion Questions

  1. Marathon argued that OFAC compliance is legally required for U.S. companies. If you were Marathon's legal counsel, would you have advised for or against the transaction filtering policy? What legal risks exist on each side?

  2. Bitcoin's protocol explicitly allows miners to include or exclude any valid transactions they choose. Is the community's expectation that miners include all valid transactions an unreasonable imposition on miners' freedom? Or is it a necessary condition for the network to function as intended?

  3. Compare the Ethereum ecosystem's response to OFAC sanctions (40-70% censorship compliance post-Tornado Cash) with the Bitcoin community's response to Marathon's filtering (immediate backlash and reversal). What structural, cultural, or technical differences between the two communities explain the different outcomes?

  4. If 60% of Bitcoin hashrate were located in the United States and the U.S. government mandated OFAC transaction filtering, what would happen? Model the short-term and long-term effects on transaction processing, mining geography, and Bitcoin's value proposition.

  5. Stratum V2 decentralizes transaction selection from pool operators to individual miners. Does this fully solve the censorship problem? Under what circumstances could censorship still occur even with Stratum V2 fully deployed?

  6. Is there a coherent position that supports both (a) sanctions enforcement as a legitimate government function and (b) Bitcoin's censorship resistance as a valuable property? Or are these fundamentally incompatible? Defend your answer.