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The Marathon Bitcoin Censorship Controversy Explained

The Marathon Bitcoin Censorship Controversy Explained

Explainers Cryptocurrencies

13 Jun 2021

Marathon Digital Holdings, one of the largest Bitcoin mining companies in North America, has done something that completely goes against the core principles of cryptocurrencies: censorship.

While Marathon has backtracked its decision later on, what the firm had done sparked quite some controversy and received backlash from crypto market participants.

But what happened, and why did Marathon decide to censor certain Bitcoin transactions?

Let's explore together in this article!

The Marathon Bitcoin Censorship Controversy: What Happened?

Before we get started, let's first take a look at Marathon itself.

From a Patent Troll to a Large Bitcoin Mining Company

Marathon Digital Holdings is originally a patent-holding company (formerly known as Marathon Patent Group), which is the parent of Uniloc, a well-known patent troll firm that sued numerous businesses for alleged infringement, such as Microsoft, Google, Amazon, and Apple.

However, after acquiring the digital asset technology firm Global Bit Ventures in November 2017, Marathon has shifted its activities from IP licensing to mining cryptocurrency.

Since then, Marathon has become one of the most prominent Bitcoin mining firms in the North American continent that features a fleet of 17,655 miners with a hash rate of 1.9 EH/s (1.9 million TH/s). As the current Bitcoin hash rate is at 136.3 million TH/s, it means that Marathon has a roughly 1.4% share of the global BTC mining market.

Interestingly, in addition to being a miner, Marathon is also the sixth-largest Bitcoin holder among publicly traded companies that owns nearly $200 million of BTC.

Marathon Censors Non-Compliant Bitcoin Transactions

What Marathon did in early May shocked the crypto community, especially if we take into account that the company has nearly four years of Bitcoin mining experience.

On May 5, Marathon announced that it directed all of its hash rate to the Marathon OFAC Pool. This special pool was designed to comply with the anti-money laundering (AML) rules of the US Department of the Treasury’s Office of Foreign Asset Control (OFAC), the agency responsible for administering and enforcing economic and trade sanctions.

As a result, the company started filtering Bitcoin transactions based on the addresses in OFAC's blacklists and databases as well as other sources like the dark web. To achieve that, the firm utilized a blockchain surveillance software solution.

This means that Marathon sought to process exclusively those Bitcoin transactions that were compliant with the OFAC's rules and reject the ones that weren't to produce "clean blocks."

As you can see, this is pure censorship, which goes against one of the core principles of Bitcoin (BTC and blockchain technology is meant to be censorship-resistant).

Of course, the company's actions received quite some backlash from the crypto community, with many criticizing Marathon for its censorship in the Bitcoin network.

On top of this, it seemed that, despite the company's efforts, illicit transactions from the dark web marketplace Hydra had still been processed in Marathon's clean blocks. Furthermore, some users from Iran (a country with ongoing US sanctions) sent BTC to the company's addresses, where the clean block rewards were distributed to undermine its new initiative.

It's important to note that unless every validator in the network decides to implement the OFAC's rules to filter transactions, other miners will process the ones neglected by Marathon. For that reason, it's nearly impossible to stop non-compliant transfers from getting validated.

Marathon Stops Censorship and Signals for the Bitcoin Taproot Upgrade

Surprisingly, Marathon decided to cease censoring Bitcoin transactions from May 31. In the same press release, the mining company also announced that it would adopt the Taproot upgrade, which is expected to improve BTC's scalability, decrease fees for complex transfers, and enhance privacy.

According to the firm's CEO, Fred Thiel, "Marathon is committed to the core tenets of the Bitcoin community, including decentralization, inclusion, and no censorship."

For that reason, Marathon announced that it would implement the Taproot upgrade without modification (which the firm achieved to do so since), which means that the company will mine Bitcoin just like other miners in the network (without any filtering or censorship).

Why Did Marathon Digital Censor Bitcoin Transactions?

As explored in the last sections, Marathon has started censoring transactions in early May but quickly backtracked on its decision later in the month.

The question now is: why did Marathon filter Bitcoin transactions in the first place?

At first glance, it would make sense to conclude that the company introduced censorship due to certain US government regulations. However, no such law or regulation in the United States requires the company to do so.

Another theory is that Marathon received subsidies from the government or certain businesses to do so. This hypothesis will make more sense if we consider the fact that rejecting certain transactions in a block decreases the rewards and revenue generated by the company.

That said, this assumption is likely wrong as well.

What's closer to the truth is that Marathon tried to sell the Bitcoin that was mined via the company's "clean blocks" at a higher price to its institutional partners. In fact, the company's CEO, Fred Thiel, stated this in the Pomp Podcast a few days ago.

These so-called clean coins were achieved by utilizing the combination of green energy and the censorship of non-compliant transactions to mine them.

However, according to Thiel, while institutional investors wanted clean BTC, they refused to pay extra to get them, arguing that all coins are created equal in the Bitcoin ecosystem.

Due to the above and the pressure from the crypto community, Marathon later decided to stop its Bitcoin transaction censorship.

The Marathon Bitcoin Censorship Controversy Is a Good Lesson for the Crypto Community

While Marathon went against the core principles of crypto with its censorship-related actions that sparked quite some controversy within the community, the whole story provides a good lesson for the industry.

First, despite the company's efforts, it couldn't stop non-compliant transactions from getting processed by other miners (even Marathon managed to include some in their own clean blocks).

For that reason, the whole event offers a good case study that showcases how powerful Bitcoin's censorship resistance is.

Furthermore, while many have attacked the company (some traders even started shorting its shares as revenge) for what it did, Marathon listened to the community and stopped the censorship to fulfill their demands.

While this doesn't fully restore Marathon's reputation, it certainly improves its trust with crypto enthusiasts.

Humans make mistakes all the time. Marathon quickly realized that its clean Bitcoin project was a bad idea, quickly backtracked on the decision, and restored the original, non-modified BTC client to mine the cryptocurrency without transaction filtering.

Hopefully, Marathon and other businesses in the industry have learned from the company's mistakes to avoid creating similar scenarios in the future.

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