Topic: "Spiraling Transaction Fees Destruction" of bitcoin (Read 8389 times)

I finally had a spare moment to contemplate the variables.

A key factor is the block size. If the block size is unlimited (and bandwidth is an insignificant cost), then unless miners have a monopoly they will accept transactions with fees as low as don't constitute a DoS attack, in order to maximize revenue.

In other words, they would have no pricing power at all (a Tragedy of the Commons) and the system would devolve into a partial-monopoly in order to gain pricing power.

A partial-monopoly in this case is enough % of the network hashrate to delay transactions (by that % of blocks) which do not include a sufficient fee.

If we limit block size, then the system doesn't scale.

If we let the Bitcoin foundation decide when to increase block size, then they control the economic market function, i.e. we've centralized Bitcoin.

Let us assume unlimited block size and partial-monopolies. Thus the transaction fee can always be forced higher in order to generate more revenue for the miners. Thus Bitcoin devolves (as coin rewards diminish) to a system that presents spenders with a choice between include a very high transaction fee or accept an ever increasing delay for confirmation. This will exacerbate as coin rewards diminish and volume of transactions increase.

If we instead assume limited block size, then the Bitcoin foundation will set the transaction fees, not the market.

Bitcoin is a broken design.

Remember that the fees will increase both by amount per transaction and also by increasing the total number of transactions. If enough people use bitcoins, the fees can be low and still support mining by sheer volume. This might require increasing the block size?

Do you really think that transaction fees will increase forever?  Why would the bitcoin way of sending money not be subject to competition just like other things in a free market?  Why would I pay a huge premium to send bitcoin if I can send funds via wire, credit card, or bank for around 3.5%?  Pretty sure the miners will need to be competitive to alternatives way of transferring money. 

I know you are a big proponent of free markets (as I am too), so I am interested on why normal supply/demand theory does not work in this instance? I feel that miners will have to competitively price fees to acceptable alternatives.  I think if they raise them too high, they drive away business.  I think they will price their product at the point which supply/demand will allow the maximum amount of fees to be generated.

No argument from me on that.

If BTC crashes, then less funding for mining (coin rewards worth less), thus difficulty must crash when many miners stop mining, thus network hashrate crashes.

Well I was writing more about the risk when price crashes and the network hashrate crashes to match.

I can't think of how ASICs makes that worse.

And that is why I wrote "or 50+% attack". Drastically downscaling hashrate is very dangerous.

But remember also that the network will reach an equilibrium scaled to the size of the demand as demonstrated by the transaction fees. If transaction fees do not rise to replace the block subsidy, then the inefficient miners will turn off their machines. Mining will be left to the people with the most efficient energy uses and for people willing to mine at a loss for ideological reasons or by companies who profit more from the bitcoin network than they lose by mining to maintain that network.

Thanks for the encouragement. Have you noticed what I realized in the other thread? 

I tried to send 0.079 bitcoins and the required fee was 0.0056 (7%) because of the size of the transactions. It's way too much.

This kind of thing has already happened to 'dust' transactions.  Fees are not normally a percentage of the value of the transaction but in proportion to the size of the transaction.  I also worry about the fees creeping higher and higher until only banks and big companies can use the thing.  I can always sell my stake as the price approaches its value though.  I can buy litecoins or ppcoins.

this is why you have peercoin, solves this exact problem

I wouldn't worry about such issues. Free market will balance everything.

If users are too greedy (low fees), miners delay their transactions.

If some miners are too greedy (forcing higher fees), other miners will take over the work.

If all miners somehow agree to be too greedy, users switch to an alt-coin.

If that alt-coin's miners become inadequate, there is a myriad of other alt-coins already created, there is a choice.

Competition is the best thing since sliced bread.

Arguments of this type can fail to factor in the Tragedy of the Commons or Anticommons. Individual self interests can override the interests of maintaining the shared part.

I haven't yet had time to think deeply about Peter Lambert's posts. I am putting out fires in other threads first. Will be back. Thanks for all the help on this one.

A miner always is a customer and has some coins,
and coins are money.

The miner will always willing to mine to keep
his or her transact. fast.

The miner will mine to protect his or her economy in life.

The miner knows that to protect his or her economy
is to don't do what you described in op.

Remember, a miner is a customer and for his or her best
thus will just keep mining.

@Anony I strongly agree with you. The low transaction fees are one of the main things that first attracted us to bitcoin as traders. Every other market has ridiculous transaction fees (unless you are trading on the floor).

I also fear government involvement in the exchanges. Once they regulate, next comes fees and taxes. Governments shouldn't  be able to touch bitcoin, but they do it by attacking the exchanges located in their countries.

I hope bitcoin stays independent as long as possible, and the technical mining difficulty issue somehow resolves itself. The new ASIC hardware that will be hitting the market over the next 6 months spells lots of trouble.

I don't think that is possible. If some people refuse to mine transactions under 10%, there will be others who include those transactions to get the fees. Having a low fee might make your transaction slower, but as long as you include some fee the transaction will eventually get picked up by somebody. Bitcoins is still open source, you will never have 100% of the miners agree completely.

Already you run into people who say "we miners are getting abused, let's all refuse to include no-fee transactions", and they can modify their software to only include fee-carrying transactions, but there will be other people who just laugh at them and keep putting the free transactions in.

Because the theory is that there is no equilibrium, and that the transaction fees will increase to far beyond what is reasonable, e.g. imagine 10% transaction fees. Spenders don't really have a choice, they can't spend if they don't pay it.

At some level, the spenders will stop spending and consider their Bitcoin to be lost. Transaction fees of 50%? 75%?

I am still trying to catch up on sleep. Once my full mental facilities return, I will try to explore the theory more mathematically if I can.

The theory may be flawed. Let's try to mathematically prove it is incorrect...

Why is your proposal a bad thing? It will just help the market balance supply and demand issues. If fewer people are sending transaction fees, then that is a signal to the miners to slow down. If people want their transactions processed faster they will add more fees. It is a give and take that was built into the structure of bitcoin from the beginning. It is a feature, not a bug.

Theoretically valid, but I think it unlikely that the cumulative fee volume will vary by enough each block to make a part time approach attractive.  The miner also has to be worried about their overhead costs (costs incurred even when not mining), Moors law will gradually make any piece of hardware obsolete so it may be uneconomical to mine in a part time fashion even if one is capturing higher then normal fees on the blocks one tries for.

It is possible that even if part-time mining occurs that the effect may simply be a kind of network wide 'Drinking Bird' effect.  Mining pools basically all wait until fee accumulation reaches some threshold before mining begins en mass.  Different cost structures would lead miners into pools based on their electricity costs, low cost pools would begin mining earlier at a lower reward then higher electricity cost pools which would turn on only as rewards pass their desired threshold, the pool would essentially provide the on/off signal to all it's clients to maximize their efficiency.  The overall effect is that hashing ramps up each block but at a rate proportional to transaction fee accumulation, and then crashes after block completion.  If this ends up forcing more fees from users or not I'm not sure.

http://en.wikipedia.org/wiki/Drinking_bird

For further analysis I would examine the Fee per block history and see what the variance is, dose it look high enough to effect miners incentives, has the variance been growing or shrinking over time so that an extrapolation out to the 2030 time frame what would we expect it to be.