Some questions about transaction fees

[jerye]

I've been reading about transaction fees. I get that it is optional and that if you want transactions to process quickly you should include a fee. The Bitcoin-qt client lets you know if you need to send a fee. Also I understand that miners get that fee which they are free to keep. Basically my question is: if I am a miner (currently mining with cgminer on slush's pool), how do I get to be one that processes transactions and get fees? Is it possible to just be a transaction miner that processes lots of transactions instead of trying to mine blocks? Is that even possible?

Recently coinbase has had some transactions stuffed up so people are not getting confirmations. I've read that coinbase paid a miner a fee to mine those problematic blocks (https://bitcointalk.org/index.php?topic=143715.0). Can one specify which blocks to mine?

To put it simply, can I instruct a mining software to mine a specific block in order to process transactions? and how do I include a transaction in a block (which I've read some posts mentioning miners can include transactions in a block)? Is it some sort of automatic sorting process where transactions are sent out to random people currently mining?

Might be misunderstanding some terms here.

Thanks for any clarification.

[Atruk]

Is it possible to just be a transaction miner that processes lots of transactions instead of trying to mine blocks?

Not really. Processing transactions and mining blocks are pretty much the same thing, or at least you can't process transactions without mining blocks.

Every pool handles fees differently. Some pools keep the fees and split the entire block reward as a way support the pool others split the fees and reward but take out a higher percentage of the pot (subsidy+tx fees) to support the pool.

[DannyHamilton]

When you are mining blocks, what you are doing is processing transactions.  If you are mining in a pool, then the pool operator is the one who gets to decide which transactions your are processing.  I suppose you could contact the operator and ask them to include particular transactions.  If you are solo mining, then I believe there are programs available that will allow you to control which transactions you are working on.  As for the fees, I'm not sure how slush's pool works.  In some pools, the pool operator chooses to share the fees along with the block subsidy with the miners.  In other pools the operator has chosen to only share the subsidy and keep all the fees for themselves.

[jerye]

When you are mining blocks, what youa re doing is processing transactions.

Clears things a bit more. Thanks! . I was under the impression that mining blocks = discovering new bitcoins from that finite pool of bitcoins.

[davos]

Bitcoins aren't really discovered. The minting is a 'reward' for miners to encourage them to process transactions and maintain/build the network

[sleepyeyes2k2]

This is a total newbie question, I know, but is there a good reason why no site seems to exist where I can safely plug in my credit card, pay one nominal fee, and receive BTC in return?  I use BitInstant almost exclusively, although I am set up to use Mt. Gox in conjunction with Dwolla, but I've never understood why that third party had to be involved. 

It may seem off topic, but I'm getting at the transaction fees thing from the end user perspective.  With BitInstant I pay the 4% plus the $3.95 ZipZap fee. 

[DannyHamilton]

When you "mine a block" what you are doing is searching for a SHA-256 of some data hash that is lower than a target value.  What is the data that is being hashed is the header of the block.  The header of the block contains the merkle root of the list of transactions in the block.  If you change which transactions are included in the block, then it changes the merkle root, and therefore it changes the hash.  This means that once someone successfully finds a SHA-256 hash with a low enough value and broadcasts the results it becomes difficult for anyone else to change the list of confirmed transactions associated with the block (since doing so would change the merkle root and make the published hash invalid).

The bitcoin protocol is designed to reward a miner (or mining pool) for doing this work.  Every block is allowed to include exactly one transaction that doesn't have any inputs and that has outputs the sum of which is less than or equal to the protocol defined block subsidy plus all the transaction fees of the transactions that the miner (or mining pool) chooses to include in the block.  The subsidy doesn't come from a finite pool. It doesn't come from anywhere. It simply comes into existence from the fact that it is included in the output of a transaction that doesn't have any inputs.

The protocol that all miners and all nodes run has a subsidy limit coded in.  Each and every miner and node verify that the total of the block reward is low enough.  If it isn't then they all just ignore the block and refuse to relay it.  This way a miner can't try and take a larger reward than allowed.  The block reward was defined at 50 BTC in the beginning, and the protocol cuts that allowed subsidy in half every 210,000 blocks.

If you do the math:

(210,000 x 50) + (210,000 x 25) + (210,000 x 12.5) + .  . .

you'll find that the total when the block reward gets cut in half from 0.00000001 BTC is just a bit less than 21,000,000 BTC.  This is why there is a 21,000,000 limit.  It isn't because of some pool of pre-existing 21,000,000 that is being drawn upon.

Since bitcoin currently has a hard coded limit of that prevents it from representing amounts less than 0.00000001 BTC, the subsidy becomes 0 BTC when 0.00000001 is cut in half.

[DannyHamilton]

This is a total newbie question, I know, but is there a good reason why no site seems to exist where I can safely plug in my credit card, pay one nominal fee, and receive BTC in return?  I use BitInstant almost exclusively, although I am set up to use Mt. Gox in conjunction with Dwolla, but I've never understood why that third party had to be involved.  

It may seem off topic, but I'm getting at the transaction fees thing from the end user perspective.  With BitInstant I pay the 4% plus the $3.95 ZipZap fee.  

The problem is in the nature of credit cards.  You can call up your credit card company and dispute the charges and they will issue a chargeback to the merchant.  There is however no way for the merchant to do the same with the bitcoins that they have already sent you. This means that the merchant is out both the bitcoins and the payment.  Far too many scammers and thieves know about this and take advantage of it.  Anyone who tries to accept credit cards is quickly run out of business from loosing to much money to fraud.

Depending on where you are located there are other ways to get your money in and out of other currency exchanges.  There is even an exchange that will pay you a fee for using their exchange if you are not in a hurry to get your bitcoin.  You can also look for locals to exchange with directly.

The fee that you are paying with BitInstant isn't the bitcoin transaction fee that gets paid to the miners.  It is a separate fee that BitInstant is charging for the convenience of using their service, and is kept by them (aside from any spent on the cost of running the business).

This video walks through the process of getting money into the bitfloor exchange without paying any fee.  The video uses a "Market Order" to get the bitcoins immediately for a 0.4% fee, but if you are not in a hurry bitfloor also provides the ability to place a "Limit Order" which pays you a 0.1% bonus for providing liquidity to the market. (Bitfloor's revenue is the difference between the 0.4% that they collect and the 0.1% that they pay).
http://www.youtube.com/watch?v=zSmxbtFQlmg&t=2m30s

The video was created back before Capital One took over the ING Direct checking accounts.  All references to ING or Electric Orange in the video should be understood to be referring to CapitalOne360.

Also, a few days after the video was created, BitFloor began accepting cash deposits at any Bank of America branch with no fee.


EDIT: As of 2013-04-17 BitFloor has ceased all operations.

[sleepyeyes2k2]

That's very cool.  I registered for a bitfloor account, now I'm just waiting on a confirmation email.  Using Bank of America to purchase BTC would be the way to go, I think.  I'm trying to work things out where each month I'm putting a little into BTC investment.