Why do people pay fees? Why are free transactions accepted by miners?

[misterbigg]

Why do people include transaction fees, if miners accept free transactions?

Why do miners include free transactions in blocks? It seems there is no incentive to do so.

Furthermore, since blocks are not full, why is there any incentive to pay fees at all?

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[Gavin Andresen]

Why do people include transaction fees?

Assuming the miner hasn't tweaked the reference code's parameters, the rules are:

Create at most a 250,000 byte block:
+ 27 kilobytes of space is set aside for the highest-priority transactions, regardless of fee.
+ 223k of space left for fee-paying transactions.

Transactions with a small number of inputs/outputs, transferring a large number of bitcoins, that weren't recently received are the highest priority and are included first.

If you send a low-priority transaction without a fee you can end up waiting a very long time for it to get confirmed (and it may never be confirmed).

Why do miners include free transactions?

Either they're too lazy to change the default rules, or they believe that allowing free, high-priority transactions will help make Bitcoin more popular and will, therefore, increase the value of their coins.

Why is there any incentive to pay fees at all?

You'll notice that pretty much every block nowadays is bigger than 27k, so there IS competition for that free space. But if you've got 10 bitcoins that have been sitting in your wallet for a week or three, you'll still have no problem spending them without a fee (they'll have a much higher priority than somebody playing SatoshiDice 100 times a day).

[farlack]

Paying a few cents to get my transaction faster is worthwhile. that's why I pay fees 

[sublime5447]

I pay the fee for my customers. Who cares .0005 is nothing (right now). If they by a coin to sign up for a web site- nzbsrus I just give them them extra .005. Again who cares?  Fee on one coin .0135 usd I think I can live with that.

[misterbigg]

Create at most a 250,000 byte block:

I thought that the maximum block size was one megabyte? It's about 250KB?

+ 27 kilobytes of space is set aside for the highest-priority transactions, regardless of fee.

Shouldn't the default mining implementation fill the block with transactions paying the highest fee per kilobyte: sort all pending transactions by fee per kilobyte, descending, and take as many from the top that fit?

Isn't this the logical end-game for miners to maximize their return on block rewards? If mining clients don't already do this, won't they tend towards this model?

Transactions with a small number of inputs/outputs, transferring a large number of bitcoins, that weren't recently received are the highest priority and are included first.

How does prioritizing transactions based on the number of inputs and outputs or coin age help miners? It seems it's only this way because it's how the original code was written but won't that change as soon as miner's decide they want to maximize the return on block rewards?

I ask these questions because they are related to the problem of maximum block size.

[grue]

I thought that the maximum block size was one megabyte? It's about 250KB?

it can be bigger, but fees end up exponentially bigger as the blocks size increases.

Shouldn't the default mining implementation fill the block with transactions paying the highest fee per kilobyte: sort all pending transactions by fee per kilobyte, descending, and take as many from the top that fit?

Isn't this the logical end-game for miners to maximize their return on block rewards? If mining clients don't already do this, won't they tend towards this model?

it's trivial to include another transaction, and there's less of a chance that a transaction that has been sitting around for a long time is spammy, so old transactions also get high priority.

[misterbigg]

fees end up exponentially bigger as the blocks size increases.

I don't follow. How does the fee per transaction increase with increasing block size? Sure, the total fees would increase (since there are more transactions) but how is this an exponential increase and how does the per-transaction fee go up?

it's trivial to include another transaction

Not when the available space in the block is smaller than the total size of all pending transactions.

there's less of a chance that a transaction that has been sitting around for a long time is spammy, so old transactions also get high priority.

Actually the best measure of whether or not a transaction is spammy would be the fees per kilobyte. But you didn't answer the question. Why would a miner NOT use the optimum strategy of including transactions with the highest fees per kilobyte (i.e. include in a block the subset of pending transactions which maximizes fees)? Excluding the obvious answer that they didn't bother to change the default implementation.

[solex]

misterbigg, we learned (in the max block size thread) that Gavin has introduced a temporary 250kb limit to see how the miners, and the network, behave when bumping against a block size limit in order to acquire real-world metrics. These metrics can be used when deciding how to overcome the 1MB limit by replacing it with an algorithm.

... Right now, miners that use the reference implementation and don't change any settings will produce blocks no larger than 250Kbytes big.

So we're finding out right now how miners collectively react to bumping up against a block size limit. I'd like to let that experiment run for at least a few months before arguing that we do or do not need to eliminate the 1MB hard limit, and start arguing about what the default rules for acceptable block size should be.

I think it is encouraging that miners are happy to use default settings, and not ignore zero-fee transactions. This helps bitcoin gain traction by appealing to new users who might not want to pay transaction fees initially, but may well pay for later transactions after seeing how good bitcoin is as a currency.

[zvs]

i pay 0.00051, to put it ahead of all those 0.0005 ...  wouldnt want to have to wait an extra block or two  


if you pay nothing, and it's not a priority transaction and you aren't mining it yourself, there's a good chance it won't go through.

if you pay 0.0001 and have modified your source to accept that, then other nodes should relay it, you'd just have to wait until a run of blocks to clear out the transaction queue since yours would be dead last (though at the moment that probably wouldnt take very long)

[Mike Hearn]

There's another reason Gavin didn't touch on. Anyone who uses software based on bitcoinj does not have a proper fee solver or implementation of the rules, because I didn't write one yet. Always attaching the minimum fee regardless of need is a common workaround.

[jgarzik]

Miners include free transactions because there is an incentive to encourage bitcoin use in general.  The fees alone do not yet support the network, so even fee-paying transactions are below-cost.

[grau]

Miners include free transactions because there is an incentive to encourage bitcoin use in general.  The fees alone do not yet support the network, so even fee-paying transactions are below-cost.

Considering that the network pays a bounty of 25 BTC for a block containing 300 tx nowadays, that is a cost of 0.08 BTC per transaction.
The typical fee is a magnitude below that, no wonder miner does not currently care much of the fee.

[Boussac]

Why are free transactions accepted by miners ?
The value of bitcoins is backed by the remarkable ability of the bitcoin network to process internet transactions.
By definition, a transaction is deemed "processed" when the receiver is in a position to spend the bitcoins sent to him.
If miners did not include transactions (based on zero or insufficient fees), the value of their bitcoin reward would drop as a result of transactions taking forever to confirm.
If and when the network gets clogged with zillions of transactions while the block reward has shrunk over time, fees may become a stronger requirement.

[Peter Todd]

Considering that the network pays a bounty of 25 BTC for a block containing 300 tx nowadays, that is a cost of 0.08 BTC per transaction.
The typical fee is a magnitude below that, no wonder miner does not currently care much of the fee.

This.

Like it or not, we have to pay for network security somehow. People constantly complain about transactions fees but the real cost is inflation; $120k USD worth of it every day. Only because of the huge number of people adopting Bitcoin and investing in it have we been able to ignore the inflationary cost of mining.