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Author Topic: The future of transaction fees - transaction exchanges  (Read 740 times)
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April 04, 2013, 08:22:42 AM
Last edit: April 04, 2013, 08:33:42 AM by alcibiades

There's three strategies that coin designers can use to keep mining profitable and ensure a robust mining ecosystem:

1) Tax the holders of money by minting new coins
2) Tax the users of money with transaction fees
3) Lower the cost of mining (PPC coin).

For Bitcoin, at first most mining profit comes from minting and later from transaction fees. The Fee Crossover Point is the first time a block is generated where the transaction fees are worth more than the new coins (and it is not a fluke).

I am not a fan of supporting miners through taxing the users of money with transaction fees. A currency becomes more valuable when more people use it and a tax on transactions discourages use. The choice of Nakamoto to rely on transaction fees is part of the reason why Bitcoin has more of a commodity nature than a currency nature. It is a good choice for a tool that is a store of value, but not a good choice for a tool for the transfer of value.

As bitcoin becomes more reliant on fees, the paying of transaction fees will have to become more transparent. Currently, popular wisdom says that you should tip your miners a certain amount, but it is not clear that the tip actually gets you any benefit. However, in the future many miners will refuse to include transactions in blocks that don't pay the fee since that will be the primary source of their income. But not all miners will publish the minimum fee that a transaction must carry to be included in a block and it may vary from miner to miner, so this will be a confusing process for BTC users. And miners may miss out on higher profits by including lower fee transactions at the expense of high fee transactions.

What is needed is a transaction exchange where miners can auction off verification space in new blocks. This creates a transparent price for users for including their transactions in the blockchain. This can be combined with automated infrastructure for purchasing verification credits on the fly so the end user doesn't have to think about them. In exchange, miners are ensured the highest bidders will be in their blocks.

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