Diminishing Returns Question

[techariah]

I can really overcomplicate this question by saying electricity costs are increasing and so on, but I'll make this real simple. If the system requires nodes doing crypto work to verify the coin and transaction and all that, and as a reward for contributing to this hive, the owner gets bitcoins, what happens when you reach the final bitcoin? So as the returns on investment diminish, why do people keep doing it? And if they all decide to stop, what happens to the value of a currency that depends on the hive in order to make transactions possible?

Thanks.

[DigiZ]

because you need it to transfer money without bank fees

[wormbog]

Miners get the transaction fees in addition to block rewards. Presumably once block rewards have gone away the transaction fees will be high enough to keep people mining.

[techariah]

Miners get the transaction fees in addition to block rewards. Presumably once block rewards have gone away the transaction fees will be high enough to keep people mining.

Thanks, I actually just found that part. I'm still not convinced of the success of that model in the long run and "presumably" isn't very reassuring.

[Peter Lambert]

I can really overcomplicate this question by saying electricity costs are increasing and so on, but I'll make this real simple. If the system requires nodes doing crypto work to verify the coin and transaction and all that, and as a reward for contributing to this hive, the owner gets bitcoins, what happens when you reach the final bitcoin? So as the returns on investment diminish, why do people keep doing it? And if they all decide to stop, what happens to the value of a currency that depends on the hive in order to make transactions possible?

Thanks.

Check out the latest block at http://blockexplorer.com/block/00000000000000f8f03160bad84c04d7fe33a76251dd43b4c9d5f5edcab819db, the first transaction listed is always the block reward. This block got 1.1% of their reward from transaction fees. As time goes on, the block subsidy will go down, currently it is 25 btc and it is halved about every 4 years. As the block subsidy goes down a larger and larger percentage of block rewards will come from the transaction fee portion.

If the block reward is not high enough for mining to be profitable, then the most inefficient miners will drop out and the difficulty will adjust downward, so the most efficient miners will always remain profitable.

[DannyHamilton]

Miners get the transaction fees in addition to block rewards. Presumably once block rewards have gone away the transaction fees will be high enough to keep people mining.

Yes, the block subsidy slowly gets smaller and smaller (being cut in half approximately every 4 years).  Meanwhile, the value of the transaction fees slowly increases as bitcoin gains popularity.  The number of transactions available for each block increases.  The percentage of people voluntarily paying a transaction fee for fast inclusion in a block increases. As such, eventually the value of the transaction fees will be a larger portion of the block reward than the block subsidy.

[techariah]

So how does the transaction fee increase? Who enforces a fee for it, and doesn't that have an affect on the perceived value? In a way the node is essentially charging you a surcharge for the transaction you want (right?) so he can be profitable whereas now he is profitable because he gets awarded newly created coins.

[otter]

Transaction fees.  They're low now because we have block rewards.  In the future though it will be really important to offer a decent fee if you want a transaction processed fast.

[dblink]

So how does the transaction fee increase? Who enforces a fee for it, and doesn't that have an affect on the perceived value? In a way the node is essentially charging you a surcharge for the transaction you want (right?) so he can be profitable whereas now he is profitable because he gets awarded newly created coins.

No one enforces a transaction fee, but a miner/pool doesn't have to include transactions without a fee in their blocks. So if you want faster confirmation, you include a higher fee. That way you are put in the first block possible.

[techariah]

So how does the transaction fee increase? Who enforces a fee for it, and doesn't that have an affect on the perceived value? In a way the node is essentially charging you a surcharge for the transaction you want (right?) so he can be profitable whereas now he is profitable because he gets awarded newly created coins.

No one enforces a transaction fee, but a miner/pool doesn't have to include transactions without a fee in their blocks. So if you want faster confirmation, you include a higher fee. That way you are put in the first block possible.

So I as the person wanting to do a transaction offer up a reward along with my transaction request in hopes someone grabs onto it to make it happen for me? It still a surcharge, I just get to define it and see if someone is willing to accept it?

[techariah]

So if miners can set a minimum fee to do a transaction then can't they ultimately lock the system up by charging extremely high fees? I know that would require cooperation among all of them to do it, but what stops that? Anything? I mean can't you ultimately end up with such high fees that the bulk of wealth ends up in their hands?

[DannyHamilton]

So how does the transaction fee increase? Who enforces a fee for it, and doesn't that have an affect on the perceived value? In a way the node is essentially charging you a surcharge for the transaction you want (right?) so he can be profitable whereas now he is profitable because he gets awarded newly created coins.

No one enforces a transaction fee, but a miner/pool doesn't have to include transactions without a fee in their blocks. So if you want faster confirmation, you include a higher fee. That way you are put in the first block possible.

So I as the person wanting to do a transaction offer up a reward along with my transaction request in hopes someone grabs onto it to make it happen for me? It still a surcharge, I just get to define it and see if someone is willing to accept it?

Exactly.

Bitcoin is a voluntary system.  It is not "required" that you include a fee.  You are welcome to attempt to broadcast a transaction with no fee (some wallets prevent this under certain circumstances, others will allow you to do so regardless of the circumstances).

However, peers are not "required" to relay your transaction.  They are welcome to refuse to relay it for any reason they like.  Most peers will be running the "reference client" called Bitcoin-Qt.  In that case they will relay most all transactions, but if the transaction appears "spammy" or like it could potentially be part of a denial-of-service attack on the network, then they may refuse to relay the transaction if it doesn't include a sufficient fee.

Additionally, miners are not "required" to include your transaction in a block.  They are welcome to refuse to include it if they feel they can increase their profits by including some other transaction that has a fee instead of your "free" transaction.

This all being said, most all "free" transactions where all outputs are greater than 0.01 BTC and the total size of the transaction is less than 10 kilobytes, will be relayed and will eventually be included in a block by a miner.  Miners see a long term benefit to maintaining a system that is cheap and easy to use.  Eventually as the block subsidy shrinks, miners will likely become more stingy about which free transaction (if any) they will include in their blocks.

Meanwhile, you may find that large retailers subsidize mining organizations to ensure that transactions paid to them are quickly confirmed.  Perhaps Walmart will offer a few mining pools a contract that pays the miner a subsidy for every transaction that is submitted by them and confirmed.  That way the consumer has the fee hidden from them in the price of the products they buy.

[DannyHamilton]

So if miners can set a minimum fee to do a transaction then can't they ultimately lock the system up by charging extremely high fees? I know that would require cooperation among all of them to do it, but what stops that? Anything? I mean can't you ultimately end up with such high fees that the bulk of wealth ends up in their hands?

Yes. But it would take a lot of cooperation.  If even one miner sees a financial benefit to confirming a bunch of transactions in the unused space in his block, the whole cabal falls apart rather quickly.

Nothing stops you and I (or retailers, or anyone else) from starting up our own miners (or pools) to force lower fee transactions to be confirmed.

[techariah]

Meanwhile, you may find that large retailers subsidize mining organizations to ensure that transactions paid to them are quickly confirmed.  Perhaps Walmart will offer a few mining pools a contract that pays the miner a subsidy for every transaction that is submitted by them and confirmed.  That way the consumer has the fee hidden from them in the price of the products they buy.

So if walmart offers a contract to the miners/pool, does that mean you can target who processes your transaction? How would they do that?

Thanks, you answered a lot there (not just in this quote). I was wondering about the retailer angle, and perhaps them either buying a pool outright or starting their own, in which case the could drive the charges down long enough to drive away small miners, and raise charges up after that. But as long as we are ready to fire up the mining community again to drive them right back down I guess that keeps them in check.

This is a pretty cool system, I only watched it a little when it first came out and now one of my partners (IT security firm) is getting real interested in it (we now have two of our hash cracker boxes, running as miners) and has unleashed me to research the buhjeezus out of it. My first take on it was what happens when time runs out on it. That seems thoroughly defeated now. I still have tons more security questions but those will need to go to a different topic.

Thanks for the help, I had heard that you guys don't take criticism and questioning too well, glad to see that isn't the case.

[DannyHamilton]

So if walmart offers a contract to the miners/pool, does that mean you can target who processes your transaction? How would they do that?

There is nothing set up like this yet, but someone could certainly setup a communication channel where they send an indication to a miner as to which transactions are theirs (basically just a list of transaction hashes).  The miner would agree to include those transactions in the next block they mine.  There would need to be stipulations as to how to prioritize the transactions if there were more transactions than fit in a block.

Thanks, you answered a lot there (not just in this quote).

No problem.  If you post additional threads with questions I may not notice them.  Feel free to send me a PM linking to the thread so I can take a look and see if I can answer your questions.

I was wondering about the retailer angle, and perhaps them either buying a pool outright or starting their own, in which case the could drive the charges down long enough to drive away small miners, and raise charges up after that. But as long as we are ready to fire up the mining community again to drive them right back down I guess that keeps them in check.

They don't get to set fees, they only get to choose which transactions they will confirm.  They may choose to only confirm transactions with low fees, but that will leave all the high fee transactions for everyone else.  Doesn't seem like that would drive other miners out of business.  If anything it would increase the profits of all the other miners since all the low fee transactions would already be gone, and lots of high fee transactions would be left for the blocks.

This is a pretty cool system,

I agree.  The more I look into it the more interesting I find it.

I still have tons more security questions but those will need to go to a different topic.

Thanks for the help, I had heard that you guys don't take criticism and questioning too well, glad to see that isn't the case.

Like any community, there will always be some curmudgeons around, but most of the experts are willing to share their knowledge with anyone that has a sincere desire to learn.

Unfounded criticism as well as questioning the ideology tend to get flamed though.

[fruitcommander]

Sheesh, this is really technical stuff, I always wondered where those transaction fees went.

[adamater]

Will there be enough transactions to support miners by them selves after all btc have been mined?

[DannyHamilton]

Sheesh, this is really technical stuff, I always wondered where those transaction fees went.

Non technical answer.

They go to the miners who are doing the work of maintaining the security, reliability, and legitimacy of the blockchain as as such the integrity of the entire bitcoin system.  Seems fair that if they are going to do that voluntarily, we should voluntarily offer a small transaction fee to help compensate them for their efforts.

[DannyHamilton]

Will there be enough transactions to support miners by them selves after all btc have been mined?

130 years from now?  If there aren't then bitcoin will have long since failed, and will have ceased to exist.

If bitcoin can't gain enough popularity to be self-sufficient after 130 years, then it is a failed experiment.

[Peter Lambert]

Sheesh, this is really technical stuff, I always wondered where those transaction fees went.

Actually, that is an easy question to answer: the transaction fees go to whichever miner publishes the block which contains your transaction.