How do miners acquire tips?

[hayek]

When I send a transaction there is the option of sending x BTC along as a tip to miners to get confirmed quicker.

I've read through the white paper and the wiki but I must have missed how this process works. Does the first miner to make the confirmation get the tip? Does it get split among miners? I understand the incentive for it, I just don't understand what the miners do with it.

[DannyHamilton]

When I send a transaction there is the option of sending x BTC along as a tip to miners to get confirmed quicker.

It is generally called a "fee", but I see your point, since it is voluntary and the amount is entirely left up to the sender, it could be considered a "tip" (or perhaps even a "bribe").

I've read through the white paper and the wiki but I must have missed how this process works. Does the first miner to make the confirmation get the tip?

Yes, the first miner (or pool) to successfully include the transaction in a block that is permanently added to the blockchain receives it.

Does it get split among miners? I understand the incentive for it, I just don't understand what the miners do with it.

It is included as part of the block reward in the coinbase transaction of the block.  The block reward consists of the sum of the block subsidy (currently 25 BTC) and all the transaction fees of all the transactions that were included in the block.  If you are solo mining, then you get the full block reward to yourself.  If you are mining in a pool, then it will depend on the rules of the pool.

[hayek]

I see.

So as transactions are recorded in the blocks the fees/tips/bribes (I think of them simply as 'awesome') gets added to the block as part of the tx. So the current return of 25BTC per block is the base reward with all the awesome as a bonus.



In a simple, simple form:
I mine a block I get 25BTC.

If 10 tx are in the block and each had a 1BTC fee that came with them then I actually get 35BTC.




That makes the connection i was missing. So in 2140 when all the BTC are mined there will still be BTC rewards for mining blocks. Those rewards are the fees/tips associated with the confirmations.

[Gabi]

Exactly!

[ymeiner]

Usually The transaction fees are way smaller and the hope is that when bitcoin will catch as a legitimate payment method, the amount of transactions will be big enough to replace the reward so mining will still be profitable for the miners.

Just as an example, latest block's fees where 0.61156 BTC.

[DannyHamilton]

Given the current maximum size (in bytes) that the protocol allows a block to be, and the average size of a transaction (again in bytes), I believe a block can hold about 4,200 transactions.  Each transaction would have to pay a fee of about 0.00595 BTC if you wanted to completely replace the 25 BTC reward with fees.  On the other hand bitcoin is still in its infancy, and it has a lot of growth potential if it is ever going to reach mainstream use.  If bitcoin were to become popular enough for the exchange rate to reach $13,000 per BTC, then fees of 0.00005950 per transaction would provide the same amount of spending power as fees of 0.00595 BTC provide today (assuming minimal loss of spending power due to inflation in the U.S. dollar during that period of time).

So, as you can see, there are several financial forces in play here.  The gradual reduction in block subsidy.  The gradual increase in total transactions. The change in exchange rate between bitcoin and your local currency. The change in transaction fees as expressed in terms of bitcoin. The change in transaction fees as expressed in terms of spending power. The inflation rate of your local currency.  The capital costs that a miner pays to acquire their equipment. The operating costs that a miner pays to run their equipment.

[hayek]

Thanks Danny,

That's an analysis not a lot of people seem to want to make. It always appears as though people analyze from a BTC perspective or a Dollar perspective and they always ignore the relationship between the two.

I read a VC blog where (I believe) he said for BTC to achieve a certain % of adoption - enough to consider it mainstream - a BTC would need to clear $2,000

I dig it

[ymeiner]

Hayek,
I hope you are right but this is a bit of wishful thinking. Of course we mine because we hope for good but I am trying to be very careful about the future keeping my pink filter glasses in the drawer. The future of bitcoin is uncertain. We still aren't sure if governments will legalize (did not say that bitcoin is illegal, it's just that the law never addressed digital currency).

Hoping that the value of the coin will go to the thousands is actually some kind of a double sided sword. If all of us are hording the mined BTC, we are actually hurting the velocity of the coin and by that we hurt the stability of it's incline in value. If people don't trust the coin they will not use it and that means that over time we will be stuck with lots of coins and not a lot of buying power.

In the near future, All I personally care about is to return the investment as soon as possible.

Also a question I have in the same subject. Lets say that bitcoin is becoming very successful and there is a problem to find a place in a block to register the transaction. Can the system decide to shorten the 10 minutes gap between blocks?

[DannyHamilton]

Also a question I have in the same subject. Lets say that bitcoin is becoming very successful and there is a problem to find a place in a block to register the transaction. Can the system decide to shorten the 10 minutes gap between blocks?

Not without a consensus of all users.  If some users want to adjust the difficulty to increase the rate that blocks are added to the blockchain, and others do not want to adjust the difficulty, the blockchain will split into two competing and incompatible currencies each trying to call themselves "bitcoin".

Coins received prior to the split could be spent on both blockchains.  Coins received after the split could only be spent on the blockchain where they were received.  In some circumstances, if someone receives "split" coins on one blockchain, they could potentially steal the same coins on the other blockchain without knowing the private key since the required signature would be the same.

There would be lots of "turbulence".  You might even call it chaos. It is difficult to predict what would result from the chaos.  Perhaps there would end up being two stable coin systems and both would have substantial support and coexist.  Perhaps one blockchain would eventually die off as people chose more and more to use the other.  Perhaps the chaos would damage the faith people have in bitcoin enough for both blockchains to die as people migrate to some other currency entirely.

On the other hand, if such a "forking" change were not made, and the protocol was left the way it is, people (and merchants) who wanted their transactions in the next block would have an incentive to increase the transaction fee they were paying.  Those paying smaller fees would have to wait until a time when there were less transactions so there would be space in the block for them.  If the fees got high enough and the wait long enough, some might choose not to use bitcoin for their transaction.  This would reduce the number of transactions and would therefore allow for the fees to drop.  Eventually an equilibrium would be reached between transaction cost and transaction frequency.

Meanwhile, third party providers would begin to offer solutions that would allow bitcoin based (or backed) transactions that occur outside the blockchain.

Imagine a brand new service provider comes along (We'll call them "Asiv").

Asiv issues a small  3 ⅜ × 2 ⅛ in (85.60 × 53.98 mm) plastic card with a magnetic stripe on the back.  Each card is assigned a unique account number by Asiv.

Asiv contracts with merchants to accept this card for payment on products and services.

When you as an Asiv carrying customer make a purchase at an Asiv accepting merchant, you swipe your card, and sign a receipt.  Asiv keeps track of all the payments made to all the contracted merchants.  Then once a day they make a single payment in bitcoin to the merchant covering the total of all the purchases made in the past 24 hours.  Therefore a merchant might have 100 Asiv purchases per day, but only receive a single bitcoin payment on the blockchain to settle the account at the end of the day.

The merchant can accept payment from the customers without having to wait for bitcoin confirmations, and the customers don't have to make a separate bitcoin transaction fee payment on every transaction.  There is just one transaction fee made by Asiv on their single payment to the merchant (or perhaps even a single transaction that pays multiple merchants all at once).  Asiv covers this cost with the fees that the merchant agrees to pay to Asiv in the contract they sign.

A customer can use their Asiv card and make purchases all month long.  Then at the end of the month, they make a single Bitcoin payment to Asiv paying only a single transaction fee.

[ymeiner]

Sounds interesting but what if all major mining pools agree to the change? is it actually technically possible?

I liked the ASIV Idea. It also made me think that this could be a powerful tool for transferring money in a back end system. Think about a company called Cardmasters   that gives you a check card solution that transfers immediately (in the speed of mining) eliminating the need to wait for the transfer. You are buying a house, you pay in dollars/eu/btc and the seller gets payed in dollars/eu/... ass soon as the bitcoin transfer confirms. the seller or the buyer can actually not even be aware that there was a bitcoin transfer but the money clears faster. The companey itself can chose when to do the conversion and make the profit by waiting for the right time.

This can also connect two different CC companeys: buyer->cardmasters->btc->asiv->seller

 

[DannyHamilton]

Sounds interesting but what if all major mining pools agree to the change? is it actually technically possible?

It is technically possible, but if you don't want to split the blockchain, you need a consensus of users (not just miners).

If a miner tries to broadcast an invalid block, all peers (even the ones that are not miners) will refuse to add it to their blockchain or relay it to their peers.  Since a block solved to a lower difficulty would be considered invalid under the current protocol, those blocks would not be accepted by any miners or peers on the "original" bitcoin.  Instead, the miners and pools (even if it is just one miner) that continue with the original difficulty calculation, resulting in an average of 10 minutes per block, will have their blocks added to all the blockchains of all the peers that are continuing with the original difficulty calculation.