Why Transaction Fees in the First Place?

[butka]

I learned recently that the transaction fees in Bitcoin's early days used to be optional. They were considered something like a tip to the miners for their service. And people could have their transactions sent without them.

In addition, if I understand correctly, there used to be a rule that the older unspent transaction outputs were given some kind of priority over the newer ones.

Anyone cares to explain why and when transaction fees become mandatory. (Or are they mandatory? As far as I can tell, there is no way I could set 0 tnx fee in electrum.)

Was there a need to introduce a criterion by which miners could sort transactions in some meaningful way (that is, from highest fees to lowest)? Because miners seem to have total freedom when it comes to including transactions in the blocks they mine.

Was this really necessary, perhaps to prevent congestion? Other than that I see no reason to increase the mining reward, after all 12.5BTC seems to be high enough a reward.

[achow101]

Anyone cares to explain why and when transaction fees become mandatory. (Or are they mandatory? As far as I can tell, there is no way I could set 0 tnx fee in electrum.)

Transaction fees are not mandatory, you can create a 0 fee transaction that is consensus valid. However such low fee transactions are considered non standard and thus will not be relayed by most nodes. Because of this standardness rule, most wallets make it impossible to set 0 fee.

Was there a need to introduce a criterion by which miners could sort transactions in some meaningful way (that is, from highest fees to lowest)? Because miners seem to have total freedom when it comes to including transactions in the blocks they mine.

Was this really necessary, perhaps to prevent congestion?

AFAICT, the idea to migrate to fee based selection came up very early on in order to prepare for post-block subsidy world. Since the block subsidy halves every 4 years on average, it will reach negligible amounts fairly soon as it is an exponential decay. In order to make up for the decreased block subsidy, we need transaction fees. The transition from primarily priority to primarily transaction fees needs to happen at some point, and probably sooner is better than later.

Other than that I see no reason to increase the mining reward, after all 12.5BTC seems to be high enough a reward.

It seems how now, but in the fast when all of this happened, 12.5 BTC was in fact a fairly small amount. First of all, the block reward was previously 25 BTC, and before that, 50 BTC. At those times, the block reward was worth a lot less in USD than the block reward is now in USD. It's USD value is so low that it was actually not profitable to be a miner for quite some time or you need to have special conditions (special electric prices, etc.) in order to be profitable.

[butka]

In order to make up for the decreased block subsidy, we need transaction fees. The transition from primarily priority to primarily transaction fees needs to happen at some point, and probably sooner is better than later.

It seems how now, but in the fast when all of this happened, 12.5 BTC was in fact a fairly small amount. First of all, the block reward was previously 25 BTC, and before that, 50 BTC. At those times, the block reward was worth a lot less in USD than the block reward is now in USD. It's USD value is so low that it was actually not profitable to be a miner for quite some time or you need to have special conditions (special electric prices, etc.) in order to be profitable.

Thanks, now that I read your reply, it's very logical and it makes a lot of sense.

[amishmanish]

Was this really necessary, perhaps to prevent congestion? Other than that I see no reason to increase the mining reward, after all 12.5BTC seems to be high enough a reward.

Another important reason I think is that zero fee transactions would make it very easy for someone to clog the mempool by simply generating a huge number of transactions. Having a fees discourages this as every transaction will cost something.

Apart from this, of course the fee-based economy is one thing on everyone's mind. The emission rate has to go to near-zero sometime. At that time, fees is the only reason that miners will include transactions. How this fee economy shapes up could be an area of research by itself.
None of the chains except BTC and ETH hve shown practically what such a situation would be like.

[squatter]

I learned recently that the transaction fees in Bitcoin's early days used to be optional. They were considered something like a tip to the miners for their service. And people could have their transactions sent without them.

In addition, if I understand correctly, there used to be a rule that the older unspent transaction outputs were given some kind of priority over the newer ones.

Anyone cares to explain why and when transaction fees become mandatory. (Or are they mandatory? As far as I can tell, there is no way I could set 0 tnx fee in electrum.)

There is natural fee pressure as transaction volume (demand) outpaces available block space (supply). In the early days, that demand didn't exist. "Priority" was just node policy that all miners eventually abandoned because they could collect fees with that block space instead.

One of the reasons the block size (or weight) limit exists is to encourage the replacement of the block subsidy with fees. As the block subsidy gets halved and halved, fees need to replace them -- at least to an extent that deters a downward spiral in hash rate. Eventually, fees will be the only revenue source for miners.

Was there a need to introduce a criterion by which miners could sort transactions in some meaningful way (that is, from highest fees to lowest)? Because miners seem to have total freedom when it comes to including transactions in the blocks they mine.

Was this really necessary, perhaps to prevent congestion? Other than that I see no reason to increase the mining reward, after all 12.5BTC seems to be high enough a reward.

They do have total freedom in that sense. That's really their only power. They are free to mine zero transactions beyond the coinbase transaction. But they are rationally incentivized to collect as much fee revenue as possible.

And what does "high enough a reward" mean in the context of skyrocketing mining difficulty? Mining is an arms race.

[butka]

They do have total freedom in that sense. That's really their only power. They are free to mine zero transactions beyond the coinbase transaction. But they are rationally incentivized to collect as much fee revenue as possible.

Speaking of the collected transaction fees, I was wondering what the average collected transactions fees per block are. Is there a website where one can check this? It would be interesting to track this parameter over time.

[bob123]

Speaking of the collected transaction fees, I was wondering what the average collected transactions fees per block are. Is there a website where one can check this? It would be interesting to track this parameter over time.

You can enter the hash of a block into an block explorer (e.g. https://www.blocktrail.com/BTC/block/00000000000000000048056e7e1ac60610b57d67d39962ee111c39d67903eed3).
You will see the first transaction having the description Newly minted coins and contains 13.44037051 BTC.
Those BTC are made up of the mining reward (12.5 BTC) and the collected fees (0.94037051 BTC), visible if you click on the transaction (e.g. https://www.blocktrail.com/BTC/tx/bb4a2e8a2b575a3fee69d9e9ca360c228773195eedad4be234c699e89308ba16).

[butka]

You will see the first transaction having the description Newly minted coins and contains 13.44037051 BTC.
Those BTC are made up of the mining reward (12.5 BTC) and the collected fees (0.94037051 BTC), visible if you click on the transaction

Thank you for the hint. I checked the last 10 blocks or so, and almost all of them were above 13 BTC, some above 13.5. Half a bitcoin or more on top of the block reward is not bad at all. If the price of bitcoin indeed goes up, it is not so difficult to see how the entire network could run just on transaction fees, despite the projected halving of the block reward.

[Anti-Cen]

Transaction fees are not mandatory, you can create a 0 fee transaction that is consensus valid. However such low fee transactions are considered non standard and thus will not be relayed by most nodes. Because of this standardness rule, most wallets make it impossible to set 0 fee.

So I was making a donation when I sold most of my Bitcoin at $18,000 to these miners was I when I stumped up $44 per transaction
because i felt sorry for them and no one was holding a knife to my throat.

As the forum moderator you are talking FUD and it's as plain as the nose on your face.

[Anti-Cen]

Decentralized mean user can all share the load, fees are not necessary so at the very best Bitcoin is semi-decentralized
and that's without the on going changes with the Lightning Network and ignoring the mining pools which is a result of
PoW and mining coins in the first place.

Bitcoin solved one problem and created ten more in it's place.

[Stedsm]

Miners burn a whole lot of energy and it's this time that's Bitcoin is making a big favor to them by adding big numbers to the charts once again (not saying that mining was not profitable before, but it has gone to a whole new level of competing for the blocks as well as money). I believe that if we stop paying fees to them [who basically should be considered as mediators without whom the network's use will go idle if they stop doing it], Bitcoins will not hold such high values. One of the major reasons why Bitcoin is at such high prices even based on speculation ONLY, is this - consumption of a lot of electricity to get those blocks on the network. Once Bitcoin crosses 21M mark, I don't think miners will be left anything but to be paid through fees only. Else, we'll need to opt for alternatives - but hey, even those alternatives will need you to pay some amounts as you're being served by them.

[Xynerise]

. If the price of bitcoin indeed goes up, it is not so difficult to see how the entire network could run just on transaction fees, despite the projected halving of the block reward.

Fun fact: around Christmas of last year block transaction fees were higher than the block reward which suggests  that the network can be secured on transaction fees alone as Greg Maxwell noted

[ranochigo]

So I was making a donation when I sold most of my Bitcoin at $18,000 to these miners was I when I stumped up $44 per transaction
because i felt sorry for them and no one was holding a knife to my throat.

As the forum moderator you are talking FUD and it's as plain as the nose on your face.

What is FUD about his post? Hmm its a free market and everyone is free to choose how much to pay and which to accept. Don't use Bitcoin if you want to deprive others of their choice.

Decentralized mean user can all share the load, fees are not necessary so at the very best Bitcoin is semi-decentralized
and that's without the on going changes with the Lightning Network and ignoring the mining pools which is a result of
PoW and mining coins in the first place.

Bitcoin solved one problem and created ten more in it's place.

I think your understanding is fundementally wrong. Decentralised means that there is no central authority that governs Bitcoin. It does not mean everyone should pay the same fee. I don't want to pay the same as someone sending a transaction that is bloated.

You seem to be trying to find faults (without proposing actual viable alternatives) to the problems. If you really don't like the concept, create a new crypto or payment system and we will see if your currency is flawless.

[Anti-Cen]

I believe that if we stop paying fees to them [who basically should be considered as mediators without whom the network's use will go idle if they stop doing it]

But "mediators" would imply trust and we all know that Bitcoin is trustless right and I don't mind paying $0.10 per meg like we get with mobile
data but that's about all.

Bitcoin is so over priced that it's priced in bytes, not gigabytes like we buy today and if other coins can maintain the network
for $0.001 per transaction then that's the going rate, compete or be replaced.

[Anti-Cen]

I think your understanding is fundementally wrong. Decentralised means that there is no central authority that governs Bitcoin.

No my understanding is perfectly fine and having 90% of the 20,000 miners being controlled by the ten top
mining pools is not decentralized at all and that leaving the Lightning Network debate aside.
https://blockchain.info/pools

Market forces did not work when it came to Tx fees as they hit $55 per transaction with these 20,000 miners
so obviously it's nothing more than a monopoly.

One million wallets all helping to maintain the network "Free of charge" is what you call decentralized, never mind
what we have here but the other big mistake is you need to separate the coin from the network.

You seem to be trying to find faults (without proposing actual viable alternatives)

EVO/IOTA/Ripple/RailHash/DAC

Take your pick and they are all faster and cheaper, all with there own faults so maybe you would like to find fault now !

[HeRetiK]

Market forces did not work when it came to Tx fees as they hit $55 per transaction with these 20,000 miners
so obviously it's nothing more than a monopoly.

I'm not sure what you're trying to say here, but mining has nothing to with how much transaction fees are calculated.

There's limited space on the blockchain. As such, if the demand (ie. transaction count) exceeds the supply (ie. available space per block) mining fees go up, as people try to get on top of the priority list. That's how a market works. That's all there is to it.

EVO/IOTA/Ripple/RailHash/DAC

PayPal and VISA, you forgot about those two.

[DannyHamilton]

So I was making a donation when I sold most of my Bitcoin at $18,000 to these miners was I

Correct.  That's how Bitcoin is designed to work.  You choose the transaction fee for your transactions (or you choose software and let that software choose the fee for you). Then miners choose whether or not they want to confirm your transaction at that fee.  You can increase the incentive by increasing the fee.

Decentralized mean user can all share the load, fees are not necessary

That is NOT what decentralized means.

But "mediators" would imply trust and we all know that Bitcoin is trustless right

Correct.  They are not mediators.  They simply create a record of history and provide a proof-of-work.

and I don't mind paying $0.10 per meg like we get with mobile data but that's about all.

Different use case, different value, different price.

Bitcoin is so over priced valuable that it's priced in bytes, not gigabytes

FTFY.

if other coins can maintain the network for $0.001 per transaction then that's the going rate, compete or be replaced.

Cheaper is not always better.  Higher value and higher demand result in higher price.

No my understanding is perfectly fine and having 90% of the 20,000 miners being controlled by the ten top
mining pools

The pools do not control the miners.  Miners can leave the pool at any time.

is not decentralized at all

Actually, it is.

and that leaving the Lightning Network debate aside.

Are you actually capable of that?

Market forces did not work when it came to Tx fees as they hit $55 per transaction

Market forces worked perfectly.  Demand was high, people voluntarily paid higher prices.  Higher prices resulted in reduced demand, and the prices came back down.  Those that were willing to wait saved money.  Those that were not willing to wait paid more for the privilege of fast confirmation.

so obviously it's nothing more than a monopoly.

I don't think that word means what you seem to think it means.

EVO/IOTA/Ripple/RailHash/DAC

Take your pick

No thanks.

[Stedsm]

Miners burn a whole lot of energy and it's this time that's Bitcoin is making a big favor to them by adding big numbers to the charts once again (not saying that mining was not profitable before, but it has gone to a whole new level of competing for the blocks as well as money). I believe that if we stop paying fees to them [who basically should be considered as mediators without whom the network's use will go idle if they stop doing it], Bitcoins will not hold such high values. One of the major reasons why Bitcoin is at such high prices even based on speculation ONLY, is this - consumption of a lot of electricity to get those blocks on the network. Once Bitcoin crosses 21M mark, I don't think miners will be left anything but to be paid through fees only. Else, we'll need to opt for alternatives - but hey, even those alternatives will need you to pay some amounts as you're being served by them.

That doesn't mean we should pay high fees (above $0.01 for me) for normal transaction (1 input and 2 outputs) to miner.

If bitcoin transaction fee is low and the community actively encourage merchants to accept Bitcoin, that would make bitcoin price rise and increase total transaction/second which would benefits both user and miner (since Bitcoin price is higher and they collect more fees because there are more transaction).

I don't know if I ever said that we need to pay higher fees for our transactions to go through. What I tried to convey here is that - fees are an important part here and should be paid to the miners to keep up with the job they're doing to run the network.

In bold - This is what even I believe that centralized miners should remain in their limits while charging the fees because these fees are one of the major reasons why bitcoin is being used for. Else, there are Visa and PayPal already killing people with their extreme fees per transaction.