The real cost of transactions

[Muis]

Bitcoin transactions seem to have cheap fees, because everybody forgets that the block rewards currently act as subsidy to keep them low. On average, a transaction costs between $30 and $40 if you do take them in account, and thats way higher than most banks charge, and way too high for micro-transactions.

Now suppose that Bitcoin had no block rewards right now (like it will in the future), there can only be two possible outcomes: either that the hash-rate would drop to much lower levels, and the fees would stay the same. Or that the fees would rise to about $40 per transaction, and that the hash-rate would stay the same.

My gut feeling would say that even with a massive drop of hashrate, Bitcoin would still be secure, because the current hashrate seems like overkill to me. But in my previous topic (Alternative initial distribution of coins) various Bitcoin-veterans (like DeathAndTaxes) stated exactly the opposite: that Bitcoin wouldnt be able to survive if miners received just the fees and no additional rewards. So the expert opinion seems to be that the network would be unusable.

The other alternative (higher fees) also seem to make the network unusable, except for high-value transactions, which are a minority.

So if both are true, is it safe to say that block rewards are just a subsidy for Bitcoin's ridiculously high transaction costs?

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[DannyHamilton]

Bitcoin transactions seem to have cheap fees, because everybody forgets that the block rewards currently act as subsidy to keep them low. On average, a transaction costs between $30 and $40 if you do take them in account, and thats way higher than most banks charge, and way too high for micro-transactions.

Now suppose that Bitcoin had no block rewards right now (like it will in the future), there can only be two possible outcomes: either that the hash-rate would drop to much lower levels, and the fees would stay the same. Or that the fees would rise to about $40 per transaction, and that the hash-rate would stay the same.

My gut feeling would say that even with a massive drop of hashrate, Bitcoin would still be secure, because the current hashrate seems like overkill to me. But in my previous topic (Alternative initial distribution of coins) various Bitcoin-veterans (like DeathAndTaxes) stated exactly the opposite: that Bitcoin wouldnt be able to survive if miners received just the fees and no additional rewards. So the expert opinion seems to be that the network would be unusable.

You missed a possible outcome.

Bitcoin could gain popularity, and the number of transactions per block could increase.  Then the miners would receive increased total fees, without increasing the fee per transaction.  If the current fee is approximately $0.06 per transaction, and a full block might have 4,200 transactions, the miners can already collect $252 per block.  If we increased the maximum block size from 1 megabyte to 60 megabytes, then $0.06 per transaction would completely replace the 25 BTC per block subsidy.

More likely the fee will increase a bit, and the blocksize will increase a bit, that way we won't need to jump all the way to 60 megabytes per block.  If we double the typical fee to $0.12, then we only need 30 megabyte blocks for the transaction fees to replace today's subsidy.

The other alternative (higher fees) also seem to make the network unusable, except for high-value transactions, which are a minority.

If the maximum blocksize is not increased, then this is a VERY likely outcome.  At that point, bitcoin would most likely become a sort of clearinghouse for some other payment type.

So if both are true, is it safe to say that block rewards are just a subsidy for Bitcoin's ridiculously high transaction costs?

Yes, the block subsidy is just a subsidy for transaction costs.  By way of inflationary effects, the entire network is splitting the current costs of mining.  You could even look at it as a "tax" that every owner of bitcoin has to pay in reduced value for the bitcoins he holds to pay for the existence of distributed consensus.

[TimS]

I think the cost per transaction will drop to more reasonable levels as the block reward drops.

As block rewards become trivial and then disappear, we'll see something interesting with the fees and hashrate, I think: With only transaction fees paying you, it's no longer worthwhile to mine when there are little to no transactions for you to claim. Barring other factors (e.g. thermal cycling could be harmful enough to the hardware to negate the benefit) then, logical, self-serving miners who pay for their own electricity/cooling would take the strategy of "when there's over x fees, it's worth it for me to mine" and have their machines automatically start and stop accordingly. This will drastically change the "block every 10 minutes" scheme we've got now, and make the hash rate harder to measure. 51% attacks would be much easier during a slower time (when most Bitcoiners are asleep, I suppose).

[Muis]

Yes, the block subsidy is just a subsidy for transaction costs.  By way of inflationary effects, the entire network is splitting the current costs of mining.

So if blockrewards are a subsidy for transaction costs, isn't it true that that same subsidy is whats causing the transaction/mining costs to be so high in the first place? That seems like a vicious circle to me? Even if the subsidy was doubled, the hashrate would double too, so the profitability would stay the same for miners, and all it does is increasing the tax (average transaction cost) for end-users even more. So that subsidy seems to be completely counter-productive, except for making sure the hashrate stays above an artifical baseline, whose level seems like overkill these days.

Is there any proof or logic that predicts the baseline that would be achieved by rewarding miners only with fees, would be too low for a secure network? Im just trying to wrap my around it.

Logical, self-serving miners who pay for their own electricity/cooling would take the strategy of "when there's over x fees, it's worth it for me to mine" and have their machines automatically start and stop accordingly. This will drastically change the "block every 10 minutes" scheme we've got now.

You may just have answered my question above. Indeed, this may be the logic behind behind the 'fixed' reward every block, to reduce miner variance.

[DannyHamilton]

Yes, the block subsidy is just a subsidy for transaction costs.  By way of inflationary effects, the entire network is splitting the current costs of mining.

So if blockrewards are a subsidy for transaction costs, isn't it true that that same subsidy is whats causing the transaction/mining costs to be so high in the first place? That seems like a vicious circle to me? Even if the subsidy was doubled, the hashrate would double too, so the profitability would stay the same for miners, and all it does is increasing the tax (average transaction cost) for end-users even more. So that subsidy seems to be completely counter-productive, except for making sure the hashrate stays above an artifical baseline, whose level seems like overkill these days.

Is there any proof or logic that predicts the baseline that would be achieved by rewarding miners only with fees, would be too low for a secure network? Im just trying to wrap my around it.

It seems intuitive and obvious that when bitcoin was just starting out and the demand for acquiring them was really low, bitcoins themselves had practically no value and there were extremely few transactions to fund mining with transaction fees.

Clearly, there needed to be some sort of subsidy to get the system up and running, and to keep it going as it grows.

As it gains popularity, the subsidy slowly becomes less important, as the transaction fees begin to provide some revenue to miners.

Since there was no way of knowing exactly how fast bitcoin would gain popularity, there was no reliable way to predict what rate the subsidy should decrease.  The original designer (or designers) of the system decided that cutting the subsidy in half every 4 years would be a reasonable attempt at adjusting for the growing popularity.

If that estimate isn't aggressive enough, then it is possible that the subsidy is encouraging more security than necessary.  On the other hand I'm not sure there is such as thing as "too much security" as long as people are feeling like the inflation rate is eating into their stored value too quickly.

[DeathAndTaxes]

I think you misinterpreted a prior post of mine.  Danny explains it well in that the subsidy probably is larger than what it needs to be right now, however Satoshi didn't know how fast Bitcoin would increase in value the subsidy simply halves every 4 years.  .  The subsidy is buying about $2M a day in security.  Would Bitcoin be fine with $1M a day, or $300K a day?  Given the current tx volume probably.  

Eventually Bitcoin will need to be supported by tx fees only.  So yes today if the block subsidy went from 25 BTC to zero then one of the following would happen:
a) fees would need to rise to $30 per tx
b) tx volume would need to increase 1000x overnight
c) the hashrate would fall >99% as miners turned off unprofitable hardware

The good news is the subsidy isn't going to zero overnight.  

Now suppose that Bitcoin had no block rewards right now (like it will in the future), there can only be two possible outcomes: either that the hash-rate would drop to much lower levels, and the fees would stay the same. Or that the fees would rise to about $40 per transaction, and that the hash-rate would stay the same.

Or tx volume increases significantly.  In 12 to 15 years, Bitcoin will either be gone or tx volume will be much much higher.  The "$40" number assumes the hashrate (or more correctly the cost of that hashrate) remains the same AND the tx volume remains the same.  avg tx fee * annual tx volume = total miner revenue.  

[cech4204a]

I rather pay miners 40$ fee than 20$ one to the bank. Otherwise, you should include raise in transactions volume, which means that the fee will be sustainable in the future. Don't worry too much about fees, the real problem is in the global acceptance.

[doldgigger]

Bitcoin transactions seem to have cheap fees, because everybody forgets that the block rewards currently act as subsidy to keep them low. On average, a transaction costs between $30 and $40 if you do take them in account, and thats way higher than most banks charge, and way too high for micro-transactions.

Now suppose that Bitcoin had no block rewards right now (like it will in the future), there can only be two possible outcomes: either that the hash-rate would drop to much lower levels, and the fees would stay the same. Or that the fees would rise to about $40 per transaction, and that the hash-rate would stay the same.

My gut feeling would say that even with a massive drop of hashrate, Bitcoin would still be secure, because the current hashrate seems like overkill to me. But in my previous topic (Alternative initial distribution of coins) various Bitcoin-veterans (like DeathAndTaxes) stated exactly the opposite: that Bitcoin wouldnt be able to survive if miners received just the fees and no additional rewards. So the expert opinion seems to be that the network would be unusable.

The other alternative (higher fees) also seem to make the network unusable, except for high-value transactions, which are a minority.

So if both are true, is it safe to say that block rewards are just a subsidy for Bitcoin's ridiculously high transaction costs?

So many pump'n'dump crapcoins out there, but no one ever tried one without subsidy, in order to find that out?

[Muis]

So many pump'n'dump crapcoins out there, but no one ever tried one without subsidy, in order to find that out?

Every coin would need some form of subsidy, else there would be no way to distribute the initial coins.

But it would be nice to see a coin where this subsidy doesn't go to the miners, but to random users for example. Normally alt-coins attract a lot of miners, and almost no users. This coin would attract a lot of users, and almost no miners, so the opposite. But since a lot of users means a lot fees, in the long run those fees would attract miners anyway. So I agree, it would be a interesting experiment.

[venij]

Bitcoin transactions seem to have cheap fees, because everybody forgets that the block rewards currently act as subsidy to keep them low. On average, a transaction costs between $30 and $40 if you do take them in account, and thats way higher than most banks charge, and way too high for micro-transactions.

Now suppose that Bitcoin had no block rewards right now (like it will in the future), there can only be two possible outcomes: either that the hash-rate would drop to much lower levels, and the fees would stay the same. Or that the fees would rise to about $40 per transaction, and that the hash-rate would stay the same.

My gut feeling would say that even with a massive drop of hashrate, Bitcoin would still be secure, because the current hashrate seems like overkill to me. But in my previous topic (Alternative initial distribution of coins) various Bitcoin-veterans (like DeathAndTaxes) stated exactly the opposite: that Bitcoin wouldnt be able to survive if miners received just the fees and no additional rewards. So the expert opinion seems to be that the network would be unusable.

You missed a possible outcome.

Bitcoin could gain popularity, and the number of transactions per block could increase.  Then the miners would receive increased total fees, without increasing the fee per transaction.  If the current fee is approximately $0.06 per transaction, and a full block might have 4,200 transactions, the miners can already collect $252 per block.  If we increased the maximum block size from 1 megabyte to 60 megabytes, then $0.06 per transaction would completely replace the 25 BTC per block subsidy.

More likely the fee will increase a bit, and the blocksize will increase a bit, that way we won't need to jump all the way to 60 megabytes per block.  If we double the typical fee to $0.12, then we only need 30 megabyte blocks for the transaction fees to replace today's subsidy.

The other alternative (higher fees) also seem to make the network unusable, except for high-value transactions, which are a minority.

If the maximum blocksize is not increased, then this is a VERY likely outcome.  At that point, bitcoin would most likely become a sort of clearinghouse for some other payment type.

So if both are true, is it safe to say that block rewards are just a subsidy for Bitcoin's ridiculously high transaction costs?

Yes, the block subsidy is just a subsidy for transaction costs.  By way of inflationary effects, the entire network is splitting the current costs of mining.  You could even look at it as a "tax" that every owner of bitcoin has to pay in reduced value for the bitcoins he holds to pay for the existence of distributed consensus.

Or both transaction volume AND bitcoin value increase over time to get the same

[p2pbucks]

If the price reach a high level (eg ,100,000 $) , low block reward wouldn't be a problem.
If it's not , then core dev & whole community should find a sustainable method to keep current blockchain system moving .

[bitfreak!]

Well you must keep in mind that the block reward will keep halving over time until it's extremely small, at some point it'll probably be smaller than the actual transaction fees. So before the block reward reaches 0 we will already have a mining system subsidized by fees more than block rewards. The question is, how will that affect the profitability of mining over time. It is my belief that the last time the block reward halved it contributed a lot to the price spike throughout 2013 because all of a sudden mining became half as profitable as it was the day before, but the level of fees was not increasing to account for that. There is no realistic situation where people are going to pay fees higher than what is charged by commercial banks, but when the block reward does get lower than the fees something will have to give, otherwise miners will just give up on mining for a profit and the network will lose the majority of it's hashing power.

[doldgigger]

So many pump'n'dump crapcoins out there, but no one ever tried one without subsidy, in order to find that out?

Every coin would need some form of subsidy, else there would be no way to distribute the initial coins.

But it would be nice to see a coin where this subsidy doesn't go to the miners, but to random users for example. Normally alt-coins attract a lot of miners, and almost no users. This coin would attract a lot of users, and almost no miners, so the opposite. But since a lot of users means a lot fees, in the long run those fees would attract miners anyway. So I agree, it would be a interesting experiment.

Well, before mining pools were invented, mining was exactly that: distributing coins to random users.

So the question would probably be: how to best distribute some initial coins among users, so there will be enough transactions to attract miners using fees?

[delulo]

various Bitcoin-veterans (like DeathAndTaxes) stated exactly the opposite: that Bitcoin wouldnt be able to survive if miners received just the fees and no additional rewards.

Someone has to pay for the electricity miners consume.
 

But it would be nice to see a coin where this subsidy doesn't go to the miners, but to random users for example.

Someone has to be paid for his/her effort to secure the blockchain....

Every POS coin without inflation is having no subsidy.

[Muhammed Zakir]

I think the cost per transaction will drop to more reasonable levels as the block reward drops.

You have a point there! I think you are right. Do you know on what a block reward depends?
Kindly,
        Muhammed Zakhir

[Sergio_Demian_Lerner]

Eventually Bitcoin will need to be supported by tx fees only.  So yes today if the block subsidy went from 25 BTC to zero then one of the following would happen:
a) fees would need to rise to $30 per tx
b) tx volume would need to increase 1000x overnight
c) the hashrate would fall >99% as miners turned off unprofitable hardware

There is a fourth possibility, which I'm trying to achieve with NimbleCoin.org:

d) Other alt-coin using Bitcoin merged mining emerges that provides Bitcoin miners the additional incentive to secure both networks with the same investment and double their earnings so that fees don't have to rise.

It may sound a little pretentious, but I think it can be done and hope I'll do it right. I'm betting all my technology into NimbleCoin.org: instant payments, full scripting language, 100 tps ready from day 0, scalable to infinite tps without requiring protocol modifications. The revenue model of NimbleCoin is not based on pre-mining but in donations to pay for development. I have the white-paper 1.0 ready and I've be publishing soon...

[Marlo Stanfield]

I think the cost per transaction will drop to more reasonable levels as the block reward drops.

You have a point there! I think you are right. Do you know on what a block reward depends?
Kindly,
        Muhammed Zakhir

The block reward started at 50 btc per block and is now at 25 btc per block. It divides itself by 2 every 210,000 blocks.

So when we hit 420,000 blocks we will be looking at 12.5 btc per block as the reward.