Will transaction fees alone be enough incentive to keep miners mining?

[adamstgBit]

This question is subject to great speculation, It is perhaps the ultimate test of free market superiority. The short answer is we do not know, but in my opinion yes, the market will find the equilibrium.

To understand the effect of having all the bitcoins minted in less then 30 years, we must take a closer look at how the bitcoin network works. Minner use their hashpower to have a chance at generating a new block. Every 10 mintues one miner is rewarded for adding a new block to the block chain, with freshly minted bitcoins (50BTC) and all the transaction fees paid in that block. As we get closer to the 21 million bitcoin limit the block reward will be halved again and again, once we are very close to 21 million bitcoin the block reward will be negligible, at that point minners will only be rewarded with transaction fees. Not only do miners mint new bitcoins and process transactions, but they also secure the network. Right now the extremely high hash rate of the newtwork, makes a 51% attack unfeasible, but bitcoin could become vulnerable to a 51% attack if the hash rate drops.

To Conclude:
Bitcoin will continue to grow and with it the number of transactions every 10 minutes. Each block has maximum number of transactions it can record. I would speculate that in 30 years, transactions will exceed this limit. As a result people will pay higher fees in order to process their transactions faster. This competition for speedy transactions will create sizable rewards for miners processing the new blocks, Thus the bitcoin network will continue to thrive.

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[FreeMoney]

The ultimate test of the free market is not one innovation in the market. Bitcoin is just one thing, if the incentives are set up wrong that means bitcoin fails because markets weed out wrong ideas.

But if you all drop out I'll fire up my CPU miner and take all the fees every 10 miuntes.

[adamstgBit]

The ultimate test of the free market is not one innovation in the market. Bitcoin is just one thing, if the incentives are set up wrong that means bitcoin fails because markets weed out wrong ideas.

But if you all drop out I'll fire up my CPU miner and take all the fees every 10 miuntes.

if your CPU mining, i will pull out my GPU and start preforming 51% attacks

will their still be enough miners to make it very hard to take 51% of the network?

[notme]

The ultimate test of the free market is not one innovation in the market. Bitcoin is just one thing, if the incentives are set up wrong that means bitcoin fails because markets weed out wrong ideas.

But if you all drop out I'll fire up my CPU miner and take all the fees every 10 miuntes.

if your CPU mining, i will pull out my GPU and start preforming 51% attacks

will their still be enough miners to make it very hard to take 51% of the network?

What's the point of a 51% attack... to have all of something you've just made worthless when you could just have half of all transactions fees/subsidies?  Or is it to steal a few coffees?  I don't see the point.

[DeathAndTaxes]

One correction there is no limit on block size.  CURRENTLY the protocol enforces a block size limit as a secondary line of defense against spam but that is just arbitrary.

[FreeMoney]

One correction there is no limit on block size.  CURRENTLY the protocol enforces a block size limit as a secondary line of defense against spam but that is just arbitrary.

That might not be trivial to change though depending on the attitude and incentives of miners. It would be good to commit to a scheme for increasing that right now before anyone is making their livelihood from artificial transaction scarcity. iirc Gavin had a pretty good proposal that had max block size set like 110% of the average size of the last X blocks. That could allow for really fast growth if needed without allowing crazy outlier spam blocks.  Sorry if I'm mis-attributing and/or wrong about the proposal.

[cunicula]

iirc Gavin had a pretty good proposal that had max block size set like 110% of the average size of the last X blocks.

That guarantees, of course, a long-run equilibrium of negligible fees and negligible mining activity.

But whatever, it is either high fees / secure txns OR low fees / insecure txns and NEVER low fees / secure txns. Whose to say which is the lessor of the two evils? It doesn't really matter if bitcoin dies from a chronic, terminal illness (high fees) or an accident waiting to happen (insecure txns).

PS I like all the gloom and doom in this thread. It is delightful.

[FreeMoney]

iirc Gavin had a pretty good proposal that had max block size set like 110% of the average size of the last X blocks.

That guarantees, of course, a long-run equilibrium of negligible fees and negligible mining activity. But whatever, it is either high fees / secure txns OR low fees / insecure txns, whose to say which is the lessor of the two evils?

No, even with unlimited size blocks there is at least one force, let me describe.

Suppose all miners are negligible (less than .1% or so) and all are shortsighted and include any transaction at any price. Users will pay the minimum fee. Miners will not cover their costs and will start to drop out. Now each miner has a higher % than before. Maybe still not enough, but if not there will be no profit and more will drop out leaving a higher % still for each (in particular for the largest miner). Now this highest % miner has enough so that he individually can increase his own profits by declining some low fee transactions. This is because some users have a preference not just for getting in a block, but for a high probability of getting in the next block. A 1% miner for example can charge people for privilege of a 100% chance at inclusion in the next block, without paying what he demands the user has to settle for a 99% chance at next block inclusion. All miners will profit from the users who pay for certainty. This will start to bring some miners back in until the 'cover' the bigger miners are giving, miners who are thinking only of themselves.

Simple math example:

Everyone paying 1 satoshi. 1% miner rejects 10000 1 satoshi transactions and 1% of people choose to pay the 1000 satoshi min fee that one 1% miner requires. Now that miner makes 1000x100=100000 satoshis per block. Everyone else gets to continue collecting the 1 satoshi fees and the larger ones, the 1% miner doesn't give a damn about them though.

It's even possible a really really small miner could have some effect, like why not pay 10 satoshis if there is even a little chance it will help. So a tiny miner expects at least 10% of people (or clients default settings will be set to) will just say whatever 10 satoshis then.

[cunicula]

iirc Gavin had a pretty good proposal that had max block size set like 110% of the average size of the last X blocks.

That guarantees, of course, a long-run equilibrium of negligible fees and negligible mining activity. But whatever, it is either high fees / secure txns OR low fees / insecure txns, whose to say which is the lessor of the two evils?

No, even with unlimited size blocks there is at least one force, let me describe.

Suppose all miners are negligible (less than .1% or so) and all are shortsighted and include any transaction at any price. Users will pay the minimum fee. Miners will not cover their costs and will start to drop out. Now each miner has a higher % than before. Maybe still not enough, but if not there will be no profit and more will drop out leaving a higher % still for each (in particular for the largest miner). Now this highest % miner has enough so that he individually can increase his own profits by declining some low fee transactions. This is because some users have a preference not just for getting in a block, but for a high probability of getting in the next block. A 1% miner for example can charge people for privilege of a 100% chance at inclusion in the next block, without paying what he demands the user has to settle for a 99% chance at next block inclusion. All miners will profit from the users who pay for certainty. This will start to bring some miners back in until the 'cover' the bigger miners are giving, miners who are thinking only of themselves.

Simple math example:

Everyone paying 1 satoshi. 1% miner rejects 10000 1 satoshi transactions and 1% of people choose to pay the 1000 satoshi min fee that one 1% miner requires. Now that miner makes 1000x100=100000 satoshis per block. Everyone else gets to continue collecting the 1 satoshi fees and the larger ones, the 1% miner doesn't give a damn about them though.

It's even possible a really really small miner could have some effect, like why not pay 10 satoshis if there is even a little chance it will help. So a tiny miner expects at least 10% of people (or clients default settings will be set to) will just say whatever 10 satoshis then.

No. Competition will drive fees to a negligible amount. You are not selling spaces in already found blocks (which would give you some monopoly pricing power), you are selling spaces in blocks which you might find in the future. Your services are identical to competitors' services. If not, then competitors can easily make them identical. All business goes to whoever sets the lowest price. The equilibrium price approaches zero. End of story.

[FreeMoney]

iirc Gavin had a pretty good proposal that had max block size set like 110% of the average size of the last X blocks.

That guarantees, of course, a long-run equilibrium of negligible fees and negligible mining activity. But whatever, it is either high fees / secure txns OR low fees / insecure txns, whose to say which is the lessor of the two evils?

No, even with unlimited size blocks there is at least one force, let me describe.

Suppose all miners are negligible (less than .1% or so) and all are shortsighted and include any transaction at any price. Users will pay the minimum fee. Miners will not cover their costs and will start to drop out. Now each miner has a higher % than before. Maybe still not enough, but if not there will be no profit and more will drop out leaving a higher % still for each (in particular for the largest miner). Now this highest % miner has enough so that he individually can increase his own profits by declining some low fee transactions. This is because some users have a preference not just for getting in a block, but for a high probability of getting in the next block. A 1% miner for example can charge people for privilege of a 100% chance at inclusion in the next block, without paying what he demands the user has to settle for a 99% chance at next block inclusion. All miners will profit from the users who pay for certainty. This will start to bring some miners back in until the 'cover' the bigger miners are giving, miners who are thinking only of themselves.

Simple math example:

Everyone paying 1 satoshi. 1% miner rejects 10000 1 satoshi transactions and 1% of people choose to pay the 1000 satoshi min fee that one 1% miner requires. Now that miner makes 1000x100=100000 satoshis per block. Everyone else gets to continue collecting the 1 satoshi fees and the larger ones, the 1% miner doesn't give a damn about them though.

It's even possible a really really small miner could have some effect, like why not pay 10 satoshis if there is even a little chance it will help. So a tiny miner expects at least 10% of people (or clients default settings will be set to) will just say whatever 10 satoshis then.

No. Competition will drive fees to a negligible amount. You are not selling spaces in already found blocks (which would give you some monopoly pricing power), you are selling spaces in blocks which you might find in the future. Your services are identical to competitors' services. If not, then competitors can easily make them identical. All business goes to whoever sets the lowest price. The equilibrium price approaches zero. End of story.

Ah, ok.

[db]

Competition will drive fees to a negligible amount.

Negligible for each user but not necessarily negligible for the whole network. When the default fee is negligible users won't bother to change it. When lots of transactions with such fees are aggregated in a block the sum can be substantial. All that's needed is enough users making enough transactions in each block.

[cunicula]

Competition will drive fees to a negligible amount.

Negligible for each user but not necessarily negligible for the whole network. When the default fee is negligible users won't bother to change it. When lots of transactions with such fees are aggregated in a block the sum can be substantial. All that's needed is enough users making enough transactions in each block.

No, negligible for the whole network.

[db]

No, negligible for the whole network.

Why? What will motivate a large majority of users to actively lower whatever "negligible" default fee setting they have?

[cunicula]

No, negligible for the whole network.

Why? What will motivate a large majority of users to actively lower whatever "negligible" default fee setting they have?

Someone would make a binary with a default fee setting of 1 satoshi for everyone to download. Not everyone has to program the nuts and bolts.

[db]

Someone would make a binary with a default fee setting of 1 satoshi for everyone to download. Not everyone has to program the nuts and bolts.

What would motivate everyone to download that particular program?

[Foxpup]

No. Competition will drive fees to a negligible amount. You are not selling spaces in already found blocks (which would give you some monopoly pricing power), you are selling spaces in blocks which you might find in the future. Your services are identical to competitors' services. If not, then competitors can easily make them identical. All business goes to whoever sets the lowest price. The equilibrium price approaches zero. End of story.

No, your services are not identical to competitors' services. You are not just selling spaces in blocks which you might find in the future, you are selling spaces in blocks which you might find in the near future. People don't just want their transaction included a block eventually, they want their transaction included in a block immediately, and they will probably be willing to pay extra to make it happen. As long as there are some miners who refuse to accept small fees, there will be an incentive for people to pay higher fees, since this is the only to guarantee that their transactions will be included in a block as quickly as possible.

[db]

No, your services are not identical to competitors' services. You are not just selling spaces in blocks which you might find in the future, you are selling spaces in blocks which you might find in the near future. People don't just want their transaction included a block eventually, they want their transaction included in a block immediately, and they will probably be willing to pay extra to make it happen. As long as there are some miners who refuse to accept small fees, there will be an incentive for people to pay higher fees, since this is the only to guarantee that their transactions will be included in a block as quickly as possible.

Yes, but that requires selfless sacrifice from the refusing miners so the equilibrium price still approaches zero (given that there is no cost for the users to lower their fees).

[Foxpup]

No, your services are not identical to competitors' services. You are not just selling spaces in blocks which you might find in the future, you are selling spaces in blocks which you might find in the near future. People don't just want their transaction included a block eventually, they want their transaction included in a block immediately, and they will probably be willing to pay extra to make it happen. As long as there are some miners who refuse to accept small fees, there will be an incentive for people to pay higher fees, since this is the only to guarantee that their transactions will be included in a block as quickly as possible.

Yes, but that requires selfless sacrifice from the refusing miners so the equilibrium price still approaches zero (given that there is no cost for the users to lower their fees).

You are assuming that all miners are motivated solely by profit and would not turn down a fee of any amount, not even a single satoshi. Maybe I'm being hopelessly optimistic, but I think there will always be at least some miners willing to sacrifice a portion of their profit "for the good of the network", as it were. I also think that if the difficulty drops dangerously low, a large number of these self-sacrificial miners will emerge to try to save the network. It's even possible (or even probable) that if Bitcoin becomes a major global economy, major governments will get behind it, spending taxpayers' dollars (bitcoins?) on unprofitable mining operations to ensure the security of the network.

[cbeast]

In 30 years I imagine that internet connectivity and computing power will speed up. When rewards drop significantly, what would happen if you decrease difficulty to decrease block creation time?

[Foxpup]

In 30 years I imagine that internet connectivity and computing power will speed up. When rewards drop significantly, what would happen if you decrease difficulty to decrease block creation time?

In short, not much. Although miners would get the block reward more frequently, the block reward halving would happen more frequently as well, causing it to balance out exactly. To put it another way, there are only 21 million BTC to be distributed, the only difference is how fast you distribute them. Furthermore, each individual block would have fewer transactions, and therefore less transaction fees, but you get more blocks, again balancing it out exactly. 10 minutes was chosen because it's not so long that transactions take forever to be confirmed and not so fast that network propagation delays result in stale blocks.

[db]

You are assuming that all miners are motivated solely by profit and would not turn down a fee of any amount, not even a single satoshi. Maybe I'm being hopelessly optimistic, but I think there will always be at least some miners willing to sacrifice a portion of their profit "for the good of the network", as it were. I also think that if the difficulty drops dangerously low, a large number of these self-sacrificial miners will emerge to try to save the network. It's even possible (or even probable) that if Bitcoin becomes a major global economy, major governments will get behind it, spending taxpayers' dollars (bitcoins?) on unprofitable mining operations to ensure the security of the network.

You don't have to mine to donate hashing power. The easiest way is to just make transactions with high fees.

[realnowhereman]

In 30 years the block reward will be near zero.  The reward will instead come from fees, and the protocol has no control over how often and how large a fee-paying transaction will be offered to the network.  Therefore the actual block period won't matter in the slightest.

I suppose it should be long enough to allow previous blocks to propagate through the network; but that's probably significantly less than 10 minutes.

The market will sort the problem out, as always.  If it becomes unprofitable (by whatever measure, monetary or security) miners will reduce until it does become profitable.  Miners will independently decide on their own "profit-requirements" and might, say, not include any transaction that doesn't offer a greater-than-zero fee; or a 0.01% fee, or whatever.  That requirement will multiply by the size of the pool implementing that requirement and will be competed against between the big pools.

Some small miner with his CPU might say "I'll mine for free"; but then your transaction won't get included for a long time.  Perhaps you're okay with that.

The only thing missing, I think, is the ability to broadcast a new transaction that supersedes one that has been stuck in limbo with a larger fee-paying one.  I think thoughts from developers are already moving in those directions.  In which case, this problem will be a non-problem well before 30 years.  I would expect, by the end of this year in fact.

[Technomage]

This is one of those issues that has been discussed at length in other sections of the forum. The conclusion is that this is a non-issue for at least this decade. During the decade we either come up with a functioning tx fee market (which is the most likely scenario) or we don't which means that we either incorporate some type of proof of stake into Bitcoin or a Bitcoin competitor kills Bitcoin.

Either way, realnowhereman is on point saying that this will most likely be solved way before it is actually an issue. The fact that there has been so much talk about this is a very good sign in itself. In fact it's very likely that a new system will begin forming during the 25 BTC reward block era, which is when tx fees quit being negligible amounts of the total reward. They will still be a small percentage (even after the 25 -> 12,5 drop, which is why I said this is really only a problem next decade).

This is speculation based on current tx amounts though, if Bitcoin usage significantly increases tx fees will be a bigger part of the picture sooner than we think. It won't accelerate the problem though because that is solely related to the amount of fixed reward. The reason for this is that increasing usage will also raise the price of BTC thus leading to more mining investments and thus a stronger network.

[Foxpup]

You are assuming that all miners are motivated solely by profit and would not turn down a fee of any amount, not even a single satoshi. Maybe I'm being hopelessly optimistic, but I think there will always be at least some miners willing to sacrifice a portion of their profit "for the good of the network", as it were. I also think that if the difficulty drops dangerously low, a large number of these self-sacrificial miners will emerge to try to save the network. It's even possible (or even probable) that if Bitcoin becomes a major global economy, major governments will get behind it, spending taxpayers' dollars (bitcoins?) on unprofitable mining operations to ensure the security of the network.

You don't have to mine to donate hashing power. The easiest way is to just make transactions with high fees.

Yes, and the easiest way to convince people to pay higher fees is for a group of miners to only process high-fee transactions.

Hmmm... It would be better if "pay a fee for faster processing" was implemented at the protocol level rather than being left up to miners (though such a protocol change would easily be accepted if enough miners felt they couldn't work out any other solution). Perhaps something like a minimum transaction fee equal to the block number's largest prime factor. That way, transactions with a fee of only 1 satoshi will have to wait for a prime numbered block, while higher-fee transactions are allowed more frequently. Clients can recommend a specific fee by working out the factors of upcoming blocks and asking the user how long they are willing to wait. Just a random idea, I don't know how well it would work in practice.

[Transisto]

Why is this in speculation ?

[Foxpup]

Why is this in speculation ?

Probably because the question is about something that's not going to happen for about a hundred years or so? I think that's about as speculative as you can get!

[Technomage]

Why is this in speculation ?

I was wondering about this also. The only way this makes sense as speculation is if one takes a super long term view. Longer than what I usually refer to as long. It's a good point if this is at all relevant here.

[cunicula]

Come up with a functioning tx fee market (which is impossible) or we don't which means that we either incorporate some type of proof of stake into Bitcoin or a Bitcoin competitor kills Bitcoin.

A functioning competitive market for a public good will never work, so I fixed that for you.

You missed one possibility, however. You could end up with the emergence of BitPal™. I'm sure BitPal™ would be super-vigilant to prevent fees from ever getting low. You could trust BitPal™ with your network security 100%!

[Foxpup]

The only way this makes sense as speculation is if one takes a super long term view. Longer than what I usually refer to as long.

Well, I plan to be reincarnated as an indestructible cyborg when the singularity hits, and I need to plan my trading strategy accordingly. Specifically, I need to know whether bitcoins will go up or down in value over the next several centuries.

[deus-ex-machina]

Yes. Here's why.

Mining will first go down. That means the reward goes up from having more time for transaction fees to go up. Mining goes up to get it. Reward goes down. Mining goes down. Lather. Rinse. Repeat.

[realnowhereman]

It's also likely that the following will become a more frequent occurrence (but for different reasons). i.e. separate agreements between merchants/service providers and miners.

Blockchain.info now has an agreement with Eligius to process low fee transactions - which hopefully means no more "stuck" transactions. I will be monitoring for any possible transaction spam.

That will allow, say, a big merchant to provide a separate payment path than fees to the miner when it is for payments from their customers.  It's a bit like the idea of free postage.  We all know that postage isn't free...

[cbeast]

This is one of those issues that has been discussed at length in other sections of the forum. The conclusion is that this is a non-issue for at least this decade. During the decade we either come up with a functioning tx fee market (which is the most likely scenario) or we don't which means that we either incorporate some type of proof of stake into Bitcoin or a Bitcoin competitor kills Bitcoin.

Either way, realnowhereman is on point saying that this will most likely be solved way before it is actually an issue. The fact that there has been so much talk about this is a very good sign in itself. In fact it's very likely that a new system will begin forming during the 25 BTC reward block era, which is when tx fees quit being negligible amounts of the total reward. They will still be a small percentage (even after the 25 -> 12,5 drop, which is why I said this is really only a problem next decade).

This is speculation based on current tx amounts though, if Bitcoin usage significantly increases tx fees will be a bigger part of the picture sooner than we think. It won't accelerate the problem though because that is solely related to the amount of fixed reward. The reason for this is that increasing usage will also raise the price of BTC thus leading to more mining investments and thus a stronger network.

Couldn't there be a way to measure the contribution quantitatively of miners (and pools) by their block signatures, and by the height of the blocks created? There would have to be a scheme that checked that only transactions with fees are counted. I would also like to see (as suggested by someone I cannot recall) to have an additional (or percentage of a) fee destroyed to go back to the unmined bitcoin count.

These and probably a few other schemes might give us a proof-of-merit model that rewards honest mining pools. Possibly with extra Bitcoin from the destroyed fees or maybe decreased difficulty. I'm trying to salvage any ideas from the prook-of-stake model that might serve to add a level of trust to a pool that it will include transactions and be amply rewarded for doing so. It would be a nice bonus if it could mitigate the risk of an unknown 51% attack.