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Author Topic: Could the fees really support the Bitcoin network?  (Read 3776 times)
Raulo
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May 20, 2011, 10:49:17 PM
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I'm very impressed by the current Bitcoin hashrate, overtaking the fastest supercomputer Tianhe-1A and probably also Folding@Home. For safety, even larger network would be necessary. 

However, at current 2700 GH/s, taking most efficient GPUs at roughly 0.5W per 1MH/s, the whole network needs 1.35 MW of electric power (FPGAs or ASICs that are used by some are more energy efficient but are more expensive and carry larger depreciation cost). With 8-9 blocks/hour, one blocks needs about 150 kWh. This is probably about $15 on average. So if there were currently no block rewards and miners were supported only by fees, a block would have to carry at least $15 in fees if you count only electricity costs or the miners will stop mining. With hardware depreciation that the miners would want to recover and some profit the fees would have to be even larger. With about 15-20 transactions per block (which are mostly free so there would be less of them if there were fees required), one transaction would need to carry at least $1 of fees. This is quite expensive. I claim that the current network size could not be supported by fees only.

More efficient miners would not help much (if at all). More efficient miners would be available not only for the Bitcoin network but also for the potential attacker. The Bitcoin network would have to be always ahead of the attacker. Maintaining such a network will be quite costly. Worse yet, there will have to be constant mining performed while the attacker could just rent the compute time for a few hours to do a >50% attack. Can we really afford it?

Unless the number of fee carrying transactions grows a lot before the mining reward is reduced,  we are going to end up with not large enough and prone to attack Bitcoin network. Or with fees that are hardly better than in mainstream banking.




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May 20, 2011, 10:57:29 PM
 #2

I agree.

The one thing that would solve the issues you present, however, is if the value of BTC gained fairly consistently over time.

And that, my friends, is a matter of faith.  Smiley

For BTC to truly rise in value and not be an inflationary speculation bubble (based off of mining/difficulty), it has to be used more frequently as a currency, not just as an intermediary towards other established currencies.  Goods and services need to be sold through it.   Think about how GDP is calculated...  That is the heart of an economy and what BTC needs.

Just my 2¢
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May 20, 2011, 11:40:22 PM
 #3

The idea is that by the time the block reward cuts in half in Jan of 2013, the network will be large enough, with enough transactions that pay a small fee of about .001 BTC on average, that the transactions will already be making up for the lost 25 BTC to the miners.  We have already come a long way in just over two years, so I'm betting that this assesment is generally correct.  Time will tell.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
CydeWeys
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May 20, 2011, 11:46:13 PM
 #4

There are three issues here:

1.  The size of the network takes into account the 50 BTC reward for each block.  If each block was presently only paying out its transaction fees (rather than the transaction fees plus 50 BTC), then the size of the network would be far smaller.

2.  Assuming the deflationary spiral continues, by the time the block reward is halved, each BTC could easily be worth well over twice what it is now.  So while the BTC per block would be decreasing, the total value of each block would not be.

3.  Bitcoin is still in its infancy.  Most of the transactions are directly attributable to pool payouts, the faucet, or currency speculation.  If Bitcoin becomes much more popular and is actually used as a regular currency for buying and selling goods and services, the number of transactions per block will absolutely dwarf what it is today.  So even with no rewards at all, if Bitcoin achieved even some small fraction of the popularity of, say, PayPal, we're talking about many thousands of transactions per block.  Those fees would add up pretty quickly.
Raulo
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May 21, 2011, 07:23:12 AM
 #5

I get your points. I know that the network is supposed to grow and that the number of transactions will grow, too. But I think it does not scale. This system is too expensive to run to be competitive to the mainstream banking which has economies of scale.

Currently for protecting 35 mln USD Bitcoin "economy", roughly 0.75 mln USD is used  a year in electricity costs. A few million USD of equipment is used constantly (or more periodically) for block generations. The equipment which depreciates rapidly. It's a very large percentage of the total Bitcoin money supply. Guarding gold is cheaper and scales much better. If everything grows (Bitcoin value, number of transaction, etc.), it's still going to cost the same percentwise. The whole network happily bears this cost because the Bitcoin money supply grows and the mining reward is much larger than the cost (at the current generation and exchange rate, the money supply grows by 20 mln USD a year). When this inflation is gone, the fees is all the miners would get. And it would be not enough to keep such a large mining network compared to the Bitcoin economy size. It means that either we will have an expensive system (large difficulty and a lot of miners) which is well guarded against an attack or a cheap system with not that many miners that will be attack prone.

I don't assume anything. The problem of cost is going to be the same regardless of what will happen.

I think it shows that if Bictoin by any chance grew to VISA size, it would have been either poorly guarded against adversaries or more expensive to use than VISA. Pick your poison.


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May 21, 2011, 07:41:22 AM
 #6

It is guaranteed that fees will support the network.

If generation were not profitable, the miner would stop mining, making the difficuly lower and hence the profit per block higher.  Job done. The miners will always be exactly the right number.

IMHO, that is one of the most elegant things about the bitcoin design.

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Raulo
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May 21, 2011, 08:32:37 AM
 #7

If generation were not profitable, the miner would stop mining, making the difficuly lower and hence the profit per block higher.  Job done. The miners will always be exactly the right number.

Of course I know it. The market will take care of mining profitability. The problem is that the difficulty required for profitable mining will be low enough for cheap >50% network attack.

Bitcoin will either be always vulnerable to attack by competition or expensive. Again, pick your poison.

P.S. After rereading one of the the previous threads I think I make the same argument as here:
http://forum.bitcoin.org/index.php?topic=8126.0
And I think that these points were too easily dismissed by the posters.

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May 21, 2011, 08:35:15 AM
 #8

If generation were not profitable, the miner would stop mining, making the difficuly lower and hence the profit per block higher.  Job done. The miners will always be exactly the right number.

Of course I know it. The market will take care of mining profitability. The problem is that the difficulty required for profitable mining will be low enough for cheap >50% network attack.

Bitcoin will either be always vulnerable to attack by competition or expensive. Again, pick your poison.

P.S. After rereading one of the the previous threads I think I make the same argument as here:
http://forum.bitcoin.org/index.php?topic=8126.0
And I think that these points were too easily dismissed by the posters.

It might be expensive if you were required to pay the full cost, but you don't have to. If millions of people are using bitcoin it'll be very cheap for you.

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May 21, 2011, 08:56:37 AM
 #9

Bitcoin will either be always vulnerable to attack by competition or expensive. Again, pick your poison.

That is like saying,

You can either secure your house with a $10,000 steel vault door, or a $20 plywood door that anybody can kick in.  Pick your option.

This isn't a binary choice, you know.  There are in-betweens that are reasonably priced and reasonably secure.


I do agree though that Bitcoin transaction fees suffer from a tragedy of the commons situation that hasn't been resolved yet.   However, it will take decades  before this becomes a serious problem, and it won't become a problem overnight, so this will give us plenty of time to think of a solution.

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May 21, 2011, 11:52:06 AM
 #10

I get your points. I know that the network is supposed to grow and that the number of transactions will grow, too. But I think it does not scale. This system is too expensive to run to be competitive to the mainstream banking which has economies of scale.

Currently for protecting 35 mln USD Bitcoin "economy", roughly 0.75 mln USD is used  a year in electricity costs. A few million USD of equipment is used constantly (or more periodically) for block generations. The equipment which depreciates rapidly. It's a very large percentage of the total Bitcoin money supply. Guarding gold is cheaper and scales much better. If everything grows (Bitcoin value, number of transaction, etc.), it's still going to cost the same percentwise. The whole network happily bears this cost because the Bitcoin money supply grows and the mining reward is much larger than the cost (at the current generation and exchange rate, the money supply grows by 20 mln USD a year). When this inflation is gone, the fees is all the miners would get. And it would be not enough to keep such a large mining network compared to the Bitcoin economy size. It means that either we will have an expensive system (large difficulty and a lot of miners) which is well guarded against an attack or a cheap system with not that many miners that will be attack prone.

I don't assume anything. The problem of cost is going to be the same regardless of what will happen.

I think it shows that if Bictoin by any chance grew to VISA size, it would have been either poorly guarded against adversaries or more expensive to use than VISA. Pick your poison.

That is disregarding that miners in the future, following the "green" trend, will want to invest in home based power production. This would drastically reduce the energy cost in the long term.

The other part is that mining difficulty is independent of transaction amount and size. I agree, if Bitcoin remains at the store of value level, I don't think the transaction volume will be able to support the network power to price ratio we are witnessing today. But, if it grows into a currency, the transaction volume could increase as much as a million times more than what we are witnessing. At this point, the block size cap would be raised and each block would pay huge amounts of transaction fee.

Of course the mitigating force of escrow to escrow account trading and private key trading have to be taken in account, since they both bypass the block chain.

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realnowhereman
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May 21, 2011, 11:59:18 AM
 #11

If generation were not profitable, the miner would stop mining, making the difficuly lower and hence the profit per block higher.  Job done. The miners will always be exactly the right number.

Of course I know it. The market will take care of mining profitability. The problem is that the difficulty required for profitable mining will be low enough for cheap >50% network attack.

Bitcoin will either be always vulnerable to attack by competition or expensive. Again, pick your poison.

But that will be at the choice of those who make transactions.  Profitability will be determined by the offered fees.  Therefore the market will sort that problem out too; if you want higher security, you should be paying more for your transactions shouldn't you?  The users of bitcoin will purchase exactly the difficulty they desire by virtue of their transaction fees.

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May 21, 2011, 12:15:29 PM
 #12

I'm very impressed by the current Bitcoin hashrate, overtaking the fastest supercomputer Tianhe-1A and probably also Folding@Home. For safety, even larger network would be necessary. 

However, at current 2700 GH/s, taking most efficient GPUs at roughly 0.5W per 1MH/s, the whole network needs 1.35 MW of electric power (FPGAs or ASICs that are used by some are more energy efficient but are more expensive and carry larger depreciation cost). With 8-9 blocks/hour, one blocks needs about 150 kWh. This is probably about $15 on average. So if there were currently no block rewards and miners were supported only by fees, a block would have to carry at least $15 in fees if you count only electricity costs or the miners will stop mining. With hardware depreciation that the miners would want to recover and some profit the fees would have to be even larger. With about 15-20 transactions per block (which are mostly free so there would be less of them if there were fees required), one transaction would need to carry at least $1 of fees. This is quite expensive. I claim that the current network size could not be supported by fees only.

More efficient miners would not help much (if at all). More efficient miners would be available not only for the Bitcoin network but also for the potential attacker. The Bitcoin network would have to be always ahead of the attacker. Maintaining such a network will be quite costly. Worse yet, there will have to be constant mining performed while the attacker could just rent the compute time for a few hours to do a >50% attack. Can we really afford it?

Unless the number of fee carrying transactions grows a lot before the mining reward is reduced,  we are going to end up with not large enough and prone to attack Bitcoin network. Or with fees that are hardly better than in mainstream banking.





There have been some blocks solved to date with fees as high as 6 BTC...

I honestly believe that by the next block distribution change (from 50 to 25 BTC per block...) that the average block mined will generate more than 50 BTC for the miner.
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May 21, 2011, 12:20:16 PM
 #13

But that will be at the choice of those who make transactions.  Profitability will be determined by the offered fees.  Therefore the market will sort that problem out too; if you want higher security, you should be paying more for your transactions shouldn't you?  The users of bitcoin will purchase exactly the difficulty they desire by virtue of their transaction fees.

This is inaccurate. Difficulty is the same for everybody. Total difficulty will be determined by the aggregation of all transaction fees.  

When paying transaction fees, you're paying for faster processing.  You are getting a tiny little bit more security as a side effect, but you are paying for the collective security of everybody, not for your own security.

If difficulty/security is lower than what the majority of users desire, no action of an individual user can do anything to increase difficulty significantly.  No individual will thus have an incentive to pay for higher security, only for faster processing.

The free market leads to a solution that maximises individual self-interest, therefore the market will not sort out that problem.  Not in the current implementation of Bitcoin anyhow.

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May 21, 2011, 12:36:54 PM
 #14

But that will be at the choice of those who make transactions.  Profitability will be determined by the offered fees.  Therefore the market will sort that problem out too; if you want higher security, you should be paying more for your transactions shouldn't you?  The users of bitcoin will purchase exactly the difficulty they desire by virtue of their transaction fees.

This is incorrect. Difficulty is the same for everybody. Total difficulty will be determined by the aggregation of all transaction fees.  

When paying transaction fees, you're paying for faster processing.  You are getting a tiny little bit more security as a side effect, but you are paying for the collective security of everybody, not for your own security.

If difficulty/security is lower than what the majority of users desire, no action of an individual user can do anything to increase difficulty significantly.  No individual will thus have an incentive to pay for higher security, only for faster processing.

The free market leads to a solution that maximises individual self-interest, therefore the market will not sort out that problem.  Not in the current implementation of Bitcoin anyhow.

Free market doesn't stop people from acting in groups. There is a direct correlation between mining profitability and difficulty. It is not impossible, although admittedly hard, for a a majority of Bitcoin users to come to a consensus on how high a fee they're willing to pay. A group that big could manipulate difficulty. Think of it as consumer union, with their own modded client to adjust fees automatically to whatever they vote it to be. I don't think that's a good thing though.

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May 21, 2011, 01:41:02 PM
 #15

The very recognition that there is a potential tragedy of the commons problem is what will prevent it from actually happening.  The essential problem is that the current fee system will steer toward the most power efficient solution without regard to the overall security afforded by that solution.  But, the pool operators will have a large voice in setting future transaction fee policies and they'll educate other miners on the need to abide by them.  They'll ponder the level of security sustained by a given level of difficulty and adjust fee policies such that a level of mining activity can be sustained that effectively protects bitcoin.  There are lots of ideas about alternative minimum fee structures and miners will start to experiment with different formulas for determining minimum fees.  I'm pretty confident that a solution will be found and there is plenty of time to find it.

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May 21, 2011, 02:10:47 PM
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I do agree though that Bitcoin transaction fees suffer from a tragedy of the commons situation that hasn't been resolved yet.   

Too many forum members post this, but this is due to a misunderstanding of what the fable of "the tragedy of the commons" represents.  The classic fable involves a town of sheephearders with a common set of grassy fields for their sheep to graze upon.  This is a commons of a depleting resource that users are incentivized to maximize their usage of, regardless of the impact on the resource.  The relationship between transaction fees and blockchain security is a commons, but not this kind of commons.  The users are incentivized to include whatever fee they believe will save them time, but no more.  This kind of commons contributes to the shared resource, in this case difficulty.  There is also a case of diminishing returns for the transaction fee payer, but that is part of the balancing mechanism.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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May 21, 2011, 03:54:14 PM
 #17

You can either secure your house with a $10,000 steel vault door, or a $20 plywood door that anybody can kick in.  Pick your option.

This isn't a binary choice, you know.  There are in-betweens that are reasonably priced and reasonably secure.

The problem is that first of all it is not the house that the lock protects. The lock protects your TV and maybe sofa from theft. Not the house itself. Even if somebody enters and burns the house down, you still have the land. Moreover, you need only to worry about local thieves. For the Bitcoin network, the danger is the the whole world. In case of the house, it's the law system that gives you most of the protection. I'm not sure if it will work for Bitcoin. In my opinion, given Bitcoin rules, malicious block reorganizations would probably be perfectly legal.

Quote
I do agree though that Bitcoin transaction fees suffer from a tragedy of the commons situation that hasn't been resolved yet.   However, it will take decades  before this becomes a serious problem, and it won't become a problem overnight, so this will give us plenty of time to think of a solution.

I'm not sure what you mean by "tragedy of the commons" but I understand that fee problem is such that miners protects the whole Bitcoin value. But fees are paid only by those who make transactions. Hoarders who gain most from this protection do not have to pay a dime. Why hoarders gain? Because BTC value is related to the stability of the payment system. If the system gets unreliable, there are double spends, unconfirmed transactions and all kind of mess due to >50% attacks, the value of BTC will drop and drop hard if it becomes the norm. And there is no easy (or probably any) solution to this problem. Do you really think that hoarders will voluntarily start to pay fees to keep it running? If I were a hoarder I would sit and relax and let others pay my share.

A statement "free market will sort it out" is true but it will sort it out probably simply by driving the Bitcoin value to the ground. And then nobody will care about bringing down the Bitcoin network.  Knowing ahead of this problem will not help if the Bitcoin Nash equilibrium is for Bitcoin to bite the dust.

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May 21, 2011, 04:17:16 PM
 #18

In case of the house, it's the law system that gives you most of the protection.

The legal system provides an opportunity for retribution, but it rarely offers protection. At best it is a deterrent.

Hoarders who gain most from this protection do not have to pay a dime. If I were a hoarder I would sit and relax and let others pay my share.

If I were holding Bitcoins, I would invest in processing and securing the transactions to protect my holdings. It has the added benefit that I can earn more by processing transactions for others.

Time will tell if the Bitcoin economy is large enough to make processing and securing the transactions valuable enough to sustain itself. I think that it will answer the question on its own. The more valuable the Bitcoin, the more people who want Bitcoin, the more transactions we see, the more profitable mining becomes, the stronger the network grows, the more secure the network becomes.
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May 21, 2011, 04:22:37 PM
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I believe that it is likely that, were Bitcoin to become a socially accepted tool, corporations like Google, Microsoft et al. would be delighted to throw some of their processors at mining and publicly donate the profits to charity.

An act that benefits everyone and appears altruistically motivated is excellent PR, and these companies can do it cheaper than anyone.
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May 21, 2011, 04:32:25 PM
 #20

Letting the market it handle is a contradiction. We are the market so let's handle it.

We didn't wait until Deepbit actually had problems from double spending. Soon as it hit near 50% people moved their work load elsewhere.

Why is it people still think the market is some White Knight who slaps you around a few times? It's just the collective entropy that we fail to adjust for. The more ignorant we are or the more irresponsible we are the harder we all get hit.

The market is the collective paranoia of all of us. It can either see the dead canary and run before the gas hits, or it can wait for the first dead body at which point you have a stampede of miners market forcing each other to death. Hurray for balance! Who cares about the funerals?

WE.ARE.THE.FUCKING.MARKET.

Proposal: http://forum.bitcoin.org/index.php?topic=11541.msg162881#msg162881
Inception: https://github.com/bitcoin/bitcoin/issues/296
Goal: http://forum.bitcoin.org/index.php?topic=12536.0
Means: Code, donations, and brutal criticism. I've got a thick skin. 1Gc3xCHAzwvTDnyMW3evBBr5qNRDN3DRpq
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