Big miners will probably wait to start generating until some amount of BTC is waiting to be claimed in queued transactions. This will encourage people to pay higher fees, since doing so will have a real effect on how quickly the next block is generated. Maybe people will even send high-fee dummy transactions after their transaction is included so it gets 6 confirmations in only a few minutes.

If the fee is pushed to 0.00000001, transaction spammers will start sending transactions at that negligible level, which will push fees higher on normal transactions.

Today, it costs the entire network something like $0.001 to process each transaction.

The limiting factor is checking to see if the transaction is valid or not (the CPU cost of ECDSA signature verification).  When the transaction volume gets high enough miners will have to start prioritizing which transactions they check, and they will use transaction fees as a quick initial check to see if they should invest CPU cycles to include transactions in a block.  Yes, miners want to include as many transactions with fees as possible in their blocks, but it won't be economical for any miner or mining pool operator to include an infinite number of them.

And speaking of mining pools... they are a lot more efficient than individual miners because they allow transactions to be verified once instead of requiring that all of the miners in the pool do that work.  Very small miners will be driven to join a mining pool, and the big mining pools will be competing to have the lowest fees and highest payouts (and so will be optimizing their ECDSA verification code and will figure out which transactions are profitable and which aren't).

So:  I don't think bitcoin will have very few miners.  I think it will have lots of miners connected to a smaller number of mining pools, and the whole system will optimize itself to be wonderfully efficient.

Hmm, I fail to see why the fees would drop with time.  The upper limit on the rate of transaction processing should drive the fees up.

From this post (of mine) http://bt.irlbtc.com/view/5758.msg84788#msg84788

The demand for performing transactions will presumably continue to increase, but the supply is constant, ~18k/hr.

The current 1MB block size limit caps bitcoin at 463 transactions/minute, or ~7 transactions per second.

Though it seems generally agreed that this limit will be raised, when it needs to be raised.

I think there is a model that lets us solve this problem without any artificial scalability limits.

I've been thinking of fees as paying for inclusion into a block. But that's not what they are really about. Fees are what you pay to secure your transaction against reversal and thus the amount you pay should really depend on the price of megahashes/sec vs the computational power you believe your untrusted counterparty may have access to. If you trust your counterparty, you don't need any confirmations to make a trade, and so you shouldn't need to pay any fees.

Say you're selling your car. You don't know the buyer and they're about to get in and drive off with their new purchase. You don't want them to drive away, press a few buttons on their smartphone and have some rented black market mining rig knock out a few blocks to get the money back. So after receiving the coins (zero confirms) you immediately spend them again but this time with a fee high enough to make you feel safe.

Let's say MikeMine Corp sells 10 gigahashes of work per Ⓑ1 of fees. My mining rigs are idle until they see a transaction which has at least that much in the fees of all pending dependent transactions. I start work on the current block but only include transactions that meet my (publically announced) minimum fee. Other transactions are left out. If I successfully solve the block containing the transaction, I keep mining on the next blocks until 100 gigahashes of work has been done and a few more blocks have been found. It doesn't matter if I get unlucky and don't actually find any of the next blocks myself, I already claimed the fee in the first block which was for work done not blocks found.

The death spiral argument assumes that I would include all transactions no matter how low their fee/priority, because it costs me nothing to do so and why would I not take the free money? Yet real life is full of companies that could do this but don't, because they understand it would undermine their own business. Consider a bus driver. He waits at point A until he has a few passengers who paid his fee and then starts driving to point B. If at the moment he's about to leave you run up and say you'll pay half price or walk, it doesn't matter ... he won't let you on board even though the marginal cost of including you is nearly nothing.

Note that fees are calculated recursively over all dependencies. If I send Ⓑ50 to my brother, we don't need any votes done on that transaction. We trust each other so the tx can be free. Now my brother wants to buy something online with those coins. He sends another free transaction spending those coins, and the seller then immediately sends them on to another of his own addresses, but this time with a fee attached. Now there are 3 transactions pending in the memory pool which depend on each other, and summing up the fees results in work being done on all three. Even though the first two were free, they'll still be included in order to claim the fees on the last.

Why does this keep getting worse and worse and even worse?

Now, you suggest a large miner that splits the block chain for profit! To prevent people from placing their transactions into the chain before the large miner has gathered enough funds to start his lengthening burst, the miner is interested in splitting the block chain at a point in the past. This is the only way his clients get the fast transaction but cheap transactions published around the same time, included by a cheap miner, don't. If the miner does not use this method, he has no sale argument and will fail!

We have only one version of your model remaining: a single miner killing all other block chains, constructing a natural monopoly. (Man, are you serious? What a decentralized currency!) The dynamics of that? (Edited here, error removed) The one miner gaining full control of the price and the ability to split any concurring miners out of the chain. That is the very definition of a vulnerable state! Now, we have eliminated all cases except going back to microscopic parties. Return to my first post to see why statistics ruin prices.

Your proposal is the apocalypse! If this is the future, the earlier I'm off this boat, the better!



Let me say this loud and clear:

DO NOT remove the transaction limit before someone has applied the relevant statistics, mathematics and game theory to describe transaction fee equilibrium at all times in question! People stupidly doing this has now risen into my top failure scenarios of Bitcoin.

And please think your scenarios through, this thread is becoming a nightmare. Who is responsible for modeling system dynamics when making Bitcoin design decisions? I'd feel a lot better if those people had a word here. If people agree on removing the transaction limit, we might enter a path of no return, so I'd be very happy if someone laid out current plans and consensus, if one exists.

Glad to see someone agree, I was beginning to feel a little crazy here.

I don't think 25 BTC/block is a problem, we'll just see some miners disappear, but the reward will still sustain things.

But the issue should be solved in advance to demonstrate that Bitcoin is meant to work on the long run. We may be faced with bribing of developers to achieve higher or lower fees if we don't carve a sustainable solution in stone early enough. Arbitrary limits in a changing protocol are a magnet for corruption. And imagine the chaos and loss of trust in Bitcoin when a fraction of the network has the rules changed against their will. The protocol rules should be finished and fixed, hopefully never to be touched again afterward.

That said, I have run into an entirely new question: do we need a lot of hashing power at all times? Maybe we can solve the attack problem with very few miners and a smart protocol! I've opened a new thread to ask this question, since this thread is confusing enough already:

http://bt.irlbtc.com/view/6363.0

Maybe we've been afraid for no reason -- maybe we're best off with very few miners! If security against attacks can be increased without increasing processing power, we're good, and we'll have super-low fees! Everybody would win.

We all love a bit of drama, but I think you're over-doing it.


No, I did not. You're the one suggesting that, and putting words in my mouth to boot.

There is no point at which miners would want to split the block chain. Unless they can dominate the network attempting to split the chain is quite likely to fail meaning they've burned a lot of electricity and claimed no fees at all. See the table of probabilities in Satoshis paper for reference.

Miners don't wait around for fees to accumulate before starting. A transaction that comes with a fee is worth doing some work on immediately, even if it's not very much. In a network with decent transaction rates you would be hashing constantly but adding and removing transactions from your current block depending on how much work was done on them. If you do some work on a tx, remove it because the fee was not high enough to carry on with and then another miner claims it, no big deal - that's the nature of the business. With equal costs that miner had just as much chance as you did to find the block unless they are operating under the "take everything they can get" model, which is inherently self destructive (unless they're not mining for profit).

I believe you're over thinking this. Claiming BitCoin can't work without artificial scalability limits is like claiming governments should mandate minimum bus sizes to support ticket prices (that is until the public transport network has been analyzed by game theorists). Oddly enough that never happened, and yet I've never heard of a countries public transit suffering death by game theory before.

Well, I can't predict what all miners will do. But I can look at real world businesses that are much like mining - large fixed costs with low marginal costs.

I've been using buses as an example but there are lots of others. To name just two, a football stadium doesn't sell tickets by auction but rather sets a fixed price and if not enough people buy at that price, the game plays to a half empty stadium. A bakery bakes cakes in the morning and sells it throughout the day, but if at the end of the day it wasn't all sold then they (usually) just throw them away. If they reduced prices towards the end of the day, they could get lots more customers but everyone would just buy their cakes after dark at unsustainably low prices.

In any market there are participants who could supply all demand at low or zero prices and suck up every bit of revenue possible. But in practice that rarely happens because it's irrational and not sustainable. In cases where a business does that and uses some unrelated business to keep themselves afloat it's called dumping and they usually do it with an eye to raising prices again once the competition is gone. Governments (sometimes) investigate it.

The argument is that there will be miners who effectively "dump" their hash power, by working on transactions that wouldn't be profitable in a block by themselves, because they are included along with higher-fee transactions that are. As you note that would be irrational because it creates a free rider problem. Why should I be the one to subsidize everyone elses transactions? Yet when I look at the world around me I see markets with hundreds or thousands of participants where all of them are rational and none of them allow free riders.

I think mining will evolve in that direction .... a reasonable but not huge number of essentially rational economic actors, who understand that allowing free riders will ultimately undermine the source of their own wealth. It's possible there will be miners who behave irrationally because they are actually interested in a different chain (dns or voting or whatever) and mine on BitCoin just because they can. In such a case regulation might be the answer, or moving to a system of non-anonymous miners so the irrational participant can be kicked out.

These issues are worth thinking about, but it's easy to end up with analysis paralysis. Kind of like if we were back in the stone age debating the newly invented 'capitalism' concept, and somebody said "What stops somebody dumping until they've cornered the market?" and somebody else said "Hmm I guess you're right, capitalism can't possibly work". Whereas the actual answer is that capitalism does work, mostly, because people figured out solutions to these problems along the way.

You're misusing "irrational". Accepting low-fee transactions is very rational for the one who accepts them, because the profits are all his own, while the free rider problem is everyone's. This is assuming the agent is selfish. The problem is that if everyone acts selfishly everyone will suffer, which is the studied-to-death "prisoner's dilemma" or "tragedy of the commons".

You may ask how to stop players from acting selfishly. If there are few players they can collude to fix prices, and they might even do it without any spoken agreement out of fear of a snowball effect. But this doesn't work when there are thousands of players and the barrier of entry is low. Someone who doesn't currently mine can rent some hardware, swipe all the low fees and exit. With these dynamics, the only transactions that will be excluded are those whose fees are less than the cost of inclusion. If a block size limit is placed, the cost of a transaction is the opportunity cost of not including a higher-fee transaction.

Some sort of regulation is another way to ensure non-selfish play, but I doubt that's the direction we want.