The Toverfee Market Myth – John Blocke – Medium

Contrary to Nakamoto’s vision, there are now humans attempting to be ter charge of the system. They aim to keep Bitcoin’s block size limit below the actual level of request. One of the primary assumptions made by this camp is that Bitcoin needs a “fee market” ter which users outbid one another to challenge for inclusion te the next block, permitting their transaction to be confirmed quicker than others who have paid less of a toverfee.

The rationale for the toverfee market goes like this: Bitcoin’s block prize decreases overheen time, and eventually no fresh bitcoins will be created, at which time Bitcoin mining will need to be subsidized entirely by users who pay transaction fees to the miners. Therefore, it is better to bring about the “fee market” early on, so that users become acquainted to the idea of bidding to make transactions. What is overlooked ter the discussion is that Bitcoin block prizes will persist for at least another century. It will be more than 100 years before this is actually necessary and the impetus to acclimate users to toverfee markets now is grossly premature at best and very suspect at worst.

The reason for Bitcoin’s block prize, aside from being the mechanism by which fresh bitcoins are issued, is to act spil a subsidy for miners during Bitcoin’s bootstrapping phase. The prize is cut te half every four years (approximately), meaning the subsidy is significant, te terms of BTC produced, te the beginning and little by little becomes less so. By the end of the current prize era sometime te 2020, 87.5% of all Bitcoins will have bot issued. After another four years, the number rises to 93.75%.

This mechanism is such a fundamental part of Bitcoin that Satoshi Nakamoto even explained it ter his January 2009 postbode to The Cryptography Mailing List announcing the release of Bitcoin v0.1:

Total circulation will be 21,000,000 coins. It’ll be distributed to network knots when they make blocks, with the amount cut ter half every Four years. very first Four years: Ten,500,000 coins

next Four years: Five,250,000 coins

etc… When that runs out, the system can support transaction fees if needed. It’s based on open market competition, and there will very likely always be knots willing to process transactions for free. -Satoshi Nakamoto (Emphasis added)

It’s based on open market competition — ponder that for a uur.

This could be interpreted spil support for a toverfee market, and certainly already is by some who support restricting Bitcoin’s transactional capabilities below actual market request. But this interpretation is refuted by the preceding line: When [the block prize subsidy] runs out, the system can support transaction fees if needed. Clearly Satoshi had no intention of forcing users into a competitive bidding process spil long spil block prizes could pay for the system to grow. Rather, transaction fees are available spil an option to pay for Bitcoin’s security monster (because nothing is free), should the block prize become insufficient.

It is true that higher transaction fees benefit miners. Thesis fees presently account for around five procent of mining revenue, however most mining pools keep the transaction fees for themselves and do not share them with the hardware operators. The visible implication of this is that Bitcoin mining is still profitable to the hardware technicus, even when subtracting transaction fees and pool fees on top of that. Spil I mentioned ter a previous verhandeling, however, the less profitable mining is, the less incentive there is for fresh entrants, and only those with the lowest marginal cost will be capable of challenging. Only those operating on the greatest economies of scale, or those who can afford the newest and most expensive hardware, are able to challenge. This substantially raises the barrier of entry and prevents puny operations and older hardware from being viable. It is stunning that the proponents of capacity confinement, for whom “miner centralization” is claimed spil a central concern, continually sidestep this glaring contradiction which undermines their entire toneelpodium.

At the time of this writing, the price of one Bitcoin hovers around $790. This means that the 12.Five BTC prize issued every ten minutes is worth $9,875, and the fees vanaf block are worth around $493.75. The fees are a nice toeslag (for the mining pools), but the real prize the miners are after is still the block prize.

Far lighter than attempting to force the transition to reliance on toverfee income is to simply make Bitcoin more valuable, thereby enhancing the value of the block prize. This may seem counterintuitive at very first: controlling fees is certainly lighter than controlling the free market trading price of Bitcoin. Phrased differently, it becomes more apparent. A modest twenty procent year-over-year growth te Bitcoin price is enough to account for the halving ter block prize every four years. Anything above twenty procent is gravy, and not only encourages fresh entrants but supports the ongoing profitability of older hardware.

On the other forearm, transaction fees would need to increase 1000% by 2020, an order of magnitude greater than what the price voorwaarde increase by te the same timespan, te order to make up for the halved block prize, assuming that other variables remain the same. This does nothing to encourage growth and decentralization of the mining industry, and also assumes that a smaller set of users will be convenient with their transaction fees enlargening by ten times what they are today. When viewed through this objectief, it is far lighter to imagine Bitcoin’s low fees and prompt transaction times being enough to foster a 20% annual growth te price (while historically the annual rate of price increase and user growth is far greater than 20%).

Thanks to Metcalfe’s Law, the utility of the Bitcoin network, and hence its price, should grow quadratically even spil the number of users grows linearly. What happened to the wish of a $Ten,000 bitcoin? Wij already know that the price of Bitcoin is more than capable of doubling inwards of a year, but now wij are told that hoping for a price doubling every four years is far too aggressive.

Proponents of restricting the Bitcoin network’s capacity will say that the bidding process is non-problematic. They say, “if you need your transaction to confirm sooner, just pay a higher toverfee.” Perhaps this is not so excellent a problem today (tho’ it is certainly still a problem), if wij assume that a majority of users can love Bitcoin’s swift confirmations spil long spil they pay an adequate toverfee. For the purposes of this argument, I will pull a number from skinny air and assume that 80% of transactions are capable of confirming te the next block. If the number of transactions being made on the network doubles, then with a 1MB block size te place that now means that only 40% of transactions can confirm te the next block, with thesis users paying higher and higher fees for the privilege. What does this mean for the other 60% of transactions? Their fees will also rise, even if they only need their transaction to confirm ter the next two or three, or ten, blocks. The end result is that swift confirmations become an off the hook resource, available only to an ever-shrinking percentage of users who can afford them. This argument also assumes that request for Bitcoin will proceed growing even spil it becomes more expensive and less reliable — it won’t.

The final fallacy of the toverfee market myth that I would like to address is an amazingly plain one, and it is again stunning that puny block proponents fail to understand it: no matter what the cost of a transaction toverfee is, even if that cost is nil, it is the result of a toverfee market.

If mining can be profitable on the onderstel of block prize alone, and miners adopt a minimal toverfee policy spil a result, then this is still the result of free market pricing of transaction fees. To suggest that a “fee market” is not a natural part of Bitcoin, but instead something that voorwaarde be artificially induced by protocol-level developers, is simply the product of an elementary ignorance of economics.

Wij are told that support for a block size increase is nothing more than the desire of “greedy Bitcoin miners” to collect more and more fees from the greater number of transactions a larger block size would enable. Yet, te the next breath wij are told that fees voorwaarde rise so that the miners can earn more money. Contradictions aside, the implication seems to be that miners cannot be trusted because they are greedy. Instead, their profitability vereiste be externally regulated by a group of developers-cum-central-planners.

Bitcoin mining is not done for charity. The “greed” of the miners (better to call it profit-seeking) is precisely what has permitted Bitcoin’s network to become the most powerful computing system te the world, with thousands of times more computational power than the world’s top 500 supercomputers combined.

Wij should want the miners to be greedy. Bitcoin mining is only profitable so long spil the network is healthy and ter high request. This is not a difficult concept to grab. Miners (spil a entire) will not harm the Bitcoin network, spil to do so is to demolish their own profits. Bitcoin even has an inbuilt fault tolerance for malicious miners — spil long spil the ordinary majority of miners remain fair, then Bitcoin is safe. If a majority of miners are malicious, then Bitcoin is already cracked. The best way to safeguard against any entity amassing a majority of hashpower is to ensure that the profit motive of mining is always present, especially for fresh entrants.

The incentive may help encourage knots to stay fair. If a greedy attacker is able to assemble more CPU power than all the fair knots, he would have to choose inbetween using it to defraud people by stealing back his payments, or using it to generate fresh coins. He ought to find it more profitable to play by the rules, such rules that favour him with more fresh coins than everyone else combined, than to undermine the system and the validity of his own wealth. -The Bitcoin Whitepaper, Section 6, Incentive

Ceterum censeo blocksize esse increscendum.

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