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Some people keep evangelizing that Bitcoin transaction fees are much lower than in PayPal or with credit cards.

However, once nearly all 21 million bitcoins have been mined, the network will still have to be secured.

But "miners" can then no longer be rewarded by newly minted bitcoins. They will have to be rewarded by transaction fees.

I read that the market will find the equilibrium how much these transaction fees will be.

Are there any estimates or more concrete calculations about that? Is it even possible to foresee, as the "degree of network security" is a rather nebulous incentive for most (casual) users? Will they thus be enforced by the software? Will these fees better be absolute or relative to the amount of a single transfer?

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It's a long way to go , dont' worry, the first production drop will come at the end of 2012. We'll see what's going to be then. for now , if you can wait, the fee can be 0, like the deepbit does. –  user342 Sep 11 '11 at 12:40

9 Answers 9

up vote 42 down vote accepted

I read that the market will find the equilibrium how much these transaction fees will be.

It will not. This is perhaps the biggest flaw in Bitcoin at the moment: once mining rewards end there is no direct linkage between the amount of hashpower needed to secure the network and the incentive to mine.

True, there is a limit on the blocksize, so if the transaction volume in a block window (approximately 10 minutes) exceeds the block size you can expect a miniature "auction" where transactions fight for space in the block by bidding up the minimum transaction fee needed to get in. However this isn't really a closed-loop adjustment: the maximum blocksize is an arbitrarily chosen number, and there's no reason to believe the maximum blocksize is small enough to ensure that transaction fees are high enough to incent enough miners to mine to keep the system secure. Unlike the difficulty and the USD/BTC exchange rate it does not respond to market activity. It also has the negative side effect of capping the worldwide Bitcoin transaction throughput since other parts of the protocol rely on the assumption that blocks are created -- in the long run -- no more than once every ten minutes.

Compare this to the current situation with mining rewards: the more valuable a bitcoin is the more incentive there is for somebody to try to overwhelm the "good guys" by gaining 50%+1 hashpower. However, the more valuable a bitcoin is the more miners will mine! It isn't perfect, but the important point is that the demand for security increases the incentive to mine. Note that although the difficulty will go up, that simply ensures that the reward granted every ten minutes is an approximately constant number of BTC -- the number of terahashes/sec fighting over that amount of BTC is free to respond to changes in their changing value (as measured in terms of all other goods in the world, including other currencies).

As the mining reward is reduced this "direct coupling" between the network's need for security and the incentive to mine becomes progressively more diluted.

I worry a lot about what will happen to Bitcoin once we decouple those two forces. I think the developers ought to at least come up with a story on how this will be solved so people can start testing it.

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@lemongignger, it's the other way around: difficulty will adjust to whatever amount of mining can be paid for using the money people choose to "donate" via transaction fees . The (voluntary) transaction fee determines the difficulty, not the other way around. There is no incentive for miners to exclude a transaction whose fee was too small yet still nonzero. This "tragedy of the transaction fee commons" is a separate (but related) issue from what OP is asking about. –  eldentyrell Sep 19 '11 at 5:58
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@Wim, people join pools to reduce the variance, not as a way to collude. I, for one, would pull out of the pool and mine on my own if I found out that my pool was colluding with others. I think you fundamentally misunderstand how pooled mining is not a form of collusion or agreement; it is a way of reducing variance and nothing more. If pools make some "agreement" between themselves and it is possible to profit by breaking the agreement (i.e. accepting transactions with too-small-but-nonzero fees), people will leave the "agreement" pool _en masse_. –  eldentyrell Sep 27 '11 at 19:23
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@DeathAndTaxes, regarding "nobody can ophan a transaction", that's exactly my point. Nobody can keep too-low-fee transactions out of the chain. There will be a "race to the bottom". Whichever pools exclude too-low-but-nonzero-fee transactions are donating money (forgone transactions) to the pools that don't. I wouldn't expect an arrangement like that to be stable for long. –  eldentyrell Jan 12 '12 at 6:48
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@Wim, no, because your proposal cannot be implemented without forking the chain. Merely getting 51% of the miners to agree is not enough to keep those transactions out of the chain. You must convince everybody on the entire network to upgrade their clients; if you don't do that, the chain will fork. The fact that your proposal causes a chain-fork makes it incredibly unlikely to ever be implemented by even a minority of the miners. They risk losing a lot of money by mining on the "wrong side" of the fork (whichever side that may be). –  eldentyrell Jan 13 '12 at 3:33
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@Wim, you are mistaken. You write that "the rule would be enforced by orphaning non-compliant blocks". The only way to orphan blocks is to make a chain-forking alteration to the block validity rules. This has not happened since the days before mining first became profitable, back when people mined only for fun; see bitcoin.stackexchange.com/questions/1309/… Miners who adopt chain-forking alterations to the block validity rules risk losing massive amounts of money. –  eldentyrell Jan 14 '12 at 2:20

It's impossible to say for sure right now, because according to Gavin, Bitcoin's transaction fee structure will be redesigned at some point:

bitcoin's fee structure isn't right either, and fixing it to create a market between miners and clients is high on the TODO list

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your link is dead –  user8077 Mar 19 '12 at 22:52
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@user8077 It still works for me. –  Chris Acheson Mar 20 '12 at 2:35
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"Reworking Bitcoin Transaction Fees" Proposal gist.github.com/2961409 –  osmosis Jan 5 '13 at 21:11
    
This needs high priority. Looking at this link shows that costs per transaction are likely NOT sustainable long term. blockchain.info/charts/… –  Brad Thomas Apr 8 at 1:41

There are a lot of unknowns because the network is so young and transaction volume is so low.

Currently the block reward is worth about $13.1 million annually. If fees stabilized at 0.1% of transaction volume (compare that to 3%+ for cc/debit/paypal) it would require a transaction volume of ~ $13 billion for fees to someday generate the same global revenue as current block rewards. To put that into perspective, credit & Debit cards have an annual transaction volume of ~ $2.5 trillion. Paypal has ~ $80 billion in transactions per year so this level of transaction volume is certainly possible.

The larger issue is that under current protocol rules fees will never stabilize at 0.1% (or any other meaningful percentage) of transaction volume. The reason is that currently there is no disincentive for a miner to exclude any paying transaction unless the block is already full of higher paying transactions. A transaction can become a paying transaction by merely including 1 satoshi with every transaction which even on a 1 BTC transaction is only 0.0000001% not 0.1%. For larger transactions it becomes infinitesimally small.

There is no method to create granularity because fees can be arbitrarily small and miners should logically not exclude a paying transaction. The current transaction fee system is simply not viable once block rewards (subsidies) are removed.

One way to look at it is the current network costs about $13 million per year to run or roughly $20 per block per TerraHash (TH). That cost is paid via subisides but that isn't a viable long term strategy. Someday it will need to be paid for with fees. If the amount of fees collected are higher than the network will be larger/stronger. If the amount collected is smaller then the network will be smaller/weaker.

Remember Moore's law doesn't make the network stronger. As miner's hardware becomes more efficient so does attacker's hardware. The network needs to generate sufficient fees to remain strong not just increase nominal hashing power due to efficiency gains. The current transaction fee system doesn't achieve that goal. It will need to be changed.

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i wonder if difficulty could be factored in to ensure that the network remains strong once all new blocks have been mined... –  mulllhausen Sep 12 '13 at 6:40

In theory, as deflation continues and mining blocks becomes more efficient, the transaction cost will approach .00000001BTC/ 1 Satoshi and will stop multiple times on its way down at the point slightly above where profitability reaches cost. It is also possible that the transaction fee will approach zero.

The reason this happens is competition will drive the price down to the point that only the most efficient miners will be in business. The price reduction is further amplified by the deflation in Bitcoin. We will find the exact stopping point from the most efficient miners who are willing to take the lowest profit margin.

This will also be a floating point because as transaction volume increases so will profitability allowing miners to further reduce their fee.

To further answer some of your questions:

1)Are there any estimates or more concrete calculations about that? A: None that I can find. My prediction is that transaction fees will have a multi-tier approach where the most efficient miners will offer "dual" processing fees one of which would be 0BTC. The miners would split their processing power(a percentage based on profitability and a simple maximization problem) and include only transactions that met the highest payment tier would be included.

For example, if you include a 0 Satoshi fee you will only get 5% total processing power. If you include a 1 Satoshi fee you will get 10% processing power.

2)Is it even possible to foresee, as the "degree of network security" is a rather nebulous incentive for most (casual) users? A: The degree of network security will be improved if users provide their own processing power but, this will not be necessary as mining will be profitable to the most efficient miners.

3) Will they thus be enforced by the software? A: Fees will be enforced by miners not including transaction with too low of a fee into the block chain. This will cause a significant delay in the speed of your transaction. In the worst case scenario, where EVERYONE on the network requires a fee, you will have to mine your own block to get your transaction processed.

4)Will these fees better be absolute or relative to the amount of a single transfer? A: A miner can choose to accept a transaction and include it into a block based upon any criteria that they see fit. It will be interesting to see how miners choose to tier their pricing.

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What's the incentive for accepting 0 fee transactions in your proposed "multi-tier approach"? I think there is none. –  user220 Sep 11 '11 at 20:06
    
There would be no direct monetary compensation for accepting zero fee transactions.It would be a goodwill gesture to the community.The goodwill gesture could increase miners overall profitability in transaction fees by allowing users to connect their clients to just them so they get the "first shot" at processing the transaction.The miner could also choose not to broadcast the transaction and solve it themselves in that case. Those who need faster processing would pay a fee and those who don't care would wait.Users would choose this option if they feel like the miner provides better service. –  Justin Weeks Sep 11 '11 at 20:20
    
You don't pay server costs with goodwill. –  Lohoris Sep 22 '11 at 9:57
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@Lohoris no you don't BUT if you have vested interest in bitcoin thriving (like say you are Mt Gox and you personal wealth in directly related to Bitcoin adoption) then it may be worth it to indirectly donate some server capacity to handle "charity transactions". –  DeathAndTaxes Oct 6 '11 at 20:49
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You say : "competition will drive the price down to the point that only the most efficient miners will be in business" If that becomes true, doesn't that open the door to collusion ? As the barrier of entry to being a miner increases, their number will diminish, and collusion will become increasingly feasable. What could prevent this ? –  Max L. Apr 12 '13 at 14:38

Most likely the fees asked for will be based on the transaction numbers. The miner's rig will need to be paid for (electricity, replacement parts, etc) for cost assumption is kind of hard to figure out until such a time as we know how many transactions will be going through once mining is complete.

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In any P2P currency, there are only 3 choices, or combination of them.

  1. You fund miners from savers.
  2. You fund miners from spenders.
  3. You let the government provide the mining. A public need so the economy doesn't stop.

1 is not available to Bitcoin long-term, because debasement is halving every four years.

2 penalizes economic activity, which is more important than burying money, ahem saving. Also it doesn't scale, unless it is uniform in the protocol. Gavin wrote making it uniform won't work in the market.

3 is thus the outcome for Bitcoin. (as designed by Satoshi)

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Your number 2 choice potentially penalises spenders less than credit card costs do, provided that retailers pass their cost savings on to their customers. This means that spenders can pay fees and still do better than they are now. Remember, Bitcoin isn't just a currency; it's a payment method. –  Highly Irregular Mar 27 '13 at 8:46
    
@HighlyIrregular Sure it scales now that we have the revelation that the mega-corporations will do the mining as a loss-leader to monopolize. But the 3% for credit cards will be nothing compared to the 100% or more once there same monopoly controlling both processing and retailing. Before at least the retailers were fighting the credit cards, now they will be one in same and we will become absolutely slaves and destitute. You Bitcoin developers are not thinking clearly. –  Shelby Moore III Mar 27 '13 at 9:04
    
That would give room in the cryptocurrency space for an alternative to take over. Remember most retailers need to provide their product at a competitive price, or another business will undercut them. And I'm not a Bitcoin developer (as least not yet)... I'm more interested in the theory, so far. I note that a new structure for transaction fees is in the works too: gist.github.com/gavinandresen/2961409 –  Highly Irregular Mar 27 '13 at 9:19
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@HighlyIrregular Retailers won't be numerous (competitive) after the reverse takeover of our economy reset coming 2017. Gavin's proposal is a red-herring-- it doesn't scale. The only correct way to keep it decentralized is to never stop the debasement. That is why I knew that Satoshi was doing something evil and intentional. –  Shelby Moore III Mar 27 '13 at 9:22
    
+1 But new crypto-currencies might remove the need for mining altogether. And I guess this will be the way. –  Stéphane Gimenez Apr 17 '13 at 14:40

At the moment, miners seem happy with a reward of B25 per block (and no fee auction seems to be happening with such a reward). You'd need to see how many transactions or how many bitcoins in average are usually contained in one block, and split those B25 over all the transactions.

So I don't think it will get very high anyway, so by itself the absence of fixed reward can be easily compensated by moderate fees.

What worries me more than the absence of fixed reward, and I think will have more impact, is the increase in the number of transactions: if blocks are mined at a constant rate, and their size is fixed, but the number of transactions keeps getting higher, it means that blocks will be more and more crowded and people start "fighting" (with fees) to get their transactions included. But again, this will be due to the number of transactions, not the presence or absence of a reward.

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I would like to point out another macroeconomic related issue for the time all bitcoins are mined. The money is accumulating to the ones who know how to make the money to make more money. If the economy is not able to produce more coins, it will either fall into loan trap, deflation spiral which will reach quickly smallest fraction of coin or a global war will happen that resets the system. So bitcoin needs a way to raise the upper limit. Would it be possible to couple the hash algorithm with date so that in the beginning of hash more choises will be possoble than 0000000 today? And maybe also more slow algorithms to be used for the time pure energy is running quantum math?

My second macroissue would be related to populatipn growth. Monetary system needs to adapt to it. Deflation is hard to happen because of greed, but hunger will raise if jobless is caused by missing or standing money. Someone needs to find a way to inject money into system. Same does apply for seasional need for money when corn needs to be processed- othetwise it will rot because of no money to pay the bill e.t.c. There is a reason why gold is no more base currency.

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Welcome Peeter. You make an interesting point, however, this answer you posted doesn't fit the question that was asked and is throwing out some questions of its own. Perhaps you could create your own question from your thoughts here? Please refer to How to Ask? –  Murch Nov 24 '13 at 2:14

The long-term miners 'fee' for validating transactions might eventually come to be interpreted as some sort of interest rate.

Traditionally the interest rate is defined as the opportunity cost of holding on to currency. Right now, there is a benefit to holding on to a bitcoin, but come the day when they are few and far between mined, and more and more 'validated' that validation will be the opportunity cost of not discovering a new bitcoin, and thus some sort of interest rate (i.e. not having a bitcoin).

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Yet, unlike an interest rate the transaction fee is neither applied relative to the balance, nor invoked at passing of certain time intervals. The comparison is not very apt. –  Murch Dec 6 '13 at 14:51
    
I'm not talking about a yield (such as the interest paid on a bond or debt instrument), but rather the long term rate of interest in an economy. –  user10263 Dec 6 '13 at 18:29

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