Can Bitcoin mining fees be increased?

Chapter 0 Introduction

After Bitcoin's block rewards are halved several times in the future, it will face the question of whether the interests of miners can be guaranteed. This is more important than anything else, because miners' income is related to the security of computing power. If miners cannot get enough economic incentives, the computing power will decline, threatening the security of the entire network.

There are two ideas for future miners' income. One is to keep the block size small, and limit the number of transactions in each block mined by miners, but increase the mining fee. The other is to expand the block size, so that miners can carry as many transactions as possible in one block. Although the mining fee for a single transaction remains low, the total mining fee of the block can be guaranteed to be sufficient.

This article wants to analyze whether the mining fee can be increased as desired, assuming that the small block size is maintained.

Chapter 1 Block congestion is undesirable

The easiest way to increase the transaction fee is to create block congestion. A single block package cannot confirm all (or most) transactions that occur in the entire network. Miners can select and confirm based on the level of the mining fee. Transactions with high bids will be confirmed faster, while transactions with low bids will have to wait in line until all transactions with higher bids than theirs are confirmed before it is their turn. This will lead to user bidding, and those who want quick confirmation will pay higher transaction fees. If this continues, the mining fee can be raised by competition among users.

The result of this will be a very poor user experience for Bitcoin's payment function, and the default expectation that transactions will be confirmed within ten minutes will be broken. Transactions with low mining fees may not be confirmed for a long time, and users will eventually be forced to use the RBF function to pay additional fees. If the transaction confirmation time is extended to the same length as the current cross-border transfer, you can imagine what kind of poor payment network it is. This kind of poor experience is not what a normal payment network should have.

The method of congesting blocks to increase transaction fees will make the Bitcoin network unable to withstand DDOS attacks, because the blocks themselves are very congested, and attackers only need to spend a higher than average mining fee to block transactions with low mining fees for a long time until they cannot be confirmed. This kind of network security will be extremely unstable and can even be exploited by short sellers.

Is there a way to make the block less congested and let users consciously increase the transaction fee? For example, will it be the case that all users who stay on the main chain are rich people, or that each transaction corresponds to a system such as a lightning network or a side chain, where a large amount of transaction fees can be deposited on the main chain. In this way, it seems that the transaction fee on the main chain can be increased without congestion. I think this situation is impossible. As long as the block is not congested, transactions on the block can be confirmed within 10 minutes. This transfer advantage will definitely attract some users who are stingy with transaction fees to use the Bitcoin main chain. If more people come, it will naturally be congested for small blocks.

Is there a situation where users who bid low cannot use the Bitcoin main chain, and all these users are kicked out of the main chain? It is conceivable that if the mining pool forms a price alliance, it can be realized by uniformly refusing to confirm transactions with low bids. But is this possible? I think it is impossible.

Chapter 2: It is difficult for a mining fee price alliance to form

Bitcoin is an open system. Anyone can buy a mining machine to join the bookkeeping, and anyone can build a mining pool to join the packaging of blocks. It is definitely impossible to require all miners and mining pools to reach a unified price concept, such as uniformly rejecting transactions with a transfer fee of less than 1 mbtc. It is easy for any miner to change the mindset, or for any rich person with different ideas to change this alliance. In other words, if the CEOs of mining pools around the world sit down to negotiate, it is possible to achieve a mining fee alliance in the short term. Although it is possible, it must be difficult. It is too difficult to unify thoughts unless there is a very good and very clear interest incentive. And it is so easy to break the alliance from outside the alliance.

When a mining pool mines a block, it can get more mining fees by packing one more transaction. This is a real economic benefit. Violating the price alliance will have a profit incentive, even if it is a short-term benefit. But this profit incentive is enough to break the price alliance. Because this is market competition.

In the process of mining pools packaging transactions sent by users, there is essentially no competition between mining pools and users. The two are in a cooperative relationship. The real competition occurs between mining pools and between users. Mining pools compete with each other for block rewards and users' mining fees. Users compete with each other for the right to use Bitcoin blocks. Can you imagine that the two competing mining pools can still reach a price alliance?

Open your eyes and look at the monopoly in various industries nowadays. Which enterprise does not regard the behavior of others as a thorn in their eyes, and would like to attract all users with the lowest price, and then starve the competitors to death. For example, the Internet industry is even more so. Various Internet products were charged to users at the beginning, then free, and now have developed to subsidize users.

Practitioners in the Bitcoin industry are not monsters. They also have to operate their businesses according to the same economic laws and it is impossible for them to reach some kind of humiliating agreement with their competitors.

Chapter 3 The Demand Curve Always Goes Down

The so-called demand curve always slopes downward is an economic law, which states that: when other conditions remain unchanged, the greater the cost, the smaller the demand; or, in other words, the smaller the cost, the greater the demand.

This is the most important cornerstone of economics, and we have reason to believe that the Bitcoin economy must also conform to the law of the downward demand curve.

We must be able to regard miners confirming transfers as a service, and the price of this service is the miner fee. The cost and service demand of this service must also conform to the downward demand curve.

When other conditions are the same, such as the same coin price and the same block size, the higher the mining fee, the lower the number of Bitcoin transfer transactions in the entire network will be, because some users will have to leave Bitcoin and seek other payment methods.

For example, if the transaction fee is too high, higher than the credit card fee, then the merchant will not support Bitcoin payments. Or the merchant is forced to only accept payments from a certain offchain wallet, or a future lightning network, etc., but there will be fewer transactions on the main chain.

This law of demand shows that it is impossible for Bitcoin payments to significantly increase mining fees while maintaining a sufficient number of transactions.

Any commodity must comply with the law of demand. If it is the same commodity, it can be sold more if it is cheaper. If you want to sell it at a higher price and in larger quantities, you have to change the quality of the thing you sell, such as changing "bag" to "LV bag", which improves the quality of the bag and makes it another commodity. Because of the "quality", it can be sold at a higher price.

Similarly, unless the service of confirming Bitcoin payments becomes another commodity, we will need to reconsider whether the existing mining fees can be increased while ensuring the demand for the service.

Can Bitcoin transfers be turned into a commodity like an LV bag in the future? I don’t know. Anyway, I can’t imagine any reason to support this possibility. For example, is it possible that when the price of Bitcoin is very high in the future, it will become something like gold?

Chapter 4: Mining fees and gold transaction costs are not the same thing

Some people would say that the transaction cost of gold is very high, and gold still maintains a high price. Based on this, Bitcoin may become a commodity like gold, which can make people willing to accept high transaction costs.

The gold transaction cost and Bitcoin mining fee mentioned here are not the same thing. The gold transaction cost is the friction of buying and selling gold, while the mining fee is the service fee paid to miners for using the Bitcoin network to transfer money. If you want to compare, you should compare the Bitcoin transaction fee in the exchange with the gold transaction cost. If you want to compare the mining fee, you should choose the fee of the payment function of gold. But gold has almost lost its payment function.

Assuming that Bitcoin will develop to a very high price in the future, exchanges and over-the-counter traders may charge higher transaction fees for transaction security reasons, but this has nothing to do with the mining fees themselves.

Maybe the price of Bitcoin will really rise in the future, and assuming that no one will use Bitcoin as a means of payment, but only use its storage function, then the mining fee calculated based on the Bitcoin price will not increase. Because Bitcoin, which has lost its means of payment, will not generate many on-chain transfers, the block will not be full, and any transaction can be confirmed within 10 minutes. The real beneficiaries are exchanges.

Of course, I believe this will not happen, that is, Bitcoin cannot become a stored-value tool without the payment function. Because to become a stored-value tool, Bitcoin must be safe. That is, Bitcoin needs a large enough computing power to protect it. But if the payment function is lost, the on-chain transactions will inevitably decrease. After the block reward is halved several times, if the on-chain transactions decrease again, the computing power will not be able to gain benefits. The computing power has to be reduced, and the entire network becomes unsafe. In this way, the price of Bitcoin will also fall.

Chapter 5 Lightning Network Pays Fees to the Main Chain

The concept of the Lightning Network hopes that transactions generated within the Lightning Network can accumulate transaction fees, which will eventually be deposited on the main chain to pay miners.

Logically speaking, if all transactions on the Lightning Network are required to pay a fee to the main chain, it would be the same as transactions on the main chain, except that transactions generated on the Lightning Network only need to accumulate the fees after multiple transactions and construct a transaction on the main chain.

The concept of tribute in the Lightning Network is actually similar to joint mining. We can make an analogy: the Lightning Network renamed the "Lightning Network Coin" generated by mining to "mining fees accumulated from multiple transactions"; the Lightning Network changed the concept of "blocks" generated by mining to the process of "opening and closing payment channels."

If the concept of Lightning Network is realized, it can indeed pay service fees to the main chain through the "joint mining" model. And the service fee for each payment will not be low. The greater the number of transactions within the Lightning Network, the higher the service fee.

I think this is a great concept and will greatly expand the number of Bitcoin transactions.

The transaction fees accumulated by the Lightning Network and paid to the main chain will be greater than the pure transaction fees on the main chain. The two may be complicated. But I think it is unlikely that the transaction fees on the main chain will be raised by the transaction fees paid by the Lightning Network.

The transaction fees accumulated by the Lightning Network and the pure transaction fees on the main chain are competing for the packaging and confirmation services of the miners on the main chain. Because the transaction fees of the former are large, miners have the motivation to confirm the accumulated transactions of the Lightning Network first. Only when a block is filled with transactions accumulated by the Lightning Network, the transactions on the main chain must be queued to the next block. But this situation will lead to the block congestion mentioned in Chapter 1. The consequence of congestion is that the accumulated transactions of the Lightning Network will form a competitive relationship, threatening the payment experience of the Lightning Network itself. When opening a payment channel from the main chain to the Lightning Network and closing the payment channel face congestion, this payment method itself becomes unsafe.

Then, opening a Lightning Network payment channel is to initiate a transaction from the main chain to the Lightning Network, which is the same as a pure on-chain transaction. If the on-chain transaction fee is raised, the cost of opening the Lightning Network will also be very high.

Then we return to the logic of Chapter 1, that is, congestion - increase transaction fees - no congestion - reduce transaction fees, and at the same time the network has to face the random possibility of DDOS.

Therefore, it is reasonable to believe that even if there are many lightning networks on the main chain, the transaction fees on the main chain will not be very high. It will just happen that the accumulated transaction fees of the lightning network will be confirmed first, and the transactions on the pure main chain will be ranked behind the lightning network. However, they all have to wait for an average of 10 minutes per block, and the average waiting time will not exceed 10 minutes. Otherwise, the transactions on the pure main chain will be equivalent to launching a DDOS on the main chain, resulting in a very poor payment experience for the entire network, and opening a lightning network payment channel will also become very poor.

Similar side chains pay transaction fees to the main chain, which is more direct joint mining, giving miners an extra coin. The value of this coin depends on the development of the side chain.

(I really hope that the Lightning Network can come out soon. I am afraid that my logical reasoning is wrong.)

Chapter 6 Payment methods are never scarce

Bitcoin is scarce, with an upper limit of 21 million. But the means of payment are not scarce, including the means of using Bitcoin to complete payment. However, Bitcoin on-chain payment is currently scarce under the block limit.

An onchain Bitcoin payment and an offchain Bitcoin payment, the former can be made scarce by the small block limit, while the latter can never be scarce.

Assuming that the Bitcoin onchain mining fee increases, the result is that payments will be driven to offchain or other payment methods. Miners simply lose the mining fees they should have received.

This is just like the fact that the minimum wage law cannot guarantee the rights of workers. The state sets a minimum wage, which only makes it impossible for low-value workers who could have found jobs to find jobs. Entrepreneurs will not use the wages stipulated by the minimum wage law to hire a worker whose labor ability does not match theirs. Why would the boss hire a less good worker when he can use such a high salary to find a better worker?

The increase in mining fees is equivalent to setting a "minimum wage". This will not change the users who are only willing to pay low mining fees. Raising mining fees will only exclude them from onchain transactions. This means that miners will not be able to get the mining fees they could have earned.

Chapter 7 Summary

1. Increasing transaction fees by blocking blocks makes the entire network extremely unsafe.

2. It is impossible for a mining fee price alliance to be formed.

3. The demand curve is always downward, and the demand for Bitcoin transfers will also decrease as the transfer fees increase.

4. Mining fees and gold transaction costs are not the same thing.

5. The fee paid by the Lightning Network to the main chain will not lead to an increase in transaction fees on the main chain.

6. Payment methods are never scarce.

Thanks for reading.

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Author: tan90d (Weibo @LightningHSL WeChat tan90d)
My BTC address: 14mhzjkJ71oMAMkKu3dy98dnUpkyQBHL1r
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