layout: post

title: Pettycoin Revisited Part VI: Fees and Horizons

commentIssueId: 42

Mining fees must be sufficient to support the network, otherwise it

will eventually fail. There's a tension between users who want the

lowest fees possible, and miners who want the highest fees possible.

And while the miner of a particular block collects the fees, the

incremental cost of remembering the transaction is carried by the

entire network.

Bitcoin is supposed to use an open market fee structure; miners choose

what to accept based on fees, and so transactions offer a fee

sufficient to have miners include the transaction in their block.

In practice, the default formula used is very simple: there are a

number of "first-in-first-served" free transaction slots in each

block, then a fixed fee is required per kb of transaction. This fixed

fee has dropped several times as the bitcoin price increases.

It's not particularly important, as miners view transactions fees as a

tiny cherry on top: the block rewards are driving mining at the

moment. This will eventually change, so efforts are underway to have

the reference bitcoin client guestimate appropriate fees which are

likely to have a transaction included. How well this will work in

practice is uncertain: miners have short-term incentive to include

transactions no matter how small the fee, but a longer-term incentive

to reject tiny fees. This is especially true if clients autodetect

appropriate fee levels.

As a first approximation, the cost of running the bitcoin network

should be equal to the value of bitcoins currently produced. Let's

assume that we want the network to continue at the current spending

level when the block reward next halves; transaction fees will have

to make up the difference, at around $4000 per block.

The bitcoin price is a huge unknown, so we'll try to make our other

guesses extremely conservative. Let the bitcoin transaction rate will

increase to a massive 100 transactions per second, that's 60,000

transactions each paying around 6c each.

If bitcoin won't let you reasonably send 1c, what would? A sidechain

specifically designed for this, with properties that ensured it

wouldn't compete with bitcoin. That way, miners could pick up the

(too-small) fees, without entering a race to the bottom on the bitcoin

network.

Of course, the sidechain would have to be cheap to run, too, so the

additional cost of merge mining it was worth the small fees involved.

This was the core design of pettycoin:

1. A 1-month horizon, after which coins are returned to the bitcoin

network.

2. Simplified, less-powerful transaction types.

3. Fees based on percentage, rather than absolute values.

The horizon ensures that pettycoin is not a store of value, but only a

transfer network, and puts an approximate upper limit on how much data

needs to be stored.

Simplified transactions

[were a bad idea](http://rustyrussell.github.io/pettycoin/2014/12/05/Pettycoin-Revisited-Part-IV:-Simplified-Transactions.html)

as they don't save much, and it's hard to tell which parts of the

bitcoin scripts will be useful in future.

The percentage-based fee (0.3% currently) makes for a simple penalty

if transactions get large enough that it would be cheaper to do them

on the bitcoin network. (You could also flag a transaction as zero-fee,

with the idea that miners may or may not accept them).

This scheme required simplified transactions, which can distinguish a

payment from change. Using percentage of the total transferred would

encourage users to split their outputs so future transactions would

not need to transfer as much, leading to a larger UTXO size.

The simplest solution I can think of would be to ignore the

largest output, and sum the rest as the fee basis.

This could still be gamed for some cases, of course, but is fairly

simple in the common case. There's no reason to restrict number of

inputs, as consuming many inputs would reduce the UTXO size and help

the network overall.

This core idea of a complementary network for sub-cent transactions

has promise, but has a significant bootstrap problem. If there are

still free bitcoin transactions, it provides no value. If there are

no more free bitcoin transactions, then you need to pay the

transaction fee to get money on and off the sidechain, in order to

save money later (and you only have a limited time to do it).

It would take a compelling use case to drive adoption, which could

be artificial: eg. a subsidised SatoshiDice-style service on the

microtransaction network.