Subject: Re: [bitcoin-dev] Off-chain transactions and miner fees

From: Joseph Poon <[email-masked]>
Date: Sun, 9 Aug 2015 22:01:03 -0700

Hi,

On Mon, Aug 10, 2015 at 12:20:36AM +0200, info--- via bitcoin-dev wrote:
> Off-chain transactions, whether it's Lightning or something else,
> potentially extract fees, which may otherwise be paid to miners, if the
> transactions were actually on-chain.
> 
> In this context, wouldn't it be contradictory, maybe even harmful, to
> aim for an environment, where some/many/most transactions are off-chain?

I think the fee market's long-term implications for mining rewards is
very important as well! However, opening and closing channels will not
be infrequent to the point that it will never happen with Lightning.
Individuals that fill up their channel will need to accommodate
accumulation (as well as those that do a lot of disbursement). These
fund flows are not too rare, and huge payments (think the equivalent to
wire transfers today) will probably be still on-chain. I think the
payment size of micropayments to credit cards are Lightning-scale, what
people use today for wire transfers (e.g. buying a house) will be
on-chain.

What Lightning does is it mitigates the advantages that doing an end-run
around bitcoin entirely via centralized systems provides to a sufficient
level, e.g. everyone transacting on Coinbase. Having everything on
centralized services will have significantly lower on-chain transactions
than Lightning and is one of the more viable alternative off-chain
payments.

Fundamentally, without off-chain transactions, there's a paradox within
a viable fee market. If you presume that fees should be relatively
competitive (i.e. not asymptotically close to zero), that implies that
higher-value transactions *will* be prioritized over low-value
transactions, as high-value transactions are willing to pay higher fees.
Wire transfers are cheap when it's a million-dollar wire.

In my view, different transaction values is the much larger risk for
on-chain transaction fee markets, with high-value transactions crowding
out low-value transactions on-chain. With lightning, it significantly
mitigates this problem by aggregating the low-value transactions
off-chain.

-- 
Joseph Poon