* [bitcoin-dev] Fee smoothing @ 2016-01-26 17:42 Luzius Meisser 2016-01-27 2:45 ` Warren Togami Jr. 0 siblings, 1 reply; 5+ messages in thread From: Luzius Meisser @ 2016-01-26 17:42 UTC (permalink / raw) To: bitcoin-dev This post serves to convince you of the economic benefits of smoothing the payout of fees across blocks. It incentivizes decentralization and supports the establishment of a fee market. Idea: currently, the total amount of fees collected in a block is paid out in full to whoever mined that block. I propose to only pay out, say, 10% of the collected fees, and to add the remaining 90% to the collected fees of the next block. Thus, the payout to the miner constitutes a rolling average of collected fees from the current and past blocks. This reduces the marginal benefit of including an additional transaction into a block by an order of magnitude and thus aligns the incentives of individual miners better with those of the whole network. As a side-effect, the disadvantage of mining with a slow connection is reduced. Example: currently, given a transaction with a fee of 1000 Satoshis and global processing cost per transaction of 5000 Satoshis, an individual miner would still include the transaction if it costs him 500 Satoshis to do so, as the remaining burden of 4500 Satoshis is carried by others (a classic externality). However, with fee smoothing, the immediate benefit of including that particular transaction is reduced to 100 Satoshis, aligning the economic incentives of the miner better with the whole network and leading the miner to skip it. Generally, the fraction that is paid out immediately (here 10%) can be used to adjust the incentive, but not arbitrarily. Benefits: 1. The disadvantage of mining with a slow connection is reduced by an order of magnitude. If it takes 30 seconds to download the latest block, a miner loses 5% of the potential income from fees as he does not know yet which transactions to include in the next block. With fee smoothing, that loss is reduced to 0.5% as he would still earn 90% of the average fees per block by mining an empty one based on the latest header. 2. This is a step towards a free fee market. In an ideal market, prices form where supply and demand meet, with the fees asymptotically approaching the marginal costs of a transaction. Currently, supply is capped and only demand can adjust. Should we ever consider to let miners decide about supply, it is essential that their marginal benefit of including an additional transaction is aligned with the global marginal cost incurred by that additional transaction. Fee smoothing is a step in this direction. 3. The incentive to form mining pools is reduced. Currently, solo-mining yields a very volatile income stream due to the random nature of mining, leading to the formation of pools. This volatility will increase to even higher levels once the amount of Bitcoins earned per block is dominated by (volatile) collected fees and not by (constant) freshly minted coins, thus increasing the economic pressure to join a large pool. Fee smoothing reduces that volatility and pressure. Problems: touching anything related to fee distribution is a political minefield. This proposal probably requires a hard fork. Its technical feasibility was only superficially verified. This is my first post to this list and I am looking forward to your comments. In case this proposal is received well, I plan to specify/implement the idea more formally in order to kick off the usual process for improvements. -- Luzius Meisser President of Bitcoin Association Switzerland MSc in Computer Science and MA in Economics ^ permalink raw reply [flat|nested] 5+ messages in thread
* Re: [bitcoin-dev] Fee smoothing 2016-01-26 17:42 [bitcoin-dev] Fee smoothing Luzius Meisser @ 2016-01-27 2:45 ` Warren Togami Jr. 2016-01-27 10:12 ` Luzius Meisser 0 siblings, 1 reply; 5+ messages in thread From: Warren Togami Jr. @ 2016-01-27 2:45 UTC (permalink / raw) To: Luzius Meisser; +Cc: Bitcoin Dev [-- Attachment #1: Type: text/plain, Size: 4801 bytes --] On Tue, Jan 26, 2016 at 9:42 AM, Luzius Meisser via bitcoin-dev < bitcoin-dev@lists•linuxfoundation.org> wrote: > This post serves to convince you of the economic benefits of smoothing > the payout of fees across blocks. It incentivizes decentralization and > supports the establishment of a fee market. > > Idea: currently, the total amount of fees collected in a block is paid > out in full to whoever mined that block. I propose to only pay out, > say, 10% of the collected fees, and to add the remaining 90% to the > collected fees of the next block. Thus, the payout to the miner > constitutes a rolling average of collected fees from the current and > past blocks. This > *reduces the marginal benefit of including an additional transaction into > a block* by an order of magnitude and thus > aligns the incentives of individual miners better with those of the > whole network. As a side-effect, > > *the disadvantage of mining with a slow connection is reduced.* I do not believe your logic is correct. Reducing the marginal benefit of including an additional transaction is problematic because it simultaneously increases the orphan risk while it reduces the reward. 90% of the fee going to the next block would also create new incentive problems like mining an empty block to minimize the chance of losing 90% of the fees from the previous block to an orphan. Another major issue with mandatory sharing is if the miner doesn't want to share, nothing stops them from taking payment out-of-band and confirming the transaction with little or no fees visible in the block. I had been thinking recently about fee deferral for a different reason. In the future when the subsidy is much smaller in proportion to the fees, there may be little incentive to confirm on top of someone else's block in cases when the expected value of replacing the current tip is higher. I think smoothing fees between the current and subsequent 5 blocks (for example) might reduce the incentive of this type of behavior. The main risk here might be in weakening too far the incentive of adding more transactions to the current block, as I believe your 10% current and 90% subsequent reward split would do. I think my idea of a mandatory split between six blocks might also be a failure because of the high incentive to conduct out-of-band payments. > Benefits: > 2. This is a step towards a free fee market. In an ideal market, > prices form where supply and demand meet, with the fees asymptotically > approaching the marginal costs of a transaction. Currently, supply is > capped and only demand can adjust. Should we ever consider to let > miners decide about supply, it is > > *essential that their marginal benefit of including an additional > transaction is aligned with the global marginal cost incurred by that > additional transaction.* Fee > smoothing is a step in this direction. > While I don't agree with the rest of your logic, it is agreeable that you care about aligning the miner's supply incentives with the global marginal cost. If you believe that is an important goal, you might like the Flex Cap approach as presented by Mark Friedenbach at Scaling Bitcoin Hong Kong. Under the general idea of the Flex Cap approach block size is no longer fixed, it can be bursted higher on a per-block basis if the miner is willing to defer a tiny portion of the current block subsidy to pay out to the miner of later blocks. If conditions are such that there is genuine demand then some are willing to pay higher fees for time preference. Some formula would balance the cost and reward in some manner like: add the value of newly included fees, subtract the expected marginal cost of orphan risk, then subtract the portion of subsidy deferred. Flex cap has periodic block size retargets to allow for a temporary limit to rise or fall to something resembling actual market demand. This temporary limit is never a "wall" that can be hit as miners can choose to burst past it if the cost is worth the reward. Flex Cap is an area of ongoing research that I strongly believe would benefit Bitcoin in the long-term. For this reason it requires careful study and simulations to figure out specifics. 3. The incentive to form mining pools is reduced. Currently, > solo-mining yields a very volatile income stream due to the random > nature of mining, leading to the formation of pools. This volatility > will increase to even higher levels once the amount of Bitcoins earned > per block is dominated by (volatile) collected fees and not by > (constant) freshly minted coins, thus increasing the economic pressure > to join a large pool. Fee smoothing reduces that volatility and > pressure. > You seem to not recognize that orphan cost is a major reason why pools are attractive. Warren Togami [-- Attachment #2: Type: text/html, Size: 6027 bytes --] ^ permalink raw reply [flat|nested] 5+ messages in thread
* Re: [bitcoin-dev] Fee smoothing 2016-01-27 2:45 ` Warren Togami Jr. @ 2016-01-27 10:12 ` Luzius Meisser 2016-01-27 23:11 ` Warren Togami Jr. 2016-01-28 20:16 ` Luzius Meisser 0 siblings, 2 replies; 5+ messages in thread From: Luzius Meisser @ 2016-01-27 10:12 UTC (permalink / raw) To: Warren Togami Jr.; +Cc: Bitcoin Dev 2016-01-27 3:45 GMT+01:00 Warren Togami Jr. <wtogami@gmail•com>: > On Tue, Jan 26, 2016 at 9:42 AM, Luzius Meisser via bitcoin-dev > <bitcoin-dev@lists•linuxfoundation.org> wrote: >> >> Idea: currently, the total amount of fees collected in a block is paid >> out in full to whoever mined that block. I propose to only pay out, >> say, 10% of the collected fees, and to add the remaining 90% to the >> collected fees of the next block. Thus, the payout to the miner >> constitutes a rolling average of collected fees from the current and >> past blocks. > > [...] Another major issue with mandatory sharing is > if the miner doesn't want to share, nothing stops them from taking payment > out-of-band and confirming the transaction with little or no fees visible in > the block. While I find the other points you raised debatable, the out-of-band argument looks strong enough to kill the idea. To work around it, one would need to create rules about the transactions that can be included in a block, for example by mandating that all included transactions must have a fee at least as high as 0.9 times the 5th percentile of the transactions in the previous 10 blocks. However, having to tell the miners what fees they are allowed to accept destroys some of the elegance of the idea. Maybe I should put it to rest for now and see if a more elegant solution comes to mind later. > While I don't agree with the rest of your logic, it is agreeable that you > care about aligning the miner's supply incentives with the global marginal > cost. If you believe that is an important goal, you might like the Flex Cap > approach as presented by Mark Friedenbach at Scaling Bitcoin Hong Kong. > Under the general idea of the Flex Cap approach block size is no longer > fixed, it can be bursted higher on a per-block basis if the miner is willing > to defer a tiny portion of the current block subsidy to pay out to the miner > of later blocks. > [...] > Flex Cap is an area of ongoing research that I strongly believe would > benefit Bitcoin in the long-term. For this reason it requires careful study > and simulations to figure out specifics. I agree that flex cap is promising. However, for it to be a viable long-term solution, it must not depend on significant block subsidies to work as the block subsidy will become less and less relevant over time. Picking up your thoughts, I guess this is how flex cap should be done: 1. There is a flexible block cap (e.g. 1 MB). This first MB is free to fill. 2. Miners can buy additional space for an exponentially increasing fee. For example, the first KiB might cost 200 Satoshis, the second KiB 400 Satoshis, the tenth KiB 102400 Satoshis etc. 3. The price of the purchased space is subtracted from the collected fees and added to the reward of the next block. 4. The amount miners are willing to spend on additional space allows to calculate the marginal costs of a transaction of a miner. For example, if a miner pays 6000 Satoshis to include a 1 KB transaction with a fee of 6100 Satoshis, the marginal costs must be below 100 Satoshis, assuming a rational miner. This cost is multiplied by say 50 to account for the costs of decentralization to get a global cost estimate of 5000 Satoshis per KB. 5. Every 1000 blocks or so, the basic cap is adjusted upwards or downwards (e.g. by 10%) depending on whether the average fees per KB were above or below the global cost estimate. Under such a scheme, prices should get very close to free market prices. However, ruthless competition can get ugly in markets where fixed costs dominate. We can currently witness this in the oil industry. Thus, from an economic point of view, it might be more advisable to simply let miners vote on block size, as has been proposed by others. The drawback of voting is that it allows miners to enforce a cartel among themselves and to charge monopoly prices instead of competitive prices. However, monopoly prices would already be much better than having an artificial cap. Warren, thank you for your thoughts! I appreciate the opportunity to discuss ideas at such a high level. -- Luzius Meisser President of Bitcoin Association Switzerland MSc in Computer Science and MA in Economics ^ permalink raw reply [flat|nested] 5+ messages in thread
* Re: [bitcoin-dev] Fee smoothing 2016-01-27 10:12 ` Luzius Meisser @ 2016-01-27 23:11 ` Warren Togami Jr. 2016-01-28 20:16 ` Luzius Meisser 1 sibling, 0 replies; 5+ messages in thread From: Warren Togami Jr. @ 2016-01-27 23:11 UTC (permalink / raw) To: Bitcoin Dev [-- Attachment #1: Type: text/plain, Size: 1196 bytes --] On Wed, Jan 27, 2016 at 2:12 AM, Luzius Meisser <luzius.meisser@gmail•com> wrote: > I agree that flex cap is promising. However, for it to be a viable > long-term solution, it must not depend on significant block subsidies > to work as the block subsidy will become less and less relevant over > time There is another variant of the Flex Cap approach that allows miners to pay with a slightly higher difficulty target instead of deferring a portion of subsidy to later blocks. I think the HK presentation was about the subsidy deferral variant because of miner feedback that they preferred that approach. Myself and a few other developers think proposals like BIP100 where the block size is subject to a vote by the miners is suboptimal because this type of vote is costless. You were astute in recognizing in your post it's a good thing to somehow align the global marginal cost with the miner's incentive. I feel a costless vote is not great because it aligns only to the miner's marginal cost, and not the marginal cost to the entire flood network. Flex Cap is superior as "vote" mechanism as there is an actual cost associated, allowing block size to grow with actual demand. Warren [-- Attachment #2: Type: text/html, Size: 1672 bytes --] ^ permalink raw reply [flat|nested] 5+ messages in thread
* Re: [bitcoin-dev] Fee smoothing 2016-01-27 10:12 ` Luzius Meisser 2016-01-27 23:11 ` Warren Togami Jr. @ 2016-01-28 20:16 ` Luzius Meisser 1 sibling, 0 replies; 5+ messages in thread From: Luzius Meisser @ 2016-01-28 20:16 UTC (permalink / raw) To: Warren Togami Jr.; +Cc: Bitcoin Dev 2016-01-28 13:00 GMT+01:00 Warren Togami Jr. <wtogami@gmail•com>: > Myself and a few other developers think proposals like BIP100 where the > block size is subject to a vote by the miners is suboptimal because this > type of vote is costless. The cost of the vote is completely irrelevant. What matters are the resulting block sizes and transaction fees. Assuming rational, profit-maximizing miners, BIP100 would allow them to effectively enforce a cartel and to set block sizes (and thereby indirectly also fees) at monopoly price levels. Charging something for a vote would not affect that equilibrium and thus also neither affect block sizes nor fees. Also note that monopoly prices are always at least as high as competitive market prices. In other words: the transaction fees that emerge under BIP100 will be higher than those that would emerge with a flex cap mechanism that is based on the total marginal costs of the miners. If you do not believe that, I'll happily go into the gory details. > You were astute in recognizing in your post it's > a good thing to somehow align the global marginal cost with the miner's > incentive. I feel a costless vote is not great because it aligns only to > the miner's marginal cost, and not the marginal cost to the entire flood > network. Flex Cap is superior as "vote" mechanism as there is an actual > cost associated, allowing block size to grow with actual demand. There are two types of flex cap mechanisms: First, there mechanisms like the one I described previously which ensures that supply is based on the actual costs of the miners. If done right, they can lead to a competitive equilibrium with free market prices. Second, there are flex cap mechanisms that simply replace todays centrally planned constant cap with a centrally planned supply curve. If you believe in central planning, that's ok. I for one prefer to avoid it. Also, it is not much better than the constant cap, maybe even worse. Note that neither type of flex cap adjusts to the marginal cost of the entire network, simply because none of them can measure the cost of running a full node, yet alone reliably detect the number of running full nodes. Any attempt to do so would be futile anyway because it would too easy to pretend-run full nodes in order to manipulate the mechanism. When reasoning about full nodes, completely different forces are at play. The only connection between full nodes and the fee market is that larger blocks make it more expensive to run a full node. However, a holistic analysis must also reason about the benefits of running a full node. I often see one-sided arguments saying that increasing block sizes will make running one more expensive and thus there will be fewer nodes. This logic is flawed because the economic reasons for running a full node are not understood and taken into account. An example reason could be the ability to monitor the network and to verify transactions, which is very valuable to exchanges, merchants and wallet services. To them, this value of running a full node even grows with the number of customers. Thus, depending on the circumstances, increase block sizes can counter-intuitively make it more attractive to run a full node. The big picture from a systemic perspective can look completely different than the conventional micro-view that only sees first-order effects. Unfortunately, most people are not great systems-thinkers. 2016-01-27 11:12 GMT+01:00 Luzius Meisser <luzius.meisser@gmail•com>: > 2016-01-27 3:45 GMT+01:00 Warren Togami Jr. <wtogami@gmail•com>: >> On Tue, Jan 26, 2016 at 9:42 AM, Luzius Meisser via bitcoin-dev >> <bitcoin-dev@lists•linuxfoundation.org> wrote: >>> >>> Idea: currently, the total amount of fees collected in a block is paid >>> out in full to whoever mined that block. I propose to only pay out, >>> say, 10% of the collected fees, and to add the remaining 90% to the >>> collected fees of the next block. Thus, the payout to the miner >>> constitutes a rolling average of collected fees from the current and >>> past blocks. >> >> [...] Another major issue with mandatory sharing is >> if the miner doesn't want to share, nothing stops them from taking payment >> out-of-band and confirming the transaction with little or no fees visible in >> the block. > > While I find the other points you raised debatable, the out-of-band > argument looks strong enough to kill the idea. To work around it, one > would need to create rules about the transactions that can be included > in a block, for example by mandating that all included transactions > must have a fee at least as high as 0.9 times the 5th percentile of > the transactions in the previous 10 blocks. However, having to tell > the miners what fees they are allowed to accept destroys some of the > elegance of the idea. Maybe I should put it to rest for now and see if > a more elegant solution comes to mind later. > >> While I don't agree with the rest of your logic, it is agreeable that you >> care about aligning the miner's supply incentives with the global marginal >> cost. If you believe that is an important goal, you might like the Flex Cap >> approach as presented by Mark Friedenbach at Scaling Bitcoin Hong Kong. >> Under the general idea of the Flex Cap approach block size is no longer >> fixed, it can be bursted higher on a per-block basis if the miner is willing >> to defer a tiny portion of the current block subsidy to pay out to the miner >> of later blocks. >> [...] >> Flex Cap is an area of ongoing research that I strongly believe would >> benefit Bitcoin in the long-term. For this reason it requires careful study >> and simulations to figure out specifics. > > I agree that flex cap is promising. However, for it to be a viable > long-term solution, it must not depend on significant block subsidies > to work as the block subsidy will become less and less relevant over > time. > > Picking up your thoughts, I guess this is how flex cap should be done: > 1. There is a flexible block cap (e.g. 1 MB). This first MB is free to fill. > 2. Miners can buy additional space for an exponentially increasing > fee. For example, the first KiB might cost 200 Satoshis, the second > KiB 400 Satoshis, the tenth KiB 102400 Satoshis etc. > 3. The price of the purchased space is subtracted from the collected > fees and added to the reward of the next block. > 4. The amount miners are willing to spend on additional space allows > to calculate the marginal costs of a transaction of a miner. For > example, if a miner pays 6000 Satoshis to include a 1 KB transaction > with a fee of 6100 Satoshis, the marginal costs must be below 100 > Satoshis, assuming a rational miner. This cost is multiplied by say 50 > to account for the costs of decentralization to get a global cost > estimate of 5000 Satoshis per KB. > 5. Every 1000 blocks or so, the basic cap is adjusted upwards or > downwards (e.g. by 10%) depending on whether the average fees per KB > were above or below the global cost estimate. > > Under such a scheme, prices should get very close to free market > prices. However, ruthless competition can get ugly in markets where > fixed costs dominate. We can currently witness this in the oil > industry. Thus, from an economic point of view, it might be more > advisable to simply let miners vote on block size, as has been > proposed by others. The drawback of voting is that it allows miners to > enforce a cartel among themselves and to charge monopoly prices > instead of competitive prices. However, monopoly prices would already > be much better than having an artificial cap. > > Warren, thank you for your thoughts! I appreciate the opportunity to > discuss ideas at such a high level. > > -- > Luzius Meisser > President of Bitcoin Association Switzerland > MSc in Computer Science and MA in Economics -- Luzius Meisser luzius.meisser@gmail•com ^ permalink raw reply [flat|nested] 5+ messages in thread
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