Subject: Re: [bitcoin-dev] BIP proposal: Fee-redistribution contracts

From: "David A. Harding" <[email-masked]>
Date: Wed, 01 Mar 2023 07:17:58 -1000

On 2023-02-27 03:32, Rastislav Budinsky via bitcoin-dev wrote:
> When a miner mines a block he takes all the fees currently. However
> with the proposed solution he takes only fraction M and remaining
> fraction C is sent to one of more contracts. One contract at its
> simplest collects fees from the miner and at the same time
> redistributes it back to the miner.

Hi Rastislav,

I think you've incorrectly made the assumption that the only way a miner 
can profit from confirming a transaction is by collecting its 
transaction fees.  Miners can (and many have) accept payment through 
alternative means, which the Bitcoin technical community often calls 
"out-of-band fees".[1]  For example, some miners have provided a 
"transaction accelerator" service that accepts fiat-denominated credit 
cards to increase their prioritization of certain transactions and I'm 
personally aware of a large web wallet provider that would occasionally 
pay miners out of band to confirm hundreds or thousands of transactions 
rather than fix its broken fee estimation.

Out-of-band fees aren't frequently used in Bitcoin today because they 
have no advantage over correctly estimated in-band fees, and good fee 
estimation is very accessible to modern wallets.  However, if the 
consensus rules are changed to require each miner pay a percentage of 
its in-band fees to future miners, then there would be a strong 
incentive for them to prefer out-of-band fees that weren't subject to 
this redistribution scheme.

I think may have seen a variation on the scheme you propose play out in 
real life.  Here's how it works where I live: the government imposes 
taxes on goods, services, and income.  Ostensibly, it redistributes the 
collected funds back to citizens in the future by providing government 
services.  When I go to pay someone who trusts my discretion, they often 
offer me a discounted rate if I pay in a way that isn't reported to the 
government (e.g., I pay with cash); even with the discount provided to 
me, they get to keep more of their income than if they had reported the 
transaction to the government.

In the case of a government, tax evasion can be reduced by the 
deployment of investigators and enforcers.  In Bitcoin, we have no 
control over activity that happens outside of the protocol and so even a 
modest incentive to pay fees out of band might quickly lead to almost 
all fees being paid out of band.  This prevents the effective 
redistribution of fees as in your proposal.  Additionally, previous 
discussions on this mailing list about paying out-of-band fees have 
highlighted that larger miners have an advantage over smaller miners in 
collecting miner-specific fee payments, undermining the essential 
decentralization of Bitcoin's transaction confirmation mechanism (moreso 
than it is already weakened by fundamental economies of scale in 
mining).

In short, I think serious consideration of your proposal can only 
proceed if it adequately addresses the problem of out-of-band fees.

That said, thank you and your co-authors for putting serious thought 
into Bitcoin's long-term economic incentives.

-Dave

[1] https://bitcoinsearch.xyz/?q=out%20of%20band%20fees&size=n_50_n