Why does Bitcoin need transaction fees prior to hitting its maximum coin limit?

I have a question regarding the theory of Bitcoin . Why does Bitcoin build in transaction fees before it hits the maximum allowed amount of coins? That is, shouldn't the reward of coins for mining a block be enough to keep the system going? In addition to the trouble we're seeing now (a high value of Bitcoin makes doing simple transactions uneconomical), it seems like building in a transaction fee taht the user can select would rig the system such taht higher fee transactions would get prioritized over lower-fee ones, which would restrict some people from using Bitcoin. I guess all cryptocurrencies do this so there is no way of avoiding it.

Dave

Posted 2018-01-09T20:05:29.460

Reputation: 375

Answers

One reason behind a transactions fees is to make spam attacks expensive. Without fees, a malicious party could create a lot of no-fee transactions for a DoS attack on blockspace. And without fees a miner wouldn't be incentivised to include the highest fee transactions in a block. He could attack the network by mining empty blocks or including spam transactions. (e.g. transactions with clearly and solely exist to bloat the UTXO-set or to fill up blocks).

And correct - with a high enough transaction fee some people in e.g. third world country's can't pay for the transaction. However enabling users to select a transaction fee is necessary. A user that doesn't need fast confirmations can pay a lower fee than a user with a need for an instant confirmation. Thus a fee-market can develop.

This might be an interesting read regarding this topic: The Fee Market Explained by Jimmy Song

0xb10c

Posted 2018-01-09T20:05:29.460

Reputation: 953

Couldn't someone create a DoS attack even if there are transaction fees? I thought I read somewhere that someone had to introduce software to set teh transaction fee at a minimum to weed out "dust" transactions, whatever those are. – Dave – 2018-01-09T21:08:57.347

Sure, but it gets expensive quickly since you have to pay for each spamming transaction. However there is one loophole for a miner. If he sends spam with a fee and mines the transaction himself, he gets his payed fee back. But if he pays low fees, he might lose out on other higher fee-tx. If he pays a high fee, a other miner might mine the transaction and he doesn't receive the fee back.

"dust" is a very small output or transaction - e.g. only a few Satoshis – 0xb10c – 2018-01-09T21:20:39.867

First, there needs to be an incentive to include any transactions in a block. While mining rewards are enough of an incentive, a healthy fee market ensures that miners attempt to add as many transactions as they can to a block.

Second, there is limited block space. How much space there should be is a huge point of contention, but pretty much everyone agrees that blocks need to have a reasonable limit in order to keep participation in the system accessible, and thus keep the system decentralized. As such, transactions will have to compete for space in a block. This is decided by what we call the "fee market", where transactions will have higher and lower fees based on the supply (amount of block space) and demand (number of transactions) of the network.

This means that, yes, transactions with higher fees are prioritized by miners (the ones collecting the fees) over transactions with lower fees. That's how a free market works.

Jestin

Posted 2018-01-09T20:05:29.460

Reputation: 8 339

Regarding, "Second, there is limited block space", so are blocks filling up now? Although the price of Bitcoin is high currently, I'm not sure if taht translates to lots of transactions. – Dave – 2018-01-09T21:05:51.790

@Dave, do you mean the price of Bitcoin is high, or the price of transaction fees? I'm not sure what you are asking. – Jestin – 2018-01-09T21:09:36.960

You were sayhing there is limited block space, which means we can only process a certain number of transactions (correct me if I'm wrong). So because there is limited block space, the miner only picks the transactions with the highest transaction fees. Am I following you? So my question is, are miners currently having to drop certain transactions from a block because there are so many transactions in teh system right now, they woudln't all fit in the block? – Dave – 2018-01-09T21:34:15.720

Yes, that is correct. Miners aren't really dropping transactions, they just ignore lower-fee transactions until there is space. The transactions aren't cancelled or anything. It's the reason it is important to put a market value fee on your transaction if you want it confirmed in a reasonable amount of time. – Jestin – 2018-01-09T21:40:27.583

Cool. So my question from above is, given the state of the world right now, are blocks filling up to capacity with only the higher-fee transactions? – Dave – 2018-01-09T22:03:47.987

They are filling up at the meeting place of the supply and demand curves...just like anything else in a free market. "High" and "low" are relative terms, and have no meaning here. The current acceptable fee is always precisely where it needs to be to meet the demand given the supply. It is never high nor low. – Jestin – 2018-01-09T22:19:07.803

Ah, you are really making me work for it Jestin! I'm not questiioning the free market. Go free market! But my question by "filling up" means a block can only hold a certain number of transactions (100,000?). My quesiton is are the block getting mined today holding the maximum number of transactions possible, thus by free market principles, forcing miners to choose only higher fee transactions as part of the 100,000 chosen? Hope this is clear. I'm really new to this ,as you can tell by all my questions. – Dave – 2018-01-10T15:16:55.357

Let us continue this discussion in chat.

– Jestin – 2018-01-10T15:22:17.973