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I have a dumb question that's probably user error on my part, but I can't seem to find a simple answer for: shouldn't BitCoin transaction fees (and thereby pric

I have a dumb question that's probably user error on my part, but I can't seem to find a simple answer for: shouldn't BitCoin transaction fees (and thereby price) eventually stabilize to the cost of electricity plus hardware? And if so, then why would price fluctuate? It seems like there are 2 options: 1) Cryptocurrency transactions cost less than the cost of electricity: a market will form farming the price discrepancy between electricity and coins (solarpunk?) 2) Cryptocurrency transactions cost more than the cost of electricity: a market will form to compensate miners for the extra electricity (money laundering? what goes here?) If mining costs keep getting more expensive, eventually the network will be so throttled that it will petrify. Also I feel like the cost of mining tied (or passed) the cost of coins a few years ago. So I don't understand why anyone would want to be a miner now. Which suggests a hidden incentive to be a miner. I stumbled onto this article from 2017 when BitCoin was close to the $20,000 it is today, and it cost about $3,000 to mine a BitCoin in Louisiana, maybe not counting hardware cost? https://www.marketwatch.com/story/in-one-chart-heres-how-much-it-costs-to-mine-bitcoin-in-your-state-2017-12-15 https://www.marketwatch.com/story/in-one-chart-heres-how-muc...

wmf 4y ago
I don't understand what mental model you're using for the relationship between price, fees, and mining costs. Bitcoin fees have nothing to do with the price or the cost of mining; fees are basically proportional to (transaction throughput demand) / (fixed transaction throughput supply). I've seen various reports saying the cost to mine 1 BTC is between $8,000 and $13,000 so miners are still profitable. Note that mining ASICs have increased their efficiency since 2017 but difficulty has also increased.
- leijurv 4y ago
  I don't think that's true, fees are not proportional to that. Fees compete for a finite and precise limited space in blocks. There's no limit to how high fees could grow in this competition, because only the 7 most lucrative transactions get mined per second. I think it is vaguely accurate to say that fees and mining costs are linked, *however*, currently the coinbase block reward is a bigger deal. Example: most recent block https://www.blockchain.com/btc/block/743055 https://www.blockchain.com/btc/block/743055 created 6.25 bitcoin out of thin air, plus 0.186 bitcoin from all its fees. In the future, when fees make up a larger share of this, miners will indeed start to get income from fees. Then, we will see an interesting dynamic where automatic difficulty adjustments and competition between miners entering and exiting the market will result in miners electricity costs aligning with bitcoin transaction fees. In other words, every unit of value that goes into a bitcoin transaction will result in that much value being spent by a miner on their electricity bill.
  - wmf 4y ago
    OK, what you're saying is that after the block reward ends, fees will equal miner revenue and miners will mine harder until equilibrium where their costs equal their revenue. That's correct but it's important to understand that the causality flows from fees to miner costs, not vice versa. Miners cannot force fees up or down.
    - leijurv 4y ago
      Well it's a continuous process: today the fees make up maybe three percent of revenue, but that fluctuates as transaction space demand changes, and as the coinbase halves every few years. But your point is good - miners are not really in a traditional supply/demand relationship with transactors, because block space is perfectly inelastic. There will be 7 slots per second (amortized), no matter what. Although... a petulant miner could artificially restrict this supply, by perhaps declaring that they'll never mine a transaction that pays less than X fee. This would only apply to the blocks that they mine, but the effect on overall supply could be nontrivial?

wmf 4y ago

I don't understand what mental model you're using for the relationship between price, fees, and mining costs. Bitcoin fees have nothing to do with the price or the cost of mining; fees are basically proportional to (transaction throughput demand) / (fixed transaction throughput supply). I've seen various reports saying the cost to mine 1 BTC is between $8,000 and $13,000 so miners are still profitable. Note that mining ASICs have increased their efficiency since 2017 but difficulty has also increased.

leijurv 4y ago
I don't think that's true, fees are not proportional to that. Fees compete for a finite and precise limited space in blocks. There's no limit to how high fees could grow in this competition, because only the 7 most lucrative transactions get mined per second. I think it is vaguely accurate to say that fees and mining costs are linked, *however*, currently the coinbase block reward is a bigger deal. Example: most recent block https://www.blockchain.com/btc/block/743055 https://www.blockchain.com/btc/block/743055 created 6.25 bitcoin out of thin air, plus 0.186 bitcoin from all its fees. In the future, when fees make up a larger share of this, miners will indeed start to get income from fees. Then, we will see an interesting dynamic where automatic difficulty adjustments and competition between miners entering and exiting the market will result in miners electricity costs aligning with bitcoin transaction fees. In other words, every unit of value that goes into a bitcoin transaction will result in that much value being spent by a miner on their electricity bill.
- wmf 4y ago
  OK, what you're saying is that after the block reward ends, fees will equal miner revenue and miners will mine harder until equilibrium where their costs equal their revenue. That's correct but it's important to understand that the causality flows from fees to miner costs, not vice versa. Miners cannot force fees up or down.
  - leijurv 4y ago
    Well it's a continuous process: today the fees make up maybe three percent of revenue, but that fluctuates as transaction space demand changes, and as the coinbase halves every few years. But your point is good - miners are not really in a traditional supply/demand relationship with transactors, because block space is perfectly inelastic. There will be 7 slots per second (amortized), no matter what. Although... a petulant miner could artificially restrict this supply, by perhaps declaring that they'll never mine a transaction that pays less than X fee. This would only apply to the blocks that they mine, but the effect on overall supply could be nontrivial?