Relationship Between RBF Signaling and Average Tx Fee
More can be found at the link posted below:
As noted in the conversation, excerpted above, Peter Todd’s proposal would have the inevitable impact of creating a ‘race condition’-esque situation where, as senders of RBF signaled TXs that have opted into Peter Todd’s n-Sequence based tool are automatically replacing/swapping transaction fees, the activity of doing so is increasing the average transaction fee on the network (as perceived by nodes and other monitoring solutions that wallets employ).
Thus, as the average fee rises on the network, users will more than likely send their transactions in accordance with said fees (as expected), in order to ensure that their transaction is confirmed ASAP.
However, as users are doing so, the average fee will inevitably rise along with it, creating a feedback loop where inevitably more TXs must be replaced with an increased fee rate attached to them.
You may have noticed in the conversation posted above between Peter Todd and other Bitcoin Core developers that the acronym, ‘CPFP’ crept its way into the chat several times when discussing the n-Sequence based RBF opt-in proposal.
Specifically, CPFP is an acronym that stands for ‘Child-Pays-For-Parent’. However, before we can dissect this concept, we must first gain a better understanding of how fees work on the Bitcoin protocol.
A good resource for those that are also looking to conduct their own independent study on the side regarding Bitcoin fees is the Bitcoin wiki, specifically: https://en.bitcoin.it/wiki/Miner_fees#Feerates_for_dependent_transactions_.28child-pays-for-parent.29
Without coincidence, this is also where we’re going to start in our dissection of the Bitcoin fee model.
It is important that we cover Bitcoin’s fee model because there are certain misconceptions that are still prevalent in the community to this day, despite the fact that this process and the mechanisms behind it have been fairly well-documented for a few years at this point.
Bitcoin Fee Fact #1: Fees Are Not a Literal Addition
As aptly noted by the Bitcoin fee breakdown by the ‘Bitcoin Wiki’, fees are not literal add-ons on the Bitcoin network. In other words, there isn’t actually a reserved spot in each Bitcoin transaction that specifies the total fee.
Below is a picture showing the inputs that one can expect in a ‘typical’ Bitcoin transaction:
Question: So how is the fee calculated then?
Great question. As stated by the ‘Bitcoin Wiki’:
Every Bitcoin transaction spends zero or more bitcoins to zero or more recipients. The difference between the amount being spent and the amount being received is the transaction fee (which must be zero or more).
Bitcoin’s design makes it easy and efficient for the spender to specify how much fee to pay, whereas it would be harder and less efficient for the recipient to specify the fee, so by custom the spender is almost always solely responsible for paying all necessary Bitcoin transaction fees.
When a miner creates a block proposal, the miner is entitled to specify where all the fees paid by the transactions in that block proposal should be sent. If the proposal results in a valid block that becomes a part of the best block chain, the fee income will be sent to the specified recipient. If a valid block does not collect all available fees, the amount not collected are permanently destroyed; this has happened on more than 1,000 occasions from 2011 to 2017,[1][2] with decreasing frequency over time.
‘Effective Market for Fee Space’
One thing to keep in mind as we go forward is that there is competition for ‘block space’ and that fees are directly correlated to block space.
There are many entities/individuals in the blockchain space that may attempt to argue differently, for whatever agenda-based reasons they have — but the explicit reality of the situation is that the finite amount of block space available (maximum of 1MB/block; 1 block targeted every 10 minutes | each TX is an avg. of roughly 250 bytes/each ) means that the fee rate for Bitcoin is a product of:
- Available space
- Number of pending transactions
- Estimated wait time
- Time of day (going by the United States; West Coast & East Coast — at their sleeping areas, the on-chain activity decreases tremendously)
- Perceived importance of having a transaction confirmed ASAP
- Desire by Bitcoin’s users (sending TXs) to have their transaction confirmed within a block
- Average size of the transactions being sent
- Price of Bitcoin because the fee is only tabulated in sats and thus not ‘aware’ or ‘sensitive’ to the USD price. Thus, Bitcoin’s fee being perceived as ‘high’ or ‘low’ at any given period of time is not just contingent on what the network’s fee is, but also the actual price of Bitcoin at that given moment in time as well.
Each element above plays a critical role in determining what the calculated average fee necessary to get a transaction confirmed on the protocol will be.
However, since there are so many variables (seven that we listed above), and various factors that can influence each one, increasing or decreasing fees on the network can never be evaluated from a strictly two-dimensional perspective (i.e., “if we simply raise the fees/adopt Lightning Network, then we’ll ensure that there are lower fees!”).
Observers of Bitcoin must also be careful to not create a false equivalency between increased throughput and lowered fees.
It is entirely possible for Bitcoin’s throughput to increase while fees simultaneously increase at an even higher rate.
The excerpts below from the Bitcoin Wiki do a solid job of characterizing the ‘effective market for fee rate’ on the Bitcoin protocol:
Published at Wed, 02 Oct 2019 00:39:13 +0000
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