A Fee Market
What is a Fee Market?
I've heard this term and even used it without really understanding what it means. I cannot find a definition for it in financial publications, so I'll presume it is meant to be word substitution. So let's figure out what it's supposed to mean. I will try to avoid economics jargon.
A market is the space of buyers and sellers to discover price for goods and services (G&S). The prices may be posted or the goods and services may be auctioned. There are many kinds of markets and auctions, but one thing they have in common is that a price is always agreed upon before money is exchanged. G&S prices are compared by buyers and sellers to determine their fairness.
Entities buying and selling services may or may not charge a fee. A fee is defined as a fixed charge for a service. The fee may be fixed by either flat amount or fixed proportional rate. A variable rate may be used, but it is unwise to offer without specific schedules agreed upon in advance. Buyers and sellers can weigh the fees in determining the fairness of the G&S price. Demanding a 35% tip after a meal when 18% is customary could raise the question of why it was not posted and a talk with the manager.
Enter cryptocurrencies. At first Bitcoin had no real value and had no fee for transacting value. After awhile it became common practice to charge a fee. Then someone on Bitcoin (BTC) decided to allow services to raise fees after money was exchanged.
This had the effect that markets can be manipulated, not by the price of the G&S, but with minimal investment and the use of an attack called Replace By Fee (RBF), where blocks can be filled with spam transactions and the mining fees skyrocket. This skyrocketing fee creates such unpredictability in the fees that blocks fill and the mempool fills to the failure point while non-RBF transactions are forced to drop out.
This is now a new financial market phenomenon of purely speculative fees as entities unto themselves with little relevance to the G&S to which they are supposed to be attached. The transactions themselves are merely placeholders in mempool real-estate. Now it has become a market within a market. So where is the fairness?
Some may not see it as unfair. The BTC folks claim that a Tragedy of the Commons is allowing the poor to spam Bitcoin real-estate and ruin it for everyone. Therefore, only the rich are entitled to have a secure way to transact value and the poor must suffer their tolerance. They claim to only allow rental use of BTC at the pleasure of the wealthy and for the greater good. No compromise was even sought because they enjoy wielding power for its own perverse pleasure.
There are two ways to handle this iniquity. The first is simply avoid it by expanding the available block space for transactions and fees. This allows fair market forces to create price discovery with no surprises after the transaction. Fees are once again restored to their role as the price of transacting G&S. Devices like RBF become irrelevant. This is why Bitcoin Cash (BCH) was forked from the original blockchain. The problem with this solution is that while it depends on blocksize to handle most of the burden of growth, it is untested at great scale.
A second way is to create a Fee Market device allows blocksize real-estate to expand, but still protects investors from unfair market manipulation at some unforseen expansion limit. Think of it like a postage stamp. At one time postage stamps for First Class letters had their price printed on the stamp. Nowadays there is a First Class stamp with no price. How is that possible? Forever stamps speculate that the investment in the postage will increase over time. It is like a security, except that it has only one specific use and nobody knows when it was bought. It has no intrinsic value besides the current value of posting a First Class letter. It doesn't matter how long you hold it, but it is only usable once. They are sold separately and are not divisible without destroying their unique purpose.
Bitcoin miners have long accepted a minimal dust limit for transactions without combining them into larger valued outputs. Ethereum miners use a dust-like fee for transactions called gas. Gas is valued in fractions of ETH, but it fluctuates to the current price. Real gas in your car is usable for multiple trips at the price you pumped it irrespective of the current price. You should be able to buy a fee token like postage or gas that you can still use after it goes up in value without buying more.
Why not color a token that miners sell like postage stamps at a fee level. Imagine Forever Stamps that are one-time use, but are sold at a protocol selected formula based on block reward, time, and difficulty divided by block size and a function of technology growth (T*R*D/S*G) or whatever best predicts mining cost per byte. It can be traded as a separate token as long as the postage color is maintained or it can be converted back to atomic units.
The dust-like value of the fee stamp would be required by the protocol, but miners will gladly accept them and sell them because they are selling the color within the blocks they create. Not accepting them would be seen as selfish and probably silly because their face value will probably be slightly higher than normal fees, but not worth the dust conversion cost by wallet holders. Postage fees would be bought through contracts created by miners. Of course there would be backwards compatibility for adding the current fee price to transactions, but you could save money by buying the Forever Bitcoins in bulk. Miners would take the speculative investment in the fee token as extra profit for coloring.
Finally, the colored fee token can gain weight with age so it will have additional protocol level inclusion power for long term investors to get a higher priority with transactions. This would also help small-blockchain users that want an extra perk for investment in the technology. The weight can be used to give preference to miner participation that includes these types of fees.
This solution may help mitigate the possibility of technology not keeping up with demand. It doesn't hurt the model of ever expanding block size limits because it's only about the fees, not the transactions themselves. This is also good for smaller blockchains because they can be used to create a firm relationship between mining and non-mining nodes as secondary remuneration. Non-mining nodes could become resellers of fee tokens and at an extreme range of ideas, MLMs and currency exchanges could be used to market many cryptocurrency fee tokens. The slight savings of buying bulk fee tokens that deflate in value automatically, just like Forever Stamps is a successful trope or scheme in many areas. The fee may end up being higher with a token than without, but for most people, it's just a convenience they are willing to pay a little extra for in addition to the savings. I know that isn't logical, but convenience also has value.
tl;dr A Fee Market is a market within a market. Just like Forever Stamps or fuel, cryptocurrencies can benefit from treating the tokens like a permanent commodity with intrinsic value. Fees benefit as one-shot single-use commodity with extrinsic value. They both benefit from market forces.
I've heard this term and even used it without really understanding what it means. I cannot find a definition for it in financial publications, so I'll presume it is meant to be word substitution. So let's figure out what it's supposed to mean. I will try to avoid economics jargon.
A market is the space of buyers and sellers to discover price for goods and services (G&S). The prices may be posted or the goods and services may be auctioned. There are many kinds of markets and auctions, but one thing they have in common is that a price is always agreed upon before money is exchanged. G&S prices are compared by buyers and sellers to determine their fairness.
Entities buying and selling services may or may not charge a fee. A fee is defined as a fixed charge for a service. The fee may be fixed by either flat amount or fixed proportional rate. A variable rate may be used, but it is unwise to offer without specific schedules agreed upon in advance. Buyers and sellers can weigh the fees in determining the fairness of the G&S price. Demanding a 35% tip after a meal when 18% is customary could raise the question of why it was not posted and a talk with the manager.
Enter cryptocurrencies. At first Bitcoin had no real value and had no fee for transacting value. After awhile it became common practice to charge a fee. Then someone on Bitcoin (BTC) decided to allow services to raise fees after money was exchanged.
This had the effect that markets can be manipulated, not by the price of the G&S, but with minimal investment and the use of an attack called Replace By Fee (RBF), where blocks can be filled with spam transactions and the mining fees skyrocket. This skyrocketing fee creates such unpredictability in the fees that blocks fill and the mempool fills to the failure point while non-RBF transactions are forced to drop out.
This is now a new financial market phenomenon of purely speculative fees as entities unto themselves with little relevance to the G&S to which they are supposed to be attached. The transactions themselves are merely placeholders in mempool real-estate. Now it has become a market within a market. So where is the fairness?
Some may not see it as unfair. The BTC folks claim that a Tragedy of the Commons is allowing the poor to spam Bitcoin real-estate and ruin it for everyone. Therefore, only the rich are entitled to have a secure way to transact value and the poor must suffer their tolerance. They claim to only allow rental use of BTC at the pleasure of the wealthy and for the greater good. No compromise was even sought because they enjoy wielding power for its own perverse pleasure.
There are two ways to handle this iniquity. The first is simply avoid it by expanding the available block space for transactions and fees. This allows fair market forces to create price discovery with no surprises after the transaction. Fees are once again restored to their role as the price of transacting G&S. Devices like RBF become irrelevant. This is why Bitcoin Cash (BCH) was forked from the original blockchain. The problem with this solution is that while it depends on blocksize to handle most of the burden of growth, it is untested at great scale.
A second way is to create a Fee Market device allows blocksize real-estate to expand, but still protects investors from unfair market manipulation at some unforseen expansion limit. Think of it like a postage stamp. At one time postage stamps for First Class letters had their price printed on the stamp. Nowadays there is a First Class stamp with no price. How is that possible? Forever stamps speculate that the investment in the postage will increase over time. It is like a security, except that it has only one specific use and nobody knows when it was bought. It has no intrinsic value besides the current value of posting a First Class letter. It doesn't matter how long you hold it, but it is only usable once. They are sold separately and are not divisible without destroying their unique purpose.
Bitcoin miners have long accepted a minimal dust limit for transactions without combining them into larger valued outputs. Ethereum miners use a dust-like fee for transactions called gas. Gas is valued in fractions of ETH, but it fluctuates to the current price. Real gas in your car is usable for multiple trips at the price you pumped it irrespective of the current price. You should be able to buy a fee token like postage or gas that you can still use after it goes up in value without buying more.
Why not color a token that miners sell like postage stamps at a fee level. Imagine Forever Stamps that are one-time use, but are sold at a protocol selected formula based on block reward, time, and difficulty divided by block size and a function of technology growth (T*R*D/S*G) or whatever best predicts mining cost per byte. It can be traded as a separate token as long as the postage color is maintained or it can be converted back to atomic units.
The dust-like value of the fee stamp would be required by the protocol, but miners will gladly accept them and sell them because they are selling the color within the blocks they create. Not accepting them would be seen as selfish and probably silly because their face value will probably be slightly higher than normal fees, but not worth the dust conversion cost by wallet holders. Postage fees would be bought through contracts created by miners. Of course there would be backwards compatibility for adding the current fee price to transactions, but you could save money by buying the Forever Bitcoins in bulk. Miners would take the speculative investment in the fee token as extra profit for coloring.
Finally, the colored fee token can gain weight with age so it will have additional protocol level inclusion power for long term investors to get a higher priority with transactions. This would also help small-blockchain users that want an extra perk for investment in the technology. The weight can be used to give preference to miner participation that includes these types of fees.
This solution may help mitigate the possibility of technology not keeping up with demand. It doesn't hurt the model of ever expanding block size limits because it's only about the fees, not the transactions themselves. This is also good for smaller blockchains because they can be used to create a firm relationship between mining and non-mining nodes as secondary remuneration. Non-mining nodes could become resellers of fee tokens and at an extreme range of ideas, MLMs and currency exchanges could be used to market many cryptocurrency fee tokens. The slight savings of buying bulk fee tokens that deflate in value automatically, just like Forever Stamps is a successful trope or scheme in many areas. The fee may end up being higher with a token than without, but for most people, it's just a convenience they are willing to pay a little extra for in addition to the savings. I know that isn't logical, but convenience also has value.
tl;dr A Fee Market is a market within a market. Just like Forever Stamps or fuel, cryptocurrencies can benefit from treating the tokens like a permanent commodity with intrinsic value. Fees benefit as one-shot single-use commodity with extrinsic value. They both benefit from market forces.
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