Miner competition, the commodity ledger and the fee market
A somewhat bigger block was mined on BSV today. Hooray! But for those who pay attention the news isn’t really that a 103,818,179 bytes block is mined. In the grand scheme of things, this is still a small block. The news is this particular block is actually a demonstration of miner competition in a way most don’t realize yet.
As some have noticed the bundle of transactions in this record block didn’t originate from the mempool. They were simply not available for other miners before the block was propagated. Is this some sort of shenanigans or trickery? No! Let me explain.
The function of the mempool is to communicate transactions to all miners as quickly as possible to ensure the transaction will be included in the next block. This is a key aspect for instant transactions, especially for transactions intended as a cash transaction. When I use bitcoin as cash, as a user, I don’t care which miner will include my transaction. As long as fees are low and it is included. Well as a spender I don’t even care if and when it is included at all. We include a mining fee because we don’t know which miner needs to get paid. But with unlimited block sizes how do we even determine what fee to include if we cannot pick the miner?
The thing about fees is, how does bitcoin allow for fee competition between miners if the spenders don’t know which miner will process its transaction and which fee to include? How are miners incentivized to keep fee’s low? Well, the fee’s aren’t for spenders at all, it’s for the merchants to care. Secondly, not al use cases use bitcoin as money, I predict that most future transaction will originate from users that use bitcoin as a commodity ledger. It’s about putting data in the ledger.
Let’s say a large industrial user want to use SV as a commodity ledger. Let’s say logistics, track and trace etc. If they would need over a million transaction a day, and instant isn’t their biggest concern, why use the mempool? Simple ask reliable miners who can offer the best deal. A fixed fee, a subscription for access to the ledger. Such a user no longer needs to add a mining fee to every transaction, they simply send them to the contracted miner.
Miners only competing for mempool fees would simply miss out on the bigger market and over time be outcompeted because the guaranteed mining rewards keep on halving. And miners would prefer a steady income from subscriptions and fixed fees because they want to be sure they can pay the bills and that investments will be profitable. Yep, Risk, Finance… as is common in every enterprise level business. Determining risk appetite and the mitigation of risk is the basis of good governance, this is how to determine what to invest in.
What does a miner have to do to compete in this game? First, they need to be reliable as in that they can proof with a track record to be able to mine a block every 3,4 or 5 blocks or whatever is needed for the end user so that the end user is ensured their transactions are included. Second, they need to propagate their big blocks fast to prevent orphans. Connectivity to other reliable miners is important and needs constant investment.
Conclusion: There will be a “fee market”, but the “fee market” will emerge between miners and heavy users of the commodity ledger.
Made a simple drawing to explain it a bit more.
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