Why Transaction Fees?

Even on the Bitcoin website (bitcoin.org), it says that Bitcoin has “low processing fees”. Yet many blockchains have large fees. For example, on Ethereum the mean transaction fee is 0.50 USD, which was once at almost 5 USD!! So much for having low fees!

But why should fees exist anyways? They are mainly used for three reasons:

1. Security against attacks
2. To provide payments for miners even after new Bitcoins stop being generated and provide incentives for miners to even include transacitons in their blocks
3. If blocks ever fill up, to create a market for putting transactions into blocks

First, we have security against attacks. Without there being transaction fees, someone could easily create millions of transactions, each sending just 1 satoshi, to flood the network and fill up storage space. This would act as a massive denial of service attack on Bitcoin and would ruin the network. But with transaction fees, the attacker would quickly lose all of his Bitcoin to fees.

Next, there is the idea that Bitcoins will stop being generaged in the future. In a few years, there will be no more Bitcoins entering the system, meaning that miners won’t be rewarded with new minted Bitcoin. But they still need to be rewarded! So we pay them with transaction fees. On this same topic, there is the idea that miners might decide not to include any transactions in their blocks, censoring the network and/or creating a massive denial of service attack. But transaction fees incentivize miners to include these transactions in their blocks to make more money.

Finally, Bitcoin blocks do fill up. And that begs the question: how do you decide which transactions to put in blocks. Transaction fees help miners decide that, with the transactions with the higher fees getting a priority spot in the block. This method makes sure that there is never a logistics crisis involving which transactions to include in full blocks.

So these are all very good reasons why Satoshi chose to have transaction fees in Bitcoin, but the times have changed. Steem, Eos, and Bitshares are challenging idea that all cryptocurrencies must have fees, with their fast, free transactions. They all use a system called “bandwidth.” With every transaction, your account’s bandwidth is drained a bit. If you don’t have any bandwidth, you can’t make a transaction. If you have more Steem, Eos, or BTS, you have a higher bandwidth capacity.

This makes sure that no denial of service attacks can happen because trying to produce thousands of transactions would destroy your bandwidth. It solves part one of problem #2 in a work-around. It’s this simple: Steem, Eos, and BTS never stop being generated. And part two of problem #2 is simple: if a witness doesn’t include any transactions in their blocks, the community will see that happening and stop voting for that witness. And about the final problem: I don’t think Steem is ever going to run out of block size, but if it does, they will figure out a way in a new fork.

I hope this cleared things up a bit about transaction fees and their future! Write a comment about what you think on the subject!