Flexible fee markets for Bitcoin SV businesses

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Enterprises demand two essential elements to plan their businesses plans around and thrive in the free market: stability and efficiency. With the fluctuating nature of digital currency prices, both of these factors can at times be difficult for businesses built on Bitcoin to count on. Steve Shadders, Chief Technological Officer at nChain, has recognized this problem and devised a way to solve it.

In his blog post, “On the future of Bitcoin Transaction Fees,” Shadders explorers how Bitcoin’s fee structure has come to be what it is, and how future updates to Bitcoin SV’s (BSV) code will provide more options for businesses and users looking for certainty in their fee pricing. The problem is fee structures have been built to a model that works for BTC, and the solution is to provide more options, and specifically those that work for Bitcoin’s original vision. As Shadders notes, “Unlike Bitcoin Core we aren’t using a market to discover how high transactions fees can be, we are using it to discover how low they can go.”

The problem, as Shadders explains, is a lack of fee discovery, prices that tend to be too high, a lack of stability with fiat expectations, no exploration of lower costs, and no differentiation for transactions based on data.

BSV is for the moment using the toolset it’s inherited from BTC’s code, with an actual fee rate and “minrelaytxfee.” The former is what miners will accept to mine a transaction, the latter for what they’ll be willing to validate. Both default to 1 satoshi per byte, but Shadders explains why it would be better to shift to a different model:

“It is actually important for a safe 0-conf fee market to emerge that minrelaytxfee is set lower by some margin than the actual fee rate, so for the purposes of this discussion we will assume that the default minrelaytxfee is actually 0.5 sats/byte. The existence of this range of fee rates is important to enable room for miners to be competitive whilst still protecting the “first see rule” that is a fundamental pillar of 0-conf security.”

By paying more or less per byte, users get more options and can opt to prioritize their transaction or deprioritize it at varying costs. Using different thresholds for transactions, Shadders notes that varying fee markets can be established, allowing users to opt for the best choice for their needs.

At the moment though, that’s not how BSV works, as all transactions are seeing fees of 1 sat/byte. Shadders notes two ways this can change in the near future. By February 2020, updates to BSVs code will allow miners to price data bytes differently, allowing services that are data heavy to seek miners that discount their cost. It will also allow fee evaluation to be moved out of BSV’s Node software, effectively creating fee markets like Shadders has described, but also allow miners to establish relationships with trusted sources. Finally, fee visibility for end users will be added through Merchant API code.

What will all of this accomplish? Allowing fee markets will create a system that can adjust to the current price of BSV and adjust it to create stability for enterprises. User based fee policies will allow authenticated users to get preferential rates. Overall, it will allow businesses and miners to seek each other out and fulfill each other’s needs at the lowest rates possible.

Before all of this comes in 2020, Shadders notes that miners are already indicating they may be willing to move off of the current default of 1 sat/byte for all transactions and may seek to peg their costs to a fiat baseline. This would “provide operational cost stability to businesses using Bitcoin SV.”

These are important changes that will create a long term healthy ecosystem for BSV businesses to operate in; but to be clear, its not fixing some kind of disaster. As Shadders concludes:

“But what is probably important to note is that Bitcoin SV is already cheapest of all major blockchains to transact upon for real utility, both in satoshis and in fiat terms, any cut will send a clear signal to the market the cost of using Bitcoin SV is going in only one direction, down. This is only economically possible because the future of Bitcoin SV is to massively scale.”