Bitcoin Update: Faster Network Would Keep Low Costs For Bitcoins

Transaction fees on the bitcoin network are often forgotten about. Yet in bitcoin they are more important than on other payment networks. Fees currently serve as protection against the network being flooded with arbitrary transactions. Eventually, they will also be required to incentivise bitcoin miners to continue providing security to the network.

Contrary to other payment networks, the fees will not be set centrally, but will be determined by a market between users and miners. The lower bound of transaction fees will be determined by the marginal cost incurred by miners for including transactions. This, in turn, is determined by the speed at which information is spread around the network.

Bitcoin, the protocol, is a set of rules for the construction, distribution and agreement of financial transactions. The excitement surrounding its invention stems from its ability to achieve consensus among anonymous participants on the order in which transactions were issued on the network. This permits the construction of an inclusive financial system that is free from discrepancies between market participants.

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However, the network is only guaranteed to come to consensus over a period of time and, in fact, the bitcoin network is in a constant state of flux, where nodes differ in their record of the history of all transactions. Subsets of nodes that agree on a common set of transactions are known as partitions.

An event, such as the discovery of a new block in the block chain creates a partition in the network. When a miner finds a new block, it is the only node in the network that thinks that the length of the block chain has increased. The rest of the network will find out about the block consequently, with the delay largely dependent on the number of transactions included.

Each extra transaction included in the block adds to the time that it takes for blocks to reach every node in the network. Miners that are slow to hear about new-found blocks spend time working on redundant problems, which hurts their margins. Furthermore, this delay increases the possibilities for malicious attackers to double spend funds on the network.

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Watch this video for more “News on Bitcoin”.

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Bitcoin miners are mainly incentivised by the 25 BTC block reward and fees play an insignificant role. Delays in blocks spreading throughout the network mean that some miners are working on a shorter block chain than the longest chain in existence.

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