Lightning Network's effect on miner fees

Lightning Network's effect on miner fees
2015-10-14 15:19 ` Paul Sztorc
  
From: s7r @ 2015-10-14 10:14 UTC (permalink / raw)
  To: bitcoin-dev

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Hello,

I am reading about the Lightning Network and the BIPs which need to be
deployed until it can be fully functional. I have to say it's a neat
solution to scale and have almost instant transactions in a peer 2
peer, distributed and trustless way. I already knows what the needed
BIPs are and what each one does, I am curios about the impact this
will have on miner fees.

If transactions happen in a big percent offchain, and they are only
broadcasted on the mainchain where funds are moved in or out of the
lightning network, this means there will be less transactions on the
mainchain -> less fees collected by the miners. What will happen when
the block reward will go away? Either the fees for the little amount
of onchain transactions will increase to unpractical levels, either
the miners will find it not profitable to keep their hardware plugged
in to mine, so will leave and the effect will be that the hashing
power of the network will decrease. Since the network's hashing power
is a security feature (it makes some attacks impossible or insanely
expensive) I think it's important to anticipate what will happen in
this scenario.
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2015-10-14 10:14 [bitcoin-dev] Lightning Network's effect on miner fees s7r

  2015-10-14 15:37   ` Bryan Bishop
  2015-10-14 22:37   ` s7r
  
From: Paul Sztorc @ 2015-10-14 15:19 UTC (permalink / raw)
  To: s7r, bitcoin-dev

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LN transactions are a substitute good for on-chain transactions.

Therefore, demand for on-chain transactions will decrease as a result of
LN, meaning that fees will be lower than they would otherwise be.

However, the two are also perfect compliments, as LN transactions cannot
take place at all without periodic on-chain transactions.

The demand for *all* Bitcoin transactions (LN and otherwise) is itself a
function of innumerable factors, one of which is the question "Which
form of money [Bitcoin or not-Bitcoin] do I think my trading partners
will be using?". By supporting a higher rate of (higher-quality) Bitcoin
transactions, the net result is highly uncertain, but will probably be
that LN actually increases trading fees.

On 10/14/2015 6:14 AM, s7r via bitcoin-dev wrote:
> Hello,
>
> I am reading about the Lightning Network and the BIPs which need to be
> deployed until it can be fully functional. I have to say it's a neat
> solution to scale and have almost instant transactions in a peer 2
> peer, distributed and trustless way. I already knows what the needed
> BIPs are and what each one does, I am curios about the impact this
> will have on miner fees.
>
> If transactions happen in a big percent offchain, and they are only
> broadcasted on the mainchain where funds are moved in or out of the
> lightning network, this means there will be less transactions on the
> mainchain -> less fees collected by the miners. What will happen when
> the block reward will go away? Either the fees for the little amount
> of onchain transactions will increase to unpractical levels, either
> the miners will find it not profitable to keep their hardware plugged
> in to mine, so will leave and the effect will be that the hashing
> power of the network will decrease. Since the network's hashing power
> is a security feature (it makes some attacks impossible or insanely
> expensive) I think it's important to anticipate what will happen in
> this scenario.
> _______________________________________________ > bitcoin-dev mailing list > bitcoin-dev@lists•linuxfoundation.org >
https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev



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2015-10-14 15:19 ` Paul Sztorc

  2015-10-15  3:35     ` Daniel Stadulis
  2015-10-14 22:37   ` s7r
  
From: Bryan Bishop @ 2015-10-14 15:37 UTC (permalink / raw)
  To: Paul Sztorc, Bryan Bishop;  Bitcoin Dev

On Wed, Oct 14, 2015 at 10:19 AM, Paul Sztorc via bitcoin-dev
<bitcoin-dev@lists•linuxfoundation.org> wrote:
> However, the two are also perfect compliments, as LN transactions cannot take place at all without periodic on-chain transactions.

Additionally, lightning network hot wallets are not an ideal place to
store large quantities of BTC and users that don't expect to be
actively using LN should in general prefer confirmed UTXOs for
long-term cold storage. So far the guess that I have seen floating
around is that LN usage will at first be restricted to very tiny
amounts of BTC in tiny hot wallets, since nobody is particularly
interested in running large hot wallets.

- Bryan
http://heybryan.org/
1 512 203 0507


 permalink raw reply	[|nested]
2015-10-14 15:19 ` Paul Sztorc
  2015-10-14 15:37   ` Bryan Bishop

  2015-10-14 23:42     ` Daniel Newton
  2015-10-14 23:55     ` Paul Sztorc
  
From: s7r @ 2015-10-14 22:37 UTC (permalink / raw)
  To: Paul Sztorc, bitcoin-dev

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On 10/14/2015 6:19 PM, Paul Sztorc wrote:
> LN transactions are a substitute good for on-chain transactions.
> 
> Therefore, demand for on-chain transactions will decrease as a
> result of LN, meaning that fees will be lower than they would
> otherwise be.
> 
> However, the two are also perfect compliments, as LN transactions
> cannot take place at all without periodic on-chain transactions.
> 
> The demand for *all* Bitcoin transactions (LN and otherwise) is
> itself a function of innumerable factors, one of which is the
> question "Which form of money [Bitcoin or not-Bitcoin] do I think
> my trading partners will be using?". By supporting a higher rate of
> (higher-quality) Bitcoin transactions, the net result is highly
> uncertain, but will probably be that LN actually increases trading
> fees.

Probably yes. But probably no. Having less hashing power is not good,
and it's unrelated to scalability and decentralization, it's related
to security. Of course we could argue that the hashing power is not
super decentralized at this moment but it's unrelated to the topic.

I'd rather have less decentralized big amount of hashing power as
opposite to less hashing power.

One theory, very close to yours, is that if Bitcoin transactions
demand grows so high that we need the lightning network, there should
be plenty of on chain transactions for miners to collect fees from.

I haven't yet seen the incentives of everyone involved in lightning
network (payment channel end points, hub operators, miners, etc.) but
would it make sense to enforce a % of the fees collected by on payment
hubs to be spent as miner fees, regardless if the transactions from
that hub go on the main chain or not?
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2015-10-14 22:37   ` s7r

  2015-10-14 23:55     ` Paul Sztorc
  
From: Daniel Newton @ 2015-10-14 23:42 UTC (permalink / raw)
  To: s7r;  bitcoin-dev

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You could make the same argument about changetip, coinbase, bitstamp or any
other entity that operates off chain transactions.

1) There is probably no way of blocking them or enforcing fee collection
from entities that operate off chain transactions
2) They all have to settle on chain eventually

On Thu, Oct 15, 2015 at 11:37 AM, s7r via bitcoin-dev <
bitcoin-dev@lists•linuxfoundation.org> wrote:

> -----BEGIN PGP SIGNED MESSAGE-----
> Hash: SHA256
>
> On 10/14/2015 6:19 PM, Paul Sztorc wrote:
> > LN transactions are a substitute good for on-chain transactions.
> >
> > Therefore, demand for on-chain transactions will decrease as a
> > result of LN, meaning that fees will be lower than they would
> > otherwise be.
> >
> > However, the two are also perfect compliments, as LN transactions
> > cannot take place at all without periodic on-chain transactions.
> >
> > The demand for *all* Bitcoin transactions (LN and otherwise) is
> > itself a function of innumerable factors, one of which is the
> > question "Which form of money [Bitcoin or not-Bitcoin] do I think
> > my trading partners will be using?". By supporting a higher rate of
> > (higher-quality) Bitcoin transactions, the net result is highly
> > uncertain, but will probably be that LN actually increases trading
> > fees.
>
> Probably yes. But probably no. Having less hashing power is not good,
> and it's unrelated to scalability and decentralization, it's related
> to security. Of course we could argue that the hashing power is not
> super decentralized at this moment but it's unrelated to the topic.
>
> I'd rather have less decentralized big amount of hashing power as
> opposite to less hashing power.
>
> One theory, very close to yours, is that if Bitcoin transactions
> demand grows so high that we need the lightning network, there should
> be plenty of on chain transactions for miners to collect fees from.
>
> I haven't yet seen the incentives of everyone involved in lightning
> network (payment channel end points, hub operators, miners, etc.) but
> would it make sense to enforce a % of the fees collected by on payment
> hubs to be spent as miner fees, regardless if the transactions from
> that hub go on the main chain or not?
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> _______________________________________________
> bitcoin-dev mailing list
> bitcoin-dev@lists•linuxfoundation.org
> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>

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 permalink raw reply	[|nested]
2015-10-14 22:37   ` s7r
  2015-10-14 23:42     ` Daniel Newton

  
From: Paul Sztorc @ 2015-10-14 23:55 UTC ( / )
  To: s7r, bitcoin-dev

On 10/14/2015 6:37 PM, s7r wrote:
> On 10/14/2015 6:19 PM, Paul Sztorc wrote:
> > LN transactions are a substitute good for on-chain transactions.
>
> > Therefore, demand for on-chain transactions will decrease as a
> > result of LN, meaning that fees will be lower than they would
> > otherwise be.
>
> > However, the two are also perfect compliments, as LN transactions
> > cannot take place at all without periodic on-chain transactions.
>
> > The demand for *all* Bitcoin transactions (LN and otherwise) is
> > itself a function of innumerable factors, one of which is the
> > question "Which form of money [Bitcoin or not-Bitcoin] do I think
> > my trading partners will be using?". By supporting a higher rate of
> > (higher-quality) Bitcoin transactions, the net result is highly
> > uncertain, but will probably be that LN actually increases trading
> > fees.
>
> Probably yes. But probably no. Having less hashing power is not good,
> and it's unrelated to scalability and decentralization, it's related
> to security. Of course we could argue that the hashing power is not
> super decentralized at this moment but it's unrelated to the topic.
Who are you talking to? Who said anything about any of this? If you are
talking to me, please don't imply that I don't already know these things.

>
> I'd rather have less decentralized big amount of hashing power as
> opposite to less hashing power.
>
> One theory, very close to yours, is that if Bitcoin transactions
> demand grows so high that we need the lightning network, there should
> be plenty of on chain transactions for miners to collect fees from.
For a given fee amount, LN transactions are worse than on-chain
transactions. So people would only use LN if they preferred cheaper txns.
>
> I haven't yet seen the incentives of everyone involved in lightning
> network (payment channel end points, hub operators, miners, etc.) but
> would it make sense to enforce a % of the fees collected by on payment
> hubs to be spent as miner fees, regardless if the transactions from
> that hub go on the main chain or not?
If you want fees to go up, either decrease supply (lower the blocksize
limit) or increase demand (a popular Bitcoin). There's no need to do
anything roundabout.

Regards,
Paul
2015-10-14 15:37   ` Bryan Bishop

  
From: Daniel Stadulis @ 2015-10-15  3:35 UTC (permalink / raw)
  To: Bryan Bishop;  Bitcoin Dev

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It makes economic sense to include a transaction on the Lightning Network,
iff the the fee to include the transaction on the blockchain is more than
than the Time Value of Money of the encumbered funds on the Lightening
Nodes amortized across the number of users pushing funds through a LN node.

Large-value transactions are going to hit the blockchain while smaller,
predictable, closer-to-median transaction-rates transactions will go into
the Lightning Network

Blockchain: Car Purchase, House Purchase, Unexpected Medical Expense
Lightning Network: Utility Bill, Groceries, Rent, Mortgage.

> If transactions happen in a big percent offchain, and they are only
> broadcasted on the mainchain where funds are moved in or out of the
> lightning network, this means there will be less transactions on the
> mainchain

This is optimal because the network has minimized the set of
costs/externalities to the minimum necessary to conduct a series of
transactions
>  -> less fees collected by the miners.
“It's tough to make predictions, especially about the future.”
The effect on fees is going to be hard to predict.
1.) One part depends on user behavior around the dynamics of bid-side
demand of fees. I.e. If there is a health ratio of
-users who want 1-block- times but are unwilling/unable to bid up the fee
of their transactions to push out other 1-block-confirmation transactions (AKA
how firm is that fee support presently and under dynamic conditions)
to
-users who take their transactions off the blockchain to LN

2.) New classes of transactions will be possible that aren't possible today.

3.) What market effect will the financial/technical potential of 'instant'
transaction (after a network-joining-intro period) have on Bitcoin's
utility/price/adoption?

It would be elucidating if any blockchain data scientists could study the
effect of the fee market when high-volume exchanges unexpectedly halted
trading.


> What will happen when the block reward will go away?
I believe a more specific question to ask is: What will happen when there
isn't a convincing economic reason for a large majority of hashing power to
be bolstering PoW defense on the main blockchain?  Right now we have a
pretty good handle on the amount of hashing power that's pointed at
extending/defending the 'main' chain but don't have as good intel on how
much idle hashing power there is.  Idle hashing power becomes more of a
threat in market scenarios where chain-extending PoW is scarce (late-game
Bitcoin).

My humble prediction is that the necessary number of block confirmation
will go up and there were be non negligible mining power idle ready to
defend actors' preferred chain.  If this is the scenario that plays out, I
don't think it'll be very concerning;  large-value transaction that will be
on the blockchain have more flexible time-settlement tolerance (no one
needs their home-buying escrow to settle in <= 1 day) and lower-value
transaction that users want/need to be confirmed quickly will be confirmed
'instantly' over Lightning Network or another Bitcoin-anchored protocol.

P.S. I see lots of concern with respect to fee reduction directed at LN
while today there are already off-chain databases that remove fee
pressure.  Like the LN / off-chain databases or not, they will exists.

Daniel Stadulis


On Wed, Oct 14, 2015 at 8:37 AM, Bryan Bishop via bitcoin-dev <
bitcoin-dev@lists•linuxfoundation.org> wrote:

> On Wed, Oct 14, 2015 at 10:19 AM, Paul Sztorc via bitcoin-dev
> <bitcoin-dev@lists•linuxfoundation.org> wrote:
> > However, the two are also perfect compliments, as LN transactions cannot
> take place at all without periodic on-chain transactions.
>
> Additionally, lightning network hot wallets are not an ideal place to
> store large quantities of BTC and users that don't expect to be
> actively using LN should in general prefer confirmed UTXOs for
> long-term cold storage. So far the guess that I have seen floating
> around is that LN usage will at first be restricted to very tiny
> amounts of BTC in tiny hot wallets, since nobody is particularly
> interested in running large hot wallets.
>
> - Bryan
> http://heybryan.org/
> 1 512 203 0507
> _______________________________________________
> bitcoin-dev mailing list
> bitcoin-dev@lists•linuxfoundation.org
> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>

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