Author: Anthony Towns 2015-10-27 05:40:29
Published on: 2015-10-27T05:40:29+00:00
The impact of a fully armed and operational Lightning Network on miner fees in Bitcoin has been a topic of discussion. The blockchain relies on transaction fees to be secure, so Lightning needs to leave sufficient transactions for the blockchain to function. The number of Lightning transactions that can be done before it reduces security is believed to be determined by market forces. However, this question can be answered with numbers. Basic assumptions include limiting the number of transactions per block, miners choosing transactions that pay the highest fees to fill blocks, and some people being priced out of using Bitcoin due to cheaper alternatives at given per-transaction fees.Assuming blocks were unlimited, miners would accept every transaction no matter how small the fee, which would set the per-tx fee to ~1 satoshi. Rational miners will limit the number of transactions they accept to ensure fees do not go to zero. Market assumptions show that the only thing preventing Bitcoin from replacing credit card transactions at point of sale is adoption of Bitcoin and transaction fees. Visa charges about 20c+2% per transaction while Lightning will charge 1% for a full transaction (e.g., 8 hops, 0.125% per hop).Without Lightning, the highest value N transactions will go via the blockchain filling it up at a fee equal to about 20c+2% of the smallest transaction. As Bitcoin adoption increases, either fees rise or the number of transactions per block increases proportionally. With Lightning, the comparison to Visa changes as you can pay 1% to Lightning nodes to route your payment instead of paying 20c+2% to Visa. If the number of transactions per block stays constant, the transactions selected will also be the same, but fees paid to miners will reduce by about half.Numerical conclusions show that handling 1.13M transactions every ten minutes would require 565MB per block. However, this would also depend on the number of transactions per block and block size. Without Lightning, miners' fees are mostly subject to what the competition charges, and if Visa drops its rates from 20c+2% to 5c+1.5%, Bitcoin transaction fees will drop correspondingly. With Lightning, the outcome to miners is the same as if Visa dropped its rates to a flat 1%.A recent post on the Bitcoin subreddit discusses how Bitcoin miners can maximize their revenue by using a block size of 83 MB and charging a fee of $2.02 per transaction, with Lightning Network taking care of transactions below this value. In such a scenario, Lightning nodes would handle 1624 transactions per second and collect approximately $107 million in fees per day. Without Lightning, Visa would be the only alternative to Bitcoin, making the optimal block size 90 MB with a corresponding fee of about $4 per transaction. This would result in miner revenue of $720,000 per block and Visa handling the remaining transactions, earning $232 million per day.The post also suggests that if Bitcoin and Lightning are adopted independently of transaction amounts and the log-normal distribution is accurate, $2.02 remains the revenue-maximizing per-transaction fee for miners. The optimal block size scales proportionally, meaning that 16,000 transactions per block or about 8 MB is optimal with 10% adoption, and 1,600 transactions per block or about 800 kB is optimal with 1% adoption. Varying the fee for Lightning nodes has a direct effect on the Bitcoin fee but does not change the optimal block size for a given level of adoption.However, there are several caveats to these suggestions, including the possibility that the log-normal distribution may not be accurate, the numbers from Visa may be inaccurate or incomplete, and Visa, Bitcoin, and Lightning are not exact substitutes. Additionally, increased adoption likely has some correlation to transaction sizes, early adopters probably have a different distribution of transaction amounts compared to late adopters, and current fees of up to ~2c/tx differ wildly from the above estimates of $2 to $4 as the revenue maximizing fees for miners above.
Updated on: 2023-05-18T15:42:59.845458+00:00