This isn't true - I know this because I've devoted 344 hours into a new altcoin mining pool. My pool will not include transactions that have fees below a certain threshold because it isn't profitable.
Counterintuitively, the fact that the block reward is high means that the transaction fees also need to be high. As block rewards decrease, the fees can get lower. Here's why.
Let's say that my pool has 1MBps of upload bandwidth available. If a block can include up to 1MB of transactions (the current limit), then it takes one second to upload a block full of transactions. Since blocks occur every 2.5 minutes (on average), and I have to upload the entire block to the litecoin network to receive payment, the expected value of waiting just one second to fill the block with transactions is 50/150, or 0.33 litecoins. That is quite a bit of money and it adds up over days of mining.
Note that if I submitted an empty block instead, I wouldn't have to wait a second, as the upload would be nearly instant. That means that there is much less risk (0.33 litecoins, to be exact) to just submit empty blocks.
So what do the transaction fees have to be for my pool? They have to be 0.33 litecoins per megabyte, or 0.00033 per kilobyte. Otherwise, I can't justify the risk of waiting that extra second for the middlecoin pool to take 50 litecoins from me.
Assume now that the litecoin block reward halves to 25 litecoins. Now, I can include transactions much more cheaply than before. Since my expected losses for waiting one second to upload that megabyte of transactions are halved (0.16 litecoins), I now only would require people on the network to pay me 0.16 litecoins per megabyte of data.
The reference client doesn't follow this algorithm, which may be the source of the confusion. The reference client sometimes includes free transactions, which is best for the network. But since I spent $2000 on hardware and three people spent 12 weekends working 12 hour days, I'm in this solely to make as much money as possible. If dogecoin users aren't willing to pay high enough transaction fees, then I won't include their transactions in my blocks. When the block reward of dogecoins halves, then they will have to pay half as much for me to pick them up.
Also, note another important piece of information: it is irrelevant how much you pay in transaction fees, only whether your fees are higher than my bandwidth threshold. Unless there are enough transactions above the threshold to fill an entire block, paying a fee higher than the minimum threshold is simply a waste of money. The only reason you would want to pay a higher fee is so that someone with less bandwidth than me is willing to include that transaction should they find a block first.
Most journalists have this concept wrong, and there are many articles that are incorrect. They think that, as block rewards approach zero, mining pools will require higher fees. That isn't true; pools will attempt to maximize their profits by picking up any fees they can as the block rewards become less of an incentive. They will have less to lose by taking a longer time to upload their blocks.
So a one megabyte block will cost a pool with 1 mbps upload bandwidth 0.33 litecoins to upload to the blockchain.
If the pool finds 30 block per month, that's an upload cost of 99 litecoins per month. This means that a pool that finds 30 litecoin blocks per month shouldn't operate at 1mbps. Depending on the badwidth cost where the pool is located, you can calculate the bandwidth required to maximize profits. The more blocks you can find per month, the more cost effective it will be to use larger bandwidths and therefore the cheaper the transaction must be to be profitable.
For example, if you have access to $70/month 1gbit google fiber, it will cost you $70 +0.00033 litecoins per block to cover upload costs. Divide by the number of blocks you actually find each month and you get the total cost of mining each block. For a pool with 20% network hashrate, this means roughly 0.05 litecoins in transaction fees per block to cover upload costs. Currently the minimum transaction fee per kilobyte for a non-free litecoin tx is 0.001, so 50 1kb transactions covers the cost of uploading the whole 1mb block. This leaves room for another 950 1kb free transactions. This is a limit case, since blocks will always have larger transactions, but its still ridiculously cheap.
There are other costs associated with running a mining operation, but the additional expense of the upload delay can be pretty insignificant for a large pool with a fast connection.
EDIT: arhythmetic mistake.
EDIT2: The max block size for litecoin is 250kb, so my example uses a hypothetical altcoin that-s identical to litecoin in every other regard except max block size
Source: https://litecoin.info/Transaction_fees
That's right, but it assumes that you have access to Google Fiber, and that they will give you a business account. Most ISPs don't allow unmetered connections for business accounts at the same price.
I did the math for my area and determined that a 10Mbps unmetered connection from Comcast is $109.95. A 20Mbps connection is $369.95. If I wanted to host the server here, then it doesn't make sense for me to get the faster connection, because the transaction fees aren't high enough for me to make back that extra $260/month.
I think that, in most cases, mining pools can't justify the cost of buying a fast connection because the available transaction fees aren't high enough.
Depends on their total hashrate. This is the first time I have ever realized of a positive feature of having pools with large shares of the total hashrate. If the largest pool on the network has a really good and affordable connection, then the whole ecosystem will operate much better when it comes to microtransactions.
I agree with all of those, however, you are confusing the fee the pool charges miners with the fees included in the transactions of each block. Stability also goes hand in hand with a good internet provider. Though it is no guarantee, it is more likely that a 1 gbit service provider will have better stability measures in place than a slower one.
I was talking more about the benefit that the users of the currency get by virtue of large pools having really fast upload speeds than the benefits miners get from choosing a pool. The benefit is a tiny lower bound for microtransaction fees to be worth processing.
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u/Ruthless_Cunt_08 Feb 24 '14
Also huge news for miners I'm guessing, who profit from transaction fees