Great piece by Solex over in
Bitco.in/forum on Bitcoin's fee market, or lack of one in the original design.
Here is just some of it:
In Bitcoin, unconfirmed transactions are propagated peer-to-peer to be stored in each node’s mempool. The fee on a transaction purchases blockspace, i.e. a miner incentive, allowing the transaction to be confirmed forever into the blockchain. Fees are buying blockspace.
Markets are always known for the commodity, product, good or service being traded. A share-market where publicly-listed equities are bought and sold, is called a “share-market’ because it’s where shares are being bought and sold. A housing-market is where houses are being bought and sold… need I go on?
The common denominator is money; products and services are bought and sold with money and there are terms of convenience as a result. In a share-market there is an order-book made of opposing buy and sell orders. It is not called an “order-market”, because orders are the market mechanism and not the product/instrument being traded. Even in FX markets, where currency is traded, the markets are for foreign exchange, not an “order-market”.
So, there is a blockspace market in Bitcoin. This market was bootstrapped into existence in 2009 slowly becoming more robust, responding to the economics of supply (from miners) and demand (from users). It is optimal for a cryptocurrency as it enables the most users while also obtaining for miners the most income, and for non-mining investors the most capital gain from the largest network effect supportable.
However! One day something strange happened. In May 2016, node mempools could no longer be drained by miners of economically viable transactions. An “economic change event” occurred, and since then the blockspace market has been artificially restructured into a fixed-supply auction room.
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Into the Hall of Mirrors: Part I — Bitcoin’s “fee-market” is an illusion
