So, let’s talk about transaction fees and why blockchains have them in a systematic fashion.
There are three questions to ask about transaction fees:
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Are fees necessary at a protocol level?
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What behaviors do fees encourage/discourage?
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Do fees encourage long-term success or not?
Let’s answer those questions related to IOTA.
1. Are fees necessary with IOTA?
This may have changed, but the basic premise of IOTA is that people using the network act as miners: " Each transaction coming in must first verify two other transactions on the ledger." This means that rather than just using the network, IOTA users are also helping to mine transactions, performing work on the blockchain in exchange for access.
This is why IOTA has no transaction fees because there is a “cost” in processing power added to the network to use it.
2. What behaviors do fees encourage/discourage on IOTA?
Because IOTA has no fees (because users are performing work on the network), even spammers can help the network by performing mining. So, the “fee” is computational power, rather than crypto.
- Do fees encourage IOTA’s long-term success?
There are no fees on IOTA so its longterm success is getting people to use the network to perform work and process transactions.
So, the argument that IOTA is successful and does not have fees does not take into account the fundamentals of the IOTA network and why fees are unnecessary when the “costs” of using the network are paid in computational expenses.
Now let’s look at traditional blockchains: Bitcoin and Ethereum.
1. Are fees necessary on Ethereum and Bitcoin?
Yes, fees are necessary because they discourage abuse of the network and pay miners for the costs they have due to helping to secure and run the network.
2. What behaviors do fees encourage/discourage on Bitcoin and Ethereum?
Fees ensure that miners are paid for processing transactions and discourage spamming the network.
3. Do fees encourage the blockchain’s long-term success?
On Ethereum, the network is moving toward a system where transaction fees are collected and a portion burned to reduce issuance. But, fees are still being charged and users can “tip” miners to make sure their transaction is processed faster.
On Bitcoin, the thinking is that once issuance declines, transaction fees will be enough (due to the high price of the Bitcoin token) to secure the network. If BTC is $100k, then transaction fees will compensate miners when new bitcoin is issued.
Now, let’s ask these questions of Incognito.
1. Are fees necessary with Incognito?
Yes, because miners are securing the network and they are supposed to help to compensate them for the costs associated with doing so.
However, unlike Bitcoin and Ethereum, the transaction fees on Incognito are so low as to almost be 0.
Will fees discourage spam on the network? No, because the fees are so small that people wanting to spam the network with transactions and block legitimate transactions could do so at very little cost, and miners wouldn’t benefit (due to low fees).
2. What behaviors do fees encourage/discourage on Incognito?
The main behavior the fees are supposed to encourage is node owners to support the network by running nodes to earn transaction fees. The thinking is that more transactions = more income.
At current transaction fees this argument breaks down because even with millions of transactions, nodes earn pennies.
3. Do fees encourage the blockchain’s long-term success?
In some ways Incognito is like Bitcoin. The thinking is that the higher the PRV price, the more fees look attractive.
The fact that fees are so low, makes me think that the developers of the protocol expect an exponential increase in PRV’s price.
Why would prices increase? Well, people would be encouraged to launch nodes, and stake and the price of PRV (gained through mining) would make it worthwhile.
But, there is no guarantee that the PRV price will continue to increase or even get to a level that the price is worthwhile.
The average price of a PRV transaction is very low, so PRV’s price would have to increase by 100x at least to make these fees even worth it for miners.
So, higher fees (which could still be low compared to Ethereum and Bitcoin), would make the economic case for staking stronger (fees are independent of the price of PRV) and secure the network’s health long-term (because people could calculate their ROI using the transaction fees to see if their basic node operation costs would be met).
So:
-We can’t compare Incognito to blockchains like IOTA that have zero fees because there’s a reason their fee model exists and it has everything to do with how the blockchain was designed at the protocol level. Making surface judgments about other blockchains is a mistake.
-Low transaction fees make node operators question whether higher transaction volume will = economic benefit and overly reliant on market speculation around the PRV token price to make mining/staking worthwhile
-Relying on token price appreciation (due to people locking PRV into nodes and staking) and speculation = a Ponzi because the first people on the ride benefit the most, but the last ones in don’t
-Creating a sustainable fee structure where node operators could know that higher use of the network = greater fees aligns incentives and removes the success of the network from being overly dependent on PRV price appreciation.