How do Bitcoin transaction fees remain decentralized?

There have been some complaints from Bitcoin users about transaction speeds. Long transaction delays are also a key point in the debate over Bitcoin’s scaling, as it involves the most appropriate way to solve the block size problem.

Some transactions are delayed because others that paid the appropriate fees are given priority, which undermines the much-touted advantage of peer-to-peer transactions: no fees.

Zero-fee transactions

Michael Vogel, CEO of Netcoins, said:

“You can try sending a Bitcoin transaction with no fee (most wallets allow users to set their own transaction fee). You will find that this zero-fee transaction will not be confirmed for several days.

Some in the bitcoin community have been critical of transaction fees, decrying any form of fees, while others have focused more on the rate at which they are charged.

However, what matters most is the reason why transaction fees are charged and why they are necessary when cryptocurrencies are traded.

It’s all about balance

Vogel explained that the reason for Bitcoin transaction fees is to serve as an incentive for miners to confirm transactions. He also pointed out that it essentially boils down to a miner's good intentions to confirm a transaction without any fees.

According to him, Bitcoin’s fees and confirmation times are the crux of the block size and fork debate, noting that if fees are too high, then it will greatly alienate those who are interested in using Bitcoin for small transactions. On the other hand, fees that are too low will risk reducing the number of miners on the Bitcoin network, so it involves a balance issue.

Fees remain decentralized

Jonathan Chester, president of Bitwage, told Cointelegraph that the only way for any system to work is to have an incentive model that allows it to continue.

Typically, this is either in the form of compensation (which drives developers on open source projects) or monetary value. According to Chester, for bitcoin mining and transaction addition, this incentive is the transaction fee.

Obviously, any payment system’s transaction addition is very important to get the incentives right. In fact, whether it is a centralized system like PayPal, banks, or a decentralized system like Bitcoin, fees are required to keep transaction additions going smoothly.

Chester also pointed out that in reality, the lower the fees, the fewer miners there are, which in turn will have a centralizing effect on transaction addition and verification.

Chester says

“Bitcoin’s decentralization is one of its main advantages, making the technology much harder to coerce. This is important for Bitcoin’s ability to counteract bad monetary policy represented by governments. If governments cannot control Bitcoin, this means that those in power must always worry about whether government-induced inflation will cause citizens to switch to Bitcoin.

He added:

“But if it turns out that governments can control Bitcoin through centralized mining, then there will be no opposition to corrupt government currency production.”

Finding a balance

However, Chester noted that high and variable fees could affect the bitcoin industry in many ways.

High fees make small transactions difficult to manage, meaning some systems like 21 Inc and Brave will be affected.

With variable fees, if exchanges do not follow fee procedures properly, this will result in delayed payments to customers, which can have a ripple effect when combined with solutions built on top of exchanges, such as various Bitcoin remittance companies.