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The Impact of Transaction Fees on Bitcoin Mining Strategies

Report ID:
May 16, 2016
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There are two incentives for Bitcoin miners to mine Bitcoin blocks. The miners
are rewarded both from the minting reward of creating a new block and from the
transaction fees on the transactions included in the block. Traditionally, the minting
reward has always been significantly larger than the transaction fees, but as time goes
on the minting fee is designed to diminish, and it is expected that the transaction
fees will take its place. We look into the unverified claim that once incentives shift to
mostly transaction fees, the security of the system will be the same as it was when
it was based on minting rewards. We show that this change can lead to very uneven
blocks, which can give rational miners an incentive to intentionally try to fork the
blockchain. Additionally, we reexamine a previously known alternate mining strategy,
known as Selfish Mining, and show that in a transaction fee based environment, it will
become profitable for any miner (regardless of their hash power) to utilize a modified
version of this strategy.

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