The fee-market refers to the tension between

  • 1) users who want to have their transactions confirmed as quickly as possible and …
  • 2) miners, who can only mined blocks with a fixed confirmation capacity (1mb, 4mWeight).

Naturally, it is in the interest of a miner to construct a block to mine from the mempool which results in the maximum block reward for the miner.

So when blocks are full, this tension between demand for confirmation and limited supply of block space will be resolved at a certain price. At a given price, there may or not be a miner who is willing to include a given transaction in its next block. If not, one simply needs to observe the (clearing) price at which transactions are being confirmed.

The fee-market is therefore between confirmation-seekers (users) and confirmation-providers (miners).

If fees rise because blocks are full, certain transaction amounts with Bitcoin will become unfeasible, because the fees in relation to the transaction amount are too high. So the remaining transactions will naturally be of higher amounts which still justify the market fee price. As long as confirmation capacity is limited and fixed, this will remain true.

This also has nothing to do with halvenings. The inflation/subsidy schedule obviously contributes to a miner’s reward, but it independent of any transaction demand, and represents an initial mechanism to distribute coins.

Article First Published here