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Photo credit: http://www.flickr.com/photos/100239928@N08/

Photo credit: http://www.flickr.com/photos/100239928@N08/

All Bitcoin transactions require that each transfer be confirmed by a Bitcoin miner. In order to make it worth the miner’s while to include the transaction in a mining block, miners are rewarded with small amount of Bitcoin called “transaction fees.” These fees are set by the core developers, and as the price of Bitcoin rises, the amount of the fee has dropped. The last change was six months ago, when the fee went from 50,000 satoshis (or 0.0005 BTC) to 10,000 (0.0001 BTC). Bitcoin’s value has risen quite a bit in that time, and the once-negligible fees are now running about $0.05. To keep the incentive system balanced, the development team has decided to slash fees to 1,000 satoshis, or about half a cent.

In an outstanding post on the topic at CoinDesk, Bitcoin devs explain the process and methodology behind the new fees, as well as the eventual plans to introduce “smart fees” decided by the miners themselves.

Part of the rationale behind fees is to provide non-mining revenue to miners who contribute resources to the overall blockchain. The system is designed to allow miners to eventually “earn” more Bitcoin than they mine, supporting the system by providing confirmations. But fees also provide another benefit, helping to discourage SPAM and DDoS attacks. According to CoinDesk:

The one worry with lowering these hard-coded relay transaction fees is that it could open the door to denial of service attacks, in which people take advantage of very low transaction fees to flood the system with useless transactions designed to clog up the network. Gavin Andresen, who heads up the open source development team behind bitcoin, has explained that the ‘dust’ rule, which defines a minimum amount that can be sent over the network, is set by the transaction relay fee.

The update to transaction fees will be included on the next update (0.9) to the Bitcoin reference client, which may also include updates to address the transaction malleability bug that has been blamed for wiping out Mt.Gox and Silk Road 2.0.

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