Dynamic TX Fees

Dynamic ADA TX Fees

The following document pertains to TX fees. For clarity, this is not about getting a free lunch, it is about the sustainability of the Cardano project while remaining competitive with the legacy banking system with respect to the movement and use of finances in the wider global economy.

Case Example

Where BTC TX fees were at one time essentially “free” they have over time come to reach as high as $55.16 US per transaction on 22nd December 2017. While for sizable international transfers of value this may be acceptable, when considering buying pizza for the family it makes the purchase non viable as well as many other transactions in a local economy. As a result BTC becomes a currency with restricted economic use and or ends up being little more than a speculative financial instrument, not a currency at all in the broader economic sense. We see a similar problem with TX fees on the ETH network, averaging $17.43 as of 5/1/2021 and getting as high as $63.00 as of late February.

Importance of TX Fees for Treasury and Network Security/Sustainability

It is clear TX fees are vital for the long term viability of the Cardano project. There needs to be a mechanism in place which allows for the collection of funds for the treasury, and distribution of rewards to stake pool operators and delegators for maintaining the network. Fees also work to decentivize network spam. These attributes of the TX fees must not be overlooked.

Importance of Low TX Fees to Maintain an Economically Viable Currency

As we can see when looking at BTC or ETH high transaction fees can be damaging to the viability of cryptocurrency in the broad financial economy. However, TX fees do not need to get to the same high levels of BTC or ETH transaction fees to have a negative impact on user experience and restrict the viable use of the currency. Moreover, increases in TX fee value can happen extremely quickly as coins go through rapid increases in value in the financial market.

A TX fee of $1.00 US quickly makes the use of a currency questionable for a vast range of economic functions when compared to fee scales of the legacy banking institutions. If banks were charging $1.00 US for each bank card transaction people would probably use cash, likewise if a cryptocurrency TX fee is $1.00 per transaction then it makes more sense to continue using the legacy banking system for day to day expenditures.

As such part of the TX fee equation needs to consider a fee value that can be absorbed by the daily user without it costing them more than the legacy banking system if possible with respect to regular daily use of the coin.

Finding Balance

Clearly TX fees are needed, the trick is in finding balance between the needs of the treasury and nodes against what users can absorb without TX fees damaging the viable use of the currency in the economy.

To this end there are several questions to ask of the ecosystem and protocols developed to facilitate a dynamic TX system.

Question 1

What level of funding does the treasury need annually to allow for the maintenance and potential future development of the Cardano project?

Question 2

What is the required reward level in dollars for running a stake pool on the Cardano network to make it worthwhile to bear the costs associated with that needed action, and how many stake pools are needed to maintain the security of the network?

Question 3

How many transactions, on average, have occured daily on the Cardano network since the launch of the Cardano SL Mainent on Friday, September 29th, 2017 and what growth in network activity can be reasonably expected over the next 12 months.

A Dynamically Scalable TX System

Using the answers to the three questions above develop a TX system which responds dynamically to the fluctuating value of ADA against the US dollar, increases and decreases in network activity and abundance or scarcity of active Nodes in the network, with the precondition of maintaining a healthy treasury?

Benefit of A Dynamically Scaled TX System

A dynamically scaled TX system offers users an assurance that the costs of using the system are pinned to a dollar value, meaning that those costs will remain consistent against the value of the coin.

If it is found that the amount of finances needed to fund the treasury and nodes annually divided by the amount of average daily transactions results in a $0.05 US value for TX fees this would mean at the $1.00 US coin value the TX fee would be 0.05 ADA per transaction. Of course transaction size plays a role in this as well. A base fee should be findable, transactions with larger byte sizes may attract larger fees. Should the coin then appreciate in value to $10.00 US the fee would then decrease to 0.005 ADA maintaining the $0.05 US fiat value. Declines in the coins US dollar value would conversely increase the fee relative to ADA to maintain the $0.05 fiat value.

The $0.05 fee is an arbitrary number used as an example only, total network costs over a year including a forward estimate for development would need to be found.

Thus, should the coin gain value against the dollar then not only will less coins be needed to make purchases in the economy but the TX fees will also respond accordingly and also be lower with respect to the ADA currency. At the same time it offers users the understanding that should the value of the coin drop not only will purchases cost more ADA but the TX fees will also be higher relative to the coins value while at all times maintaining a viable ecosystem through a healthy treasury and stake reward system.

In Conclusion

A dynamically scalable TX system has the potential to make the Cardano network and ADA coin extremely competitive with the legacy banking system, attracting users by giving them a fixed fiat fee value against use of the coin, while also maintaining a healthy ecosystem with somewhat predictable financial outcomes for the treasury and stake pools. This would avoid the cost problems with making transactions with either BTC or ETH, making ADA a viable tool for daily use as a true financial instrument. The new global financial operating system.

Thank you for taking the time to read through this. I think Cardano has outstanding potential to change the face of financial economics globally but feel this particular issue could be a barrier to widespread use as a replacement of fiat currency.

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