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To: Sebastian Geisler <sebastian@gnet.me>,
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Subject: Re: [bitcoin-dev] Out-of-band transaction fees
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Good morning Sebastian and e,

> Hi Eric,
>
> > In paying fees externally one must find another way to associate a fee =
with its transaction. This of course increases the possibility of taint, as=
 you describe in part here:
>
> I'm not sure I follow, do you see a problem beyond the facts that miners
> would need to authenticate somehow? This can be done in a privacy
> preserving way per block. I don't think transactions would need to
> change in any way. The bounty-transaction link is upheld by a third
> party service which the miners have to trust that it will pay out if the
> transaction is included (not perfect, but a business decision they can
> make).

There has to be an association of "how much do I get if I include *this* pa=
rticular transaction" to "*this* particular transaction", so that the miner=
s have an informed decision of how much they stand to earn.
Unless fees are also standardized, this can be used to leak the same inform=
ation ("sombody offered this specific amount of money to the bounty server,=
 and the bounty server associated this particular amount to this particular=
 transaction").


More concerningly, [a trusted third party is hard to get out of](https://na=
kamotoinstitute.org/trusted-third-parties/).
If there are only a few of them, it becomes easy to co-opt, and then a part=
 of the mining infrastructure is now controllable from central points of fa=
ilure.
If there are many of them, then evaluating which ones cheat and which ones =
do not will take a lot of effort, and the system as a whole may not provide=
 benefits commensurate to the overall system cost in finding good third par=
ties.


> > It is also the case that the "bounty" must be associated with the trans=
action. Even with miner and payer mutual anonymity, the fee inputs and outp=
uts will be associated with the transaction inputs and outputs by the miner=
, rendering the proposal counterproductive.
> > Total transaction sizing is not reduced by paying fees externally, in f=
act it would be increased. The only possible reduction would come from aggr=
egation of fees. Yet it is not clear how that aggregation would occur priva=
tely in less overall block space. At least with integral fees, it's possibl=
e to spend and pay a fee with a single input and output. That is not the ca=
se with externalized fees.
>
> I should have made this more clear, I don't imagine anyone to pay these
> fees with L1 transactions, but rather some L2 system like Lightning or a
> BTC backed chaumian token issued for that purpose by the bounty service
> provider. Even Lightning would be far more private for the use cases I
> described that don't allow fee deduction from inputs. But if one accepts
> more counter party risk with e.g. some centrally pegged chaumian token
> it can be anonymous.

Since such L2 mechanisms themselves are dependent on L1 and require a facil=
ity to bump up fees for e.g. commitment transactions in Lightning Network, =
this brings up the possibility of getting into a bootstrapping problem, whe=
re the security of L2 is dependent on the existence of a reliable fee-bumpi=
ng mechanism at L1, but the fee-bumping mechanism at L1 is dependent on the=
 security of L2.
Not impossible, but such strange loops give me pause; I am uncertain if we =
have the tools to properly analyze such.

>
> I see that this might not be very useful today, but I imagine a future
> in which Bitcoin is mostly a settlement and reserve layer. This would
> make it feasible to keep most UTXOs in common sizes. Only large, round
> transactions happen on-chain, the rest can happen on L2. This would
> allow tumbling these already evenly-sized UTXOs on spend without toxic
> waste if we can somehow tackle the fee payment problem. I know of the
> following solutions:
>
> -   everyone has to add a second UTXO per input
> -   Someone is chosen fairly at random to pay the total fee
> -   pay a service on L2 to add an input/output for fee payment
> -   out-of-band L2 fee payments
>
>     Only L2 fee payments can hide who is involved in such a tumbling
>     operation as additional fee inputs that get reused would indicate the
>     same entity was present in two tumbling operations. The out-of-band
>     approach saves one input and one output and appears more general (e.g=
.
>     could be used like rbf).
>
>     This is also not a general solution for fee payments. In many cases i=
t
>     will still be preferable to pay on-chain fees. But having the option =
to
>     avoid that in a standardized way could help some protocols imo.
>
>     Best,
>     Sebastian
>
>
> > -----Original Message-----
> > From: bitcoin-dev bitcoin-dev-bounces@lists.linuxfoundation.org On Beha=
lf Of Sebastian Geisler via bitcoin-dev
> > Sent: Monday, November 30, 2020 3:03 PM
> > To: bitcoin-dev@lists.linuxfoundation.org
> > Subject: [bitcoin-dev] Out-of-band transaction fees
> > Hi all,
> > the possibility of out of band transaction fee payments is a well known=
 fact. Yet it has been mostly discussed as an annoying inevitability that c=
an be problematic if on-chain fees are to be used as a consensus parameter.=
 The potential use cases have seen little interest though (please correct m=
e if I'm wrong).
> > One such use case is sending UTXOs "intact". Let's assume we get to a p=
oint where Bitcoin is primarily a settlement layer for L2 systems.
> > These L2 systems might want to protect their privacy and keep UTXOs of =
a common sizes (e.g. 1 BTC, 10 BTC, =E2=80=A6). For certain settlement appl=
ications these can be transferred as a whole, but currently fee requirement=
s force the system to add another input for fees which will introduce taint=
 (because it's used repeatedly). If instead a fee could be paid out of band=
 in a privacy preserving way the TXO chain would leak little about the inte=
rmediate holders.
> > Taking this concept even further CoinJoin-like protocols could also be =
used to introduce further ambiguity without leaking that a certain entity t=
ook part in the CJ (which fee inputs/reused "toxic waste"
> > inevitably do afaik). Such a mechanism would probably also make CJ tran=
sactions much smaller as no fee inputs had to be provided (assuming the inp=
uts already have the right size).
> > Out-of-band transaction "accelerators" already exist and taking fee pay=
ment out-of-band can not be effectively prevented. So even though any such =
proposal will probably have slight centralizing effects I believe that havi=
ng a standard for it is preferable to having every pool implement their own=
 API making it harder for small pools to get into the market.
> > Imo the central questions are:
> >
> > -   how to build such a out-of-band "transaction bounty" system
> > -   how to standardized it
> > -   how can the centralizing effects from it be mitigated
> >
> > Imo fees are small enough to not really care about counter party risk t=
hat much. It's more important that it is easy to run so that there is some =
choice for users and miners. In that sense I consider single-operator servi=
ces providing both standardized user and miner APIs as well as an optional =
UI suitable. I would still take into account that this could change and mig=
ht consider the needs of federated services in the protocol.
> > Each such service would need to announce which means of payment it supp=
orts and allow users and miners to choose when paying/redeeming fees. Users=
 should be able to submit transactions and either be presented with a singl=
e payment method dependent "invoice" or one per input (for the CoinJoin use=
 case). As soon as all invoices are paid the bounty goes live and is visibl=
e to miners through an API.
> > Miners that included a transaction need a way to authenticate when clai=
ming the bounty. One possibility would be to optionally include a unique pu=
blic key e.g. in the coinbase scriptsig after the height push (is this feas=
ible?). This could be used to claim any bounties after 100, 120, or even a =
user-defined confirmation threshold is met. If the key is unique for every =
block there won't be a problem with pool accountability which might become =
a risk down the road (so this should also be enforced at least in the bount=
y protocol to avoid lazy implementations leading to dangerous precedents).
> > Any feedback is welcome :)
> > tl;dr Out-of-band fee payment services are inevitable and useful, so we=
 should at least standardize them and mitigate negative effects as much as =
possible.
> > Best,
> > Sebastian
> >
> > bitcoin-dev mailing list
> > bitcoin-dev@lists.linuxfoundation.org
> > https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>
> bitcoin-dev mailing list
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