Fee sourcing

Also covering Exogenous fees and Endogenous fees

Fee sourcing refers to the decisions made by designers of committed transactions (such as presigned transactions) about what sources of funds they’ll use for paying transaction fees. Endogenous fees are a fundamental part of a transaction or set of transactions. Exogenous fees are those which don’t need to be paid for a transaction or set of transactions to be valid.

Some examples:

● Original LN commitment transactions paid a feerate chosen at the time the transaction was signed (endogenous fees).
● Anchor-style LN commitment transactions pay a small fee at the time the transaction is signed—enough to get it into expected mempools—but the bulk of the fee is intended to be paid using by CPFP fee bumping an output of the transaction (exogenous fees).
● Second generation anchor-style HTLC-X transactions pay no fees and are partly signed with the SIGHASH_SINGLE|SIGHASH_ANYONECANPAY sighash flag, allowing the second signer to create a transaction that includes at least one additional input for paying fees, plus an additional output for any change from paying the fee. This is an example of exogenous fees even though the fee is paid in the transaction itself; it’s exogenous because Bitcoin’s protocol allows the transaction to be created and confirmed without any additional inputs or outputs.

The nature of committing to a transaction now and potentially broadcasting it much later precludes the signer from knowing what feerate it should use to get confirmed within a desired number of blocks. The advantage of exogenous fees in this case is that they’re relatively easy to design for. The Bitcoin protocol provides several features, such as sighash flags and a DAG transaction topology, that allow an independent UTXO to pay fees for another transaction.

The direct downsides of exogenous fees are that the spender must have access to an independent UTXO and must put extra data onchain to spend it. Much like a rocket must expend some fuel to accelerate other fuel that it needs for its primary mission, a transaction using exogenous fee must spend some transaction fees to pay for the other transaction fees that it needs for its primary purpose.

The indirect downside of using exogenous fees, one that some people consider more important than the direct downsides, is that the extra onchain data they require can be eliminated if the fees are instead paid to a miner out of band. Less onchain data per transaction benefits the miner because they can then include more transactions in their blocks, so the miner can offer a discount to the user, incentivizing them to pay out of band. Only the largest miners practically benefit from out of band payments, so frequent use of them would lead to mining centralization.

Endogenous fees are harder to build into many protocols, but they can result in smaller transactions (reducing fees) and do not put centralization pressure on miners.

A suggested approach to allow dynamic endogenous fees is presigned incremental RBF bumps where multiple versions of a transaction are created, each paying a different feerate. At the time the transaction is sent, fee estimation can be performed and the version with the closest match to the estimated feerate can be broadcast. If need be, the broadcasted version can later be replaced with another presigned version paying a higher feerate. This approach has been criticized for slowing down transaction signing in time-sensitive applications, limiting the scalability of transaction trees, and requiring an excessive amount of capital to be reserved for paying fees.

2024

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