Bitcoin Forum

I've wrote on my blog about various economic forces behind block size limit. Here's the most important part:

If the miners hit the block limit, it would only mean one thing: there is a desire to process more transactions, but historical untested agreement does not allow it. Then miners will either raise the limit (the smaller the increment, the bigger support it will have), or transaction fees will go up as people compete for the space in blocks. As transaction fees go up, not only miners, but also regular users and service companies using the full blockchain would desire to raise the limit. So it will be easier to make a consensus as demand grows.

My prediction is that the block size limit will probably never be abolished, but will be constantly pushed up by a factor of two as amount of transactions approaches the limit. Maybe after a couple of updates, people would decide that it’s safe to abolish the limit completely if it is cheaper to account for it, than to have uncertainty of a hard fork.

Other concerns are addressed in the full post:
http://blog.oleganza.com/post/43677417318/economics-of-block-size-limit

I did not go deep into analyzing complex schemes like adjustable size limit. Please feel free correct me where I am wrong.

Hard forks should also get softer and softer over time.

For example some day one's operating system's package-manager might well be able to check the authenticity of an updated bitcoin package from the source you have designated to it as the one to trust, automatically. Even down to checking whether it is a "critical" / "urgent" update or a mere non-critical bugfix update.

The software could even come with a "warning, this version should not be relied upon to remain up to date beyond (some date about a year after its release)".

Any time bitcoin exchange rates fall drastically in response to too many blocks being full of paying transactions too much of the day/night, machines all over the world could find, during their nightly automatic check for package updates, an update ready for them to automatically install.

Sure a lot of security and trust details to get that all down pat, but provably repeatable builds from reputably attestedly audited and tested source code, which is already in place, is a nice step already in that direction.

-MarkM-

You are, apparently, blogging about technology you do not understand. Please stop. Miners cannot "raise the limit"— that isn't how Bitcoin works. That precisely the same as saying that when the subsidy halved from 50 to 25 miners would continue on mining 50 because they prefer the greater income. They may have wanted to— but the system doesn't permit it, and the miners can't change the system. Darn good that they can't because otherwise all our expectations about the rules that make Bitcoin valuable would be worthless— subject to the whim of a small pool of anonymous interests.

Honestly, Mark.  Do you not see the contradiction in the above statement?  What makes you believe that the rate of transactions are, in any way, related to the exchange rates?

The FUD brigade's sky-is-falling / sky-will-fall FUD about how failing to make blocks too big too soon will cause a mass migration of users, hence thus presumably also value (else they aren't the important users anyway, maybe) from bitcoin and/or a failure to bring in new users (which, combined with the inflation rate from minting, also could lower exchange rates).

Or in short, "if exchange rates aren't falling, the sky ain't either".

-MarkM-

Maybe a little harsh, there; my take on the OP was more toward responding "yes, it is a market in action, if it pays everyone it will happen".

As it didn't seem to me to be saying miners could force it up by mining so much as that the soft limits we have in place that miners do get to comment out or adjust to their liking will provide feedback.

In other words, knowing that the miners only have the soft limits to adjust, benefit of the doubt along with recognition that the whole hard versus soft limits techie details was maybe a bit rich for his intended audience led me to the idea that speaking in terms of the soft limits rather than the hard limit possibly suited the article better.

-MarkM-

I can accept that.

Thanks for reply. I didn't mean unilateral change by miners only. I meant consensus that must be achieved by everyone who runs the full node. I have rephrased the sentence to avoid the confusion.

Is there anything else incorrect or badly written?

It is crucial to understand the concept and, yes, economic impact of a hard fork before even approaching the economic analysis of changing the max block size.

A hard fork is a significant event that knocks legitimate users off the network, makes coins unspendable, or potentially makes the same coins spendable in two different locations, depending on whether or not you're talking to an updated node.

It is, to pick a dramatic term, an Extinction Level Event.  If done poorly, a hard fork could make it impossible for reasonable merchants to trust the bitcoins they receive, the very foundation of their economic value.

Furthermore, a hard fork is akin to a Constitutional Convention (http://en.wikipedia.org/wiki/Constitutional_Convention_%28United_States%29):  a hard fork implies the ability to rewrite the ground rules of bitcoin, be it block size, 21M limit, SHA256 hash, or other hard-baked behavior.  Thus, there is always the risk of unpredictable miners, users and devs changing more than just the block size precisely because it makes the most engineering sense to change other hard-to-change features at the time of hard-fork.

It is a nuclear option with widespread economic consequences for all bitcoin users.

Finally, common sense. Static thinking and imagining people are robots who won't change their behavior dynamically in response to change is rife, maybe because coders are not used to incorporating human action into their considerations. https://www.youtube.com/watch?v=BbGKkV-WoYg (https://www.youtube.com/watch?v=BbGKkV-WoYg)

I wouldn't be so dramatic about hard fork. People will not change their software unless they are 99,99% sure everyone else is going to do the same. If there is no way to "vote", then nothing will change. If block size limit or some other rule will get in the way of many users, everyone's desire to find a good enough mechanism of voting will get stronger until it is finally found, implemented and the change is applied.

No miner, user or developer is going to "unpredictably" change any rule if he is not sure others are doing the same. There is no nuclear situation at all. If someone is not smart enough to update without a proof of consensus, he and his customers will suffer. But not the whole network. Thankfully, there are plenty of businesses, nodes and miners, so stupidity of one of them will not significantly affect trust in the network.

I guess, we already have a way to vote for an new proposal using block version numbers: https://en.bitcoin.it/wiki/BIP_0034

Say, "block version 3 increases limit to 2 Mb". Miners who agree with that will upgrade to version 3, but still keeping the block size under 1 Mb. If > 90% of the blocks is version 3, it will show the consensus. Those who disagree (including non-mining nodes) will have data for calculating their risks. We can see that 90% consensus is possible only if 90% of miners really believe they have a lot of valuable transactions, not spam, and that it's profitable for them to increase the limit. If only a couple of miners want to increase the limit, there will be no consensus.

When the miners vote, the natural question is whether miners have opposite interests to those of other full nodes. I think the interests are aligned in case of a block size limit. Every node that creates transactions, competes with other nodes. And the more transactions the node creates, the more expensive it is going to be (think bitpay, coinbase etc.), hence the bigger incentive for them to accept larger blocks. When they see majority of miners accepting new rule, they are going to accept it too with probability proportional to their transaction expenses (which is proportional to number of transactions). In the end, the opposition to miner's consensus will consist of only nodes with little originating transactions. And these remaining non-mining nodes may choose not propagate new blocks, but it does not matter as there are a lot of other nodes who will. Disagreeing minority of miners will of course prefer certainty of block rewards to the risk of producing orphaned blocks and will accept the new rule.

Last point: if the suggested block size limit is too high, people would have more reservations against it. If, however, it is only 2x the current limit, the cost of bandwidth and storage is much easier to calculate, so everyone would feel good enough. And if it works out well for everybody, we can do another round of increase when new limit is filled up. If it does not work well for everybody, miners will simply create smaller blocks.

In the end, I don't think anybody would bother upgrading until we start approaching 1 Mb limit for real. When we will, it will be much clear for both miners and non-miners how much the change is desired.

(Re the post above...)

Very well written, thank you.

Not sure folk are going to be able  to come up with much to refute it, either.

Maybe we should hope you aren't right simply because other people being right is one of the most annoying things in the whole wide world thus could lead to flame wars or something. ;) :D

-MarkM-

It might also be worth adding an delay to activation.  If 90% of blocks between 235000 and 250000 are version 3, then starting with block 270000, the block size will be 2MB.


Maintaining independent verification is important too.

There is probably a curve for optimal profits.  If the block size is infinite, then there are no fees due to space requirements.  Similarly, if there is no space, fees are zero due to no transactions.

Like the Laffer curve, there would be an optimal (to miners) size, which draws in the maximum amount of fees.

If miners, vote, then they will aim for that.

I would repeat this.

I couldn't agree with your analysis more.  I personally think the limit should be abolished along with a few other constraints.  Although I'm not sure the community agrees as a whole.  The exchanges have the most say for now because they are most centralized part of bitcoin.  If mtgox decides to fork, then the whole community will.  Although to be honest, bitcoin won't last forever.  We'll get to a point where forking is too difficult & switching to another cryptocurrency is an easier option.  And it may make more sense to forget forking at all because bitcoin is too fragile & I'd rather at least one cryptocurrency succeed for now despite its flaws (which pale in comparison with non-cryptocurrencies).

While I do agree, this is also an argument for getting things settled sooner rather than later. 

That puts it in very good perspective. Thank you for that post.

After a hard fork, even there are only 4 people hashing on the original chain with old client, it will quickly develop into a popular chain and most possibly knock out the new chain

It is a no brainer: One chain has limited resource (expensive), another chain has abundant resource (cheap), btc on which chain will worth more?

Not necessarily,people also need to consider long term success of which fork.

Gold seldom get moved more than once a year
Fiat money moves thousands of times a second around the world

Remove the block size limit won't make the scalability any better, since then you have exponential growth of bandwidth and disk space, and fall into the exactly the trajectory as today's monetary system: If bandwidth and disk space did not grow, bitcoin will die, in order for bitcoin to survive, the internet must grow...

To answer your question, the one that will be worth more will be the one that people trust in and use.

If one has 4 people securing it, and the other has thousands of people securing it, which do you think people will trust in more?

Trust is everything in a currency.  But the number of people securing it is a dynamic variable, subject to change over time based on confidence and expectations.

Allow me to pose to you a different question.

Assuming a fork, which of these blockchains is more trustworthy:

Chain 1: a coin which has low transactional capacity, but which is subject to a single kind of manipulation based on 51% processing power accumulation.

Chain 2: a coin which has high transactional capacity, but which is subject to three kinds of manipulation: 51% processing power accumulation, 51% bandwidth crowding out, and 51% storage capacity crowding out.  And which possibly requires human debate and intervention (reforking?) every few years to set an "optimal" block size.

As a long-term saver, I know I would stay with Chain 1, even if it had fewer miners initially.  And I think you underestimate the number of people who value security and decentralization much more than transactional capacity.  I'd predict that over time, as people understood that Chain 2 has more attack vectors than Chain 1, they would migrate their savings over to Chain 1, leading to a much higher valuation for Chain 1 over Chain 2, regardless of the fact that Chain 2 can potentially process many more transactions per second.

High valuation for a currency does not come from transactional or commercial use, quite the opposite, it comes from the percentage of the monetary base that is withheld from the market as savings.  That percentage is the true measure of trust in a currency (the higher the better).  Gold has already proven this conclusively, with a $1500 market value in spite of virtually zero commercial transactions per second, and virtually zero merchants accepting it as payment.  

Would Bitcoin trading at $1500 with 7 max TPS be a failure, or a giant success?

There is nothing to fear from a limited (low) TPS.  It is a tradeoff for guaranteeing Bitcoin's high security and reliability as a long-term store of value.  Savers should not be sacrificed to accommodate merchants and bankers.  I think that's what the message embedded in the genesis block is all about.  The world desperately needs rock solid secure undebaseable savings vehicles for the little guy.  Ask Zimbabweans, Iranians, Argentinians, etc.

BTW I'm not opposed to increasing the block size gradually and conservatively as average storage/bandwidth improves, but I'm opposed to the idea of overdoing it based on unscientific hunches, or the false narrative that Bitcoin will go extinct if TPS is set too low.  Again, look at gold to see the resounding succcess of a 0 TPS monetary unit.

I recently read (yesterday, in this or related thread) that 7 transzctions per second is calculated from the artificial, soft, canary in the coalmine limit Gavin recently put in, of quarter of a meg. So actual limit, accordingly, would be 28 transactions per second.

I do not know where the blog linked to in the original post got the 40 transactions per second figure that it was saying is current limit back when I read the blog.

Also look at all the demurrage literature. Deliberately devaluing-constantly currency because that speeds up actual commerce.

It seems maybe ideal would be a gold-like currency for storing value, and a cheap, maybe constantly going down in value currency to spend. Each day or week or whatever you borrow the cheap stuff using the good stuff as collateral, getting a good interest rate since its hold wants to get rid of it fast before it loses value, and you never move your good stuff from the vaults where it sits, acting (unmoving) as collateral...

-MarkM-

Sounds like current financial system......

Yes, this two-currency proposal is similar to the FOFOA viewpoint regarding the inherent conflict between value storage and transactional demand, which I think has philosophical merit and historical evidence behind it, the inability to split those two monetary functions being part of the reason for the move from the 1800s 100% hard gold standard towards our currently 100% "elastic" and "flexible" credit-based money.  Same forces and motivations at work in this blocksize debate, the needs of savers vs. the needs of commerce.

Ideally I think we would give projects like Ripple or Coinbase a bit of time to play out, and see if they naturally take over a certain percentage of transactions that would otherwise be done via Bitcoin.  Hopefully, when looking at this blocksize issue, Gavin will have time to evaluate whether such external systems have any potential to reduce transactional load on the Bitcoin network.  But that's why this is a hard problem, the future and external variables are wildly unpredictable, no one can really tell whether Ripple or Coinbase will exist 5 years from now.  Hence my guess is that we'll have to accept that the blocksize will have to be periodically reviewed and adjusted if the community wants it to always be some optimal compromise between average node hardware and projected transaction loads.

I'm starting to think that Satoshi quit because he saw this blocksize issue coming, and knew it would be a giant pain with no simple elegant solution :)

Nah, it has a simple elegant satoshilution: a million or few million ancient coins suddenly awake from their sluimber, Satoshicorp International datacentres spring up on all seven continents, and lobby for a one terrabyte or ten or twenty terrabyte max block size because obviously any "reasonable" world currency verification operation can "easily" handle such blocksizes.

:) :D

-MarkM-

Firstly let me say that I appreciate your post very much. It was well thought out and did a good job to illustrate the issue.

The concern that I have with your statement is that if transactions are expensive, Bitcoin is then NOT a savings vehicle for the little guy because its too expensive for him to make deposits. Now I realize that people like MarkM are saying "look, we are so far from transactions being expensive that this isn't a concern yet, let the market play things out with the existing block size limit", but my concern is that a change at that point will be incredibly more difficult since it would require miners to make larger blocks for potentially smaller transaction fees (in the short term).

Instead of aligning user and miner interests, it puts them at odds. Users want more transactions and cheaper, miners want fewer transactions and more expensive. What we should go for is users and miners want maximum transactions at maximum market supported rate. Otherwise we have an artificial price floor, as supply has been limited to a level less than what the market could supply otherwise.

Here's a thought experiment, how valuable would Bitcoin be if it could only support one single transaction per day? Sure, that transaction might cost a large sum of money (if anyone still cares to use it), but it would certainly be less than the combined transaction fees in a system that supports many more transactions. The reason for that is that the technology is much less useful, less used, less competitive against others, etc.

So if you agree that a Bitcoin which could only perform 365 transactions per year would be a less valuable Bitcoin, which can't you agree that a Bitcoin that can only support x number of transactions per year forever would be a less valuable Bitcoin?  And why is no one concerned that we are going to enter into a situation where miners and normal users are at odds?

Bigger transaction fees are not really essential for miners for many years yet.

By the time we halved the subsidy, bitcoin had doubled in value.

If it doubles in value again by the time the subsidy halves again miners should still do fine.

If it more than doubles by then less fees (if doubling block size does in fact lead to less fees) won't bother miners much if at all.

-MarkM-

I agree with the sentiment, but I myself try to avoid "shoulds" and "oughts" as much as I can. People will figure this out to their personal and, in effect, mutual benefit without using moral propositions like "you should think about poor miners in Zimbabwe on a dialup" or "people should have unlimited block size to be able blah-blah". People embraced the existing Bitcoin rules voluntarily and everyone for his own reasons. No one is entitled to say what anybody is "supposed" to do with the system.

I have clarified the economic forces at play in a new article:

http://blog.oleganza.com/post/43849158813/this-is-how-block-size-limit-will-be-raised

My position is not "we should do this and that". My position is that I predict what will happen and why. And I publicly abstain from judging whether it is right or wrong. It is just the way it will be.

Extra comment: if the block limit is higher than the optimal block size (e.g. limit is 1 Gb, but it's only profitable to send blocks 5-10 Mb each), it says nothing about relative amount of fees. It may be that transactions will still be cheap. Or it may happen that the competition for a place in a 5-10 Mb block is so high, that transaction fees will be enormous, so only big amounts of money could be moved around. We cannot know that in advance, so we cannot say anything about whether "regular folks" will be able to send less than a dollar around the internet for free as they do now. Only market will tell.

My personal feeling is that the pressure of high transaction fees would require miners to upgrade network to allow bigger block sizes, just like any shop is pressed to decrease costs of warehousing to allow more and more of merchandise if the demand for it grows. I bet in the future transaction fees will be typically higher than today (outside of temporary increases before increase of block size limit and the bandwidth), not suitable for very small transactions, but not outside the reach of most of the people. And the small amounts will be processed by clearing houses anyway for they can be validated much faster.

Nice, though you might want to check your grammar at the very end of the article.

You left out a potentially interesting option:

Show some folks your business opportunity! Look, I make money selling 100 apples a day just to this small neighborhood! How many could you sell to your neighbors? Heck I can even let one of you take over my retail operation here, a proven business with existing customers! Because I will move up to wholesale, I will buy lots of 1000 or more apples from farmers, assuring their livelihood with futures contracts on apples, and deliver to each of you 100 apples per day cheaper than I am paying for them right now! It is win win win, provided of course you too enter into a contract: I need assurance you will in fact be buying at least one lot of 100 apples per day from me so I can finance all of this.

(Our miners correspond to the farmers, the retailer to the people making a profit on having transactions put into the chain. So its again my "bring the money" argument: prove/assure you have enough customers ready to use a megabyte a block and blocks can be increased in size by a megabyte as fast as your assurance investment can get turned into upgraded capacity of the network.)

-MarkM-

That was excellent, I think this is exactly how it will play out as well.

Thanks for the review. I think you wouldn't even need any retailer to prove/assure anything. Miners themselves will see how many transactions they are processing. When they approach the limit and see that the risk of orphaned blocks is not increasing as much as to hurt their projected profits, they will individually desire increase of the limit. And since mining is a lottery where all transactions are spread more or less equally between all the miners, they all will have blocks of the same size in average. So it will be easier to come to a consensus.

One exception is when some miners generate smaller blocks because of the constrained bandwidth, while others have more bandwidth and send out full 1 Mb blocks. But they would still not be against the higher limit because 1) they still could create smaller blocks while it is a a higher risk for others to share bigger blocks with everyone else including them; 2) they would want to plan for the future upgrades of their own connectivity so they themselves will have more freedom in their operations. Otherwise, if they neither upgrade their network, nor vote for increased limit, they are just having problems with scaling in the long run. Everyone will simply outcompete them and have more earnings to fund faster machines and bigger bandwidth in the mid-term future.

Thanks, yes, that makes sense.

I was holding this back so as not to shoot down my previous narrative, but one could kind of suggest we have in a sense sort of already provided miners a futures contract in the form of the block subsidies.

If we make sure we do our part well so the value of those subsidies actually goes up in real buying power despite going down in number of bitcoins, miners should be able to survive. If we can make the buying power of bitcoins four times higher by the time the subsidy halves, miners will have double their current subsidised income, so should be able to afford to double network capacity, one might hope. (Or even expect?!)

(So lets get busy raising exchange rates! :))

-MarkM-

The big block needs to be downloaded by everyone including low bandwidth peers to verify. This put up a huge disadvantage of low bandwidth peers and may finally force them off the network.

Yeah but if bitcoins are worth $120 or more each by then, they are maybe just stupid not to have invested in some more bandwidth by then? Or some more ASICs maybe if bandwidth is low due to low hashpower resulting in low income?

Its still four times whatever they are making now with the gear they already have, divided by the block halving by then so double what they are already making now.

So lets get those exchange rates up! :)

-MarkM-

To put things into perspective what will a 2 MB limit offer vs a 1MB in terms of theoretical scalability? I guess you could say "twice as much" . What would that be like compared to say paypal for instance?

Couldn't you also argue that if we run up to the limit... and it is seen that it is to everyone's benefit that a raise would be good.... doesn't that mean that we don't need to come up with some fancy /adaptive dynamic limit(since if we can do it once we can do it again)? If we can get a consensus and fork increasing the limit by 1MB then that is good news for the future of bitcoin I think.

I think that much is a slam-dunk.

But, while we are in there, doubling size when we halve subsidy also looks like it will be putting in place another four years ahead a value that will also be a slam-dunk by then or will motivate us really well to make damn sure that it is a slam dunk by then; and even four years after that the next value will either be pathetically too slow an increase or yet another slam dunk or just another damn good reason to make sure we manage to make it yet another slam dunk.

So I still think just double max block size when you halve subsidies looks like it would be much better than any fixed constant we could put in when we hard-fork.

-MarkM-

Yes.

Nonetheless, the double-when-we-halve is such a slam-dunk we might as we might as well put it in, as you say we can always hard fork later. Hard forks get easier and easier, not harder and harder, as Gavin et al perfect the techniques for doing them smoothly.

Plus also, aren't massive swarms of independent ordinary typical nodes typically more agile, in general, than vested interests, old money, political parties, lobby groups, megacorporations and such (the "forks are politically impossible!" crowd) anyway already, in addition to that crowd being precisely the kind of folks/entities we desire to outmanoever / outagile ?

-MarkM-

One could argue that doubling the block size on every halving of the subsidy is exactly the wrong thing to do at the wrong time.

When the subsidy gets cut in half all of the miners that were previously at the margins of profitability are now kicked off the network (since they would lose money by running their rigs). A drop in the hash rate is the result. Combine the halving of the subsidy with the inevitable reduction in transaction fees (since there is no more scarcity) and you have the perfect storm that could create the perverse financial incentive to use newly idle hash power to attack the network rather than secure it.

This doesn't even take into account the possibility of losing additional miners who have insufficient bandwidth on a block size increase (a debate that has not been resolved).

Please, for the love of Bitcoin, drop this idea of doubling the block size on every halving!!!!

For these reasons, I feel that it is better to just leave the max block size alone versus doubling the block size on every halving.

Good point, okay, how about interleave the two adjustments, halving the subsidy halfway through each doubling of the size period aka doubling the size halfway through each halving of the subsidy period?

-MarkM-

I think that any fixed block size inflation schedule or any inflation schedule that is based on static measurement of block chain history, would require an oracle to tune correctly. Since we do not have an oracle, it is guaranteed that the block size will either grow too quickly, or grow too slowly. The consequence of growing too slowly is that we incurred the cost of a hard fork for nothing (although it can be argued that it is better than having no change in the limit).

But the consequence of growing too quickly is severe, a large drop in fees. Even if you stagger the subsidy cut and the block size increase, there is a mismatch in the two growth curves.

Each successive cut in the subsidy has an exponentially decreasing effect on the network. Consider the last cut, going from 2 satoshis down to 1. It is practically nothing. Most of the coins were created in the first 4 years. Over the next 4 years we will create 25% of all the coins that will ever be created. Let's pretend that the subsidy will end in 40 years. By that time the block size will be 512 megabytes. You have an inverted curve compared to the money supply. Most of the block size increase will happen in the last 4 years of the inflation schedule, at a time when very few coins are created. Just when we need transaction fees the most (at the end of the inflation schedule), we would create  the largest decrease in the market for fees ever: each doubling of the block size sets a new record for reducing scarcity.

An exponential growth characteristic seems wrong. Now you might say, well why don't we make it geometric? Say, a percentage increase each time? The problem, while not as severe, still remains: you need an oracle to tune the percentage correctly. Even if we knew the "god percentage" (globally optimum growth value), we could have oscillations where sometimes the optimum percentage is too little, and sometimes its too much.

At the same time, this analysis completely ignores the effect of bandwidth. If we take that into account, every doubling of the block size will double the minimum bandwidth requirement. If transmitting a block took 5 seconds for the average node, it would take 42 minutes after 40 years (using the example above). Are we going to bet Bitcoin's existence on average bandwidth increasing by a factor of 500 in 4 decades?

Again, I think we should drop the idea of a fixed schedule of block size increases. Furthermore, for the analysis I gave elsewhere we should drop the idea of any sort of static measuring system to adapt the block size. I think that so far only the voting system is resistant to all the problems I mentioned.

The optimum method for increasing the block size would have to factor in the exchange rate, people's tolerance for fees, and the effects of the increased bandwidth requirement. I do not believe this can be modeled in an automated fashion. Therefore, we solve the problem in parallel by letting miners try to solve this complex equation for their own use-case and vote on the result.

If so then we are down to determining what percent to increase by per referendum and what percent yes vote in the referendum is required to cause that increase.

Maybe frequency of referendi too. (Faux Latin! Or is that real Latin? (By some sheer fluke.))

-MarkM-

The nitpicking details of what percentages to use are just constants. It is still a voting system. I'm sure we could come up with an infinite set of variations on the voting theme. Maybe instead of a yes/no vote everyone just votes on what they think the new size should be (this would let it go up and down). Then we take some sort of smoothed median? Who knows.

Maybe someone can come up with a better idea than voting. In my mind there are only two workable choices for addressing max block size:

1) leave it alone
2) vote in the block chain

As far as the percentages go, the amount of increase should be small enough so that we always err on the side of being conservative with the increase. It is always preferred to raise the block size limit by too little rather than too much. In other words, better that the fees are too high (more security) than too low. As far as the 90% well that would be a politically driven choice.

Can we really not get rid of any going back down? If it can come down later it ought not to have gone up in the first place.

-MarkM-

3) Base it on some metric

Adding a formal way to measure orphans would be one way to see if the network can handle the current block size.  This could be accomplished by adding another field into the header to list orphans (maybe a merkle root), since the last difficulty adjustment. 

That isn't perfect, since a majority of miners might refuse to include blocks that list miners (assuming miners want to increase the size, even though there are orphans).

People often overlook two things:

1. When there are more transactions that blocks can handle, they will not be dropped, but will go elsewhere. Namely, through some escrows. So instead of congesting bandwidth in some part of the network, they will take up bandwidth in some other part of the network. It's just a question of who will get paid for it: miners or escrows.

2. Bandwidth is not a static environment that we happen to float in. It is a series of tubes ;) that are owned by someone and paid by people who use them. If someone wants to send or receive more data, he will pay for it. If he is not willing to pay more than $X, he will not send/receive more than Y bits/s. So there is no question of "lets save precious bandwidth", everyone decides on his own.

It is absolutely irrelevant what you think about how security "as a whole" is achieved through fees and mining profits. Miners have interest in keeping transactions validated and blocks pushed to *other* miners as quick as possible. Users and escrows are interested in having their transactions validated as quick and as cheaply as possible. So it is irrelevant what you, independent non-mining "validator", thinks about your own bandwidth. If you cannot keep up with the miners, no one will notice. Yes, maybe security will be worse without you. But it does not matter, because people will continue doing what they do as long as they think the security is "good enough". It is absolutely possible in the future to have some miners build their own optical fiber channels between each other to provide the fastest validation possible for biggest blocks possible. Everyone else will naturally join the network to read the latest data from it at their own pace with their own bandwidth.

In fact, this happens already. If an owner of mining equipment wants to avoid issues with bandwidth and orphaned blocks, he simply joins the mining pool. So you end up having small number of well-connected miners who actually collect and validate transactions, while everyone else who has invested in hardware can use slower bandwidth and perform hashing only, without a need to send/receive blocks. If however, the costs of bandwidth are lower for miner than pool fees, then he will mine on his own. It is pure economics that will determine how the bandwidth is used.

Some people worry that this may end up as a single global super-mining-pool. It will not, because the pool by itself is useless: it is actual miners who connect to the pool make it valuable. They, of course, want to hedge their risks, so they will never end up in a huge pool. So there is always an opportunity for competitors to establish their pools. And then every pool owner will strongly desire the best connectivity to his competitors to reduce his own costs.

I predict that the limit will either be abolished completely (less probable, considering amount of FUD), or bumped from 1 MB to 2 MB, then to 4 MB etc. as long as demand for transactions increases. When the bandwidth will get in the way of miners, they will reduce block size voluntarily regardless of the hard limit.

Also, think of it this way: imagine year 1998 when everything was slower. The Bitcoin would have artificial limit of 50 Kb per block. Does it look that everyone would prefer having this limit today, pay $50 in transaction fees and pass all sub-$1000 transactions through escrows? Of course not. The same goes for 1 Mb limit today. In 5 years it will look just silly.

1998 : 00.05 MB (50k)
2002 : 00.10 MB
2006 : 00.20 MB
2010 : 00.40 MB
2014 : 00.80 MB

Hey, you're right, 50k in 1998 with the 4 years thing we're only a little ahead of schedule, but are nowhere near hitting the max. Cool, start the 4 year doubling way back in 1998 then.

If we start it now though, we could instead end up with

2014 : 02.00 MB
2020 : 04.00 MB
2024 : 08.00 MB
2028 : 16.00 MB

So at 2028 and onward we'd be starting into some seriously large increases in size.

As you said, miners are free to voluntarily use smaller if they choose.

-MarkM-

I was never saying anything about the *schedule* of changing the block limit. I was saying that as soon as limit is limiting, it will be raised. It may happen in 10 years or 10 months. Nobody knows and I don't care. Even if today miners+users agree to some schedule, if they hit the limit much sooner than the next increase, they will vote to raise the limit earlier.

Unless you have some sort of function of number of transactions (like difficulty is function of number of blocks, not time). But the more complex schedule you propose, the more unreliable it will be to implement and less probable to vote it in.

Much the same probably applies to the security.

Before the twin towers got knocked down, did people vote in the removal of of what liberties or privacies they had not already lost by then? Or did it take a catastrophe  to make an entire nation or maybe even continent finally upgrade its infrastructure enough to hopefully make it invulnerable to that kind of attack going forward?

Of course some people are not going to want to be invulnerable to a too large block, as they are going to want to be the attacker. Others will not because they cannot afford the far far too excessively huge setting the fat cats think is fine for a max block, so simply will not put enough resources in place to handle it.

When the attack comes, paralysing the whole nation we'll be going like damn just leaving the max block size at a reasonable level would have nipped that in the bud. Prevented it outright.

We really kind of need it to be achievable all around, not so high that tons of pipes never actually bother to even try to really be capable of it because it just seems like some number the megacorps put in to blow them away with, not a reasonable defensive measure at all. If it is there so the megacorps can blow you away you might as well just wait for them to blow you away instead of blowing yourself away voluntarily ahead of time by trying to upgrade to prepare for it when you aren't even getting anywhere near enough transactions yet to even fill the current limit.

Remember, final settlement with, for example, paypal, takes six months. So having transactions take up to six months to finally get into the chain is a good thing, its by design in networks like paypal.

-MarkM-

Could you please provide a proof for your assertion?

1. Do you seriously suggest that you are better protected after 9/11? Considering amount of non-justified warfare in muslim world for the last 10 years, I would think that any US citizen is now more vulnerable to random terrorist attacks than before. Also, everybody knows how efficient TSA is at finding actual bad guys.

2. That unlimited block size is a path for massive all-destroying attack. In other words, what is the recipe to bring down the network when block size is not limited? Also, I'm really interested how this situation is different from, having a powerful miner who does not include any useful transactions in his blocks.

Also, do not forget that Bitcoin operations were never based on good will of people how endlessly cooperate in the name of common good. Everyone is running his node for his own benefit since the inception. And anyone who wants to play by different rules, is free to do so and some people do. The whole network never needed any appeal to "common good" and "lets all think for the future".

When each individual user weights risk of theoretical flood-attack with a higher block size limit against his actual measurable costs transactions, the decision will be made. I cannot say how much increase will be justified by vast majority: 2 Mb, 10 Mb or 1000 Mb, this will depend on the lowest common denominator for 99% of users. The remaining 1% will have to play along. Just like some people who do not like 6 Gb blockchain, they have to either accept it, or trust someone else to keep it. The fact that Bitcoin is decentralized does not mean that everybody must always agree with each other on everything. If vast majority expects benefit from change, the change will come ;-)

thank you for this.  thus, i would suggest making any changes to block size only if absolutely necessary.

I don't think many here is suggesting we do a hard fork unless absolutely necessary. Thing is, it's very likely to become necessary at some point. It isn't necessary now, or in a while yet, but we anticipate it will be in the future.

It really doesn't matter even if Bitcoin doesn't become the jack of all trades (which I think it won't because the blockchain structure is just too heavy for doing everything), it's just that the usage of it in any mainstream capacity will become fairly impossible for anything other than the transfer of very large amounts, unless this is eventually changed. 7 transactions per second is simply not enough.

It's extremely important for people to stop looking at this like we either have Bitcoin as this very rigid and inflexible system that can store value well, or we "try to scale it infinitely and risk safe value storage". The real issue is anything but that. There is a clear middle ground which is what we should aim for.

Bitcoin is not suitable for all possible transaction types that people have need for but it can do more than 7 transactions a second, and it needs to do more than that. Otherwise we will at some point hit a brick wall in Bitcoin adoption.

Exactly.

Also, that point is within a year, based upon the long-term growth rate:

http://blockchain.info/charts/n-transactions?timespan=all&showDataPoints=false&daysAverageString=7&show_header=true&scale=1&address=

I calculate 345,000 per day as the level where 1Mb block saturation occurs.

I hesitate to call SatoshiDICE spam or dust, but the vast majority of those transactions are small transfers going back and forth between the same 2 addresses. It would be a very bad idea if we created a hard fork just so people could transfer one BTC back and forth constantly.

Absolutely! SD is just over 50% of the vols, but unless it voluntarily closes down, (and no similar sites pop up) then the mathematics have Bitcoin hitting a self-imposed limit this year. Perhaps SD should internalize their transactions to give more time for the 1Mb limit to be addressed. Note that SD also pays a lot in fees. None of this is a black-and-white issue.

Ideally we want mining to be supported by transaction fees rather than the block subsidy so that mining capacity will scale with demand. So the question to answer is when that will happen.

Right now with the blocks about 25% full we are seeing about 50 BTC (http://blockchain.info/charts/transaction-fees?showDataPoints=true&timespan=30days&daysAverageString=1&scale=0&address=) of transaction fees per day. This means that with 1 MB blocks the network will earn 200 BTC/day in transaction fees or 1.4 BTC/block.

That's obviously not much of an incentive. At 18 MB blocks, however, transaction fees should equal the block reward. With twice the effective income the incentive to mine will double, so we should expect double the investment in ASICs. Since there will be multiple suppliers in the market soon this should result in an increase in the number of miners. If the block size is allowed to increase to meet demand then every increase will result in more economic incentive to mine and this more miners.

No it doesn't. Read the other threads to understand why.

The other threads are full of unsubstantiated irrational assertions, and short on data. They rely on the observed relationship between transaction volume and fee revenue to magically reverse for no reason.

The only reason people pay fees now is because there is a minimum fee requirement in order for transactions to get relayed. Paying more than the minimum fee requirement doesn't help because blocks aren't full.

And?

Because at 250KB soft limit, free transactions still get included in blocks which breach the limit. Once you hit the hard limit of 1MB constantly for every block, there will be competition to be included in blocks and drive up fees.

A hard limit is not necessary for competition. The reason there is only a little bit right now is because transaction fees are so small compared to the block subsidy that miners don't have much incentive to be selective.

You also can't predict with certainty how far users will be willing to bid up the transaction fees. We know how much they are willing to pay now. If future users are unable to get their transactions in a block they might be willing to pay more, or they might decide not to use Bitcoin at all. You can't take demand for granted. Right now Bitcoin is attracting new users because the advantages it offers, but anything that reduces the value proposition reduces the number of people willing to use it. How many businesses maximize their revenue by intentionally limiting the number of customers they service and refusing to increase production to meet demand?

Based on the facts we have available we know Bitcoin users are willing to pay 50 BTC per day in transaction fees with 250k blocks. Right now the number of transactions can only increase by a factor of about 4 before the block limit is reached. At this point we can only process 7 tps no matter how many people are trying to use bitcoin. Assuming that the world-wide users of Bitcoin will happily accept this situation and try to outbid each other to get their transactions included instead of just giving up on Bitcoin entirely is extraordinarily dangerous.

The idea that you can preserve the decentralized nature of mining with a hard cap on the transaction rate is insane. Once the blocks saturate and you get price discovery for transaction fees, then the total mining revenue will reach its maximum possible value. After this point the block subsidy will decrease, and the fee revenue will remain constant. Assuming Bitcoin remains in use after this point there will be no incentive for new miners to enter the market. Mining will slowly get less profitable over time so existing miners will slowly drop out until only a few are left.

Nice job preserving decentralization.

The exchange rate is probably one of the most influential variables.

I expect that if bitcoins go up to $125 per coin over the next few months only very late comers to the mining game would not be eager to upgrade their homes to the best home bandwidth they can get.

Right now is a bad time to talk about increasing expenses because everyone is still waiting since last year for the supposedly any moment now advent of ASICs. The huge delay in getting ASICs along with the constant claims they would be arriving at any moment already screwed up GPU system upgrades and new investment in GPU rigs, now there is talk of making everyone devote twice as much (or more) bandwidth yet here we still sit waiting to buy ASICs or even to just find out whether there are really going to even be any ASICs.

Once we can order an ASIC that will be shipped immediately, and, as looks likely, bitcoin exchange rates are up farther too, talk of upgrading our bandwidth will maybe be better received.

Currently we don't even know if we will even be able to have ASICs, or those will always be order a year in advance items or even no longer sold to end users at all, instead all being destined for a few huge hashing centres in Iceland and suchlike places, with only a few of the initial prototype batches ever getting into independent hands at all.

-MarkM-

I do not dispute the problems caused by ASIC delays.

At the same time Bitcoin is in extremely vulnerable place. It's attracting attention but isn't yet too big to shut down. Anything that slows down or stops the rate of adoption, such as an inability to process more than 7 tps, is dangerous.

Really?  We just crossed 400 Petaflops, roughly 20 times the tested max for the fastest (unclassified) supercomputer on Earth, and you consider Bitcoin not yet too big to shut down?  Who would be doing the shutting down?

I meant in terms of commerce conducted in Bitcoins, exchange volumes in countries outside the US and Europe, international trade, use for remittances, etc.

The user base is still below what I would consider a safe critical mass that would continue to grow in spite of active attempts to forbid or hinder bitcoin use.

the way i view this is that by arguing that we need to increase block size in anticipation of a large growth in tx's, you are in essence making a "market prediction".  right now, as the price continues to escalate it is easy to see why you might assume this.

but what if the US starts to have economic problems like Europe?  what if we follow in the footsteps of Japan and have a prolonged deflationary episode lasting many years?  the # tx's might never get to the size you envision.

the other thing to consider is what if Bitcoin was meant to become the world's next reserve currency to be used to settle daily trade imbalances like we had with the gold standard?  perhaps that is it's most optimum and efficient usage and might be served by the block size staying right where it is.  

That would be suicide for Bitcoin. The Napsters and Megauploads of the world get shut down while Bittorrent successfully resists all efforts to stop it. The only protection Bitcoin has is growth and widespread, diversified usage.

But that is why we don't want to scale it up to the napsters and megauploads scale, we want to keep it lean and mean so millions of pople all over the world can run full nodes at home.

-MarkM-

i'm not saying that central banks would be the only ones using Bitcoin.  after all, even individuals used gold under the gold standard.

Millions of people all over the world can run already Bitcoin at PayPal-like transaction rates if a few identified optimizations are implemented.

You'll never get millions of users, though, if you ration them to a couple of transaction per person per year.

+1

I am amazed that some people just cannot understand this point...

All those wanting higher fees should check out this chart!

https://blockchain.info/charts/transaction-fees-usd?showDataPoints=false&timespan=&show_header=true&daysAverageString=7&scale=0&address=

Do we really need to ration blockspace? Why not let this plateau out and then decide whether fees are high enough?

The amount of totalitarian way of thinking in this community is amazing. Who appointed you to say "we want"? Where do you get what people want to do at home? My personal opinion is that no one wants to run full node at home. If it is possible to ensure great security by verifying random 1% of transactions and throwing away old spent outputs, then many people would do just that. Because no one really likes to waste more resources than his own level of paranoia allows. Only miners would need to run full nodes, and only people who want to mine, will mine.

How about talking about *economics* instead of *morality*? That is, what everyone wants for themselves and how this can be achieved, what incentives are moving people, what solutions they might embrace or reject, and for what reasons. You cannot force others to follow your "shoulds" and "should nots" anyway. It's like having a business negotiation and saying "you SHOULD do X because it's meant to be this way" instead of "how about doing X, does it sound interesting to you?"

You're right, it is totalitarian not to want people to throw themselves upon the mercy of oppressive regimes.

Seems like what the lemmings always do so might as well sit back and let them.

Luckily there are plenty of altcoins, maybe not all of them will be descended upon by swarms of locusts determined to bring them to Big Brother's attention. Or maybe we should plan on each one in turn following the same route, so those who want to stay hard to stamp out must constantly move to new small grass-roots systems. Each new system can maybe even finance itself by selling-out the previous one.

-MarkM-