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Assume the union members have substantial investments in specialized mining hardware and they are unhappy about the decreased payoffs due to increasing difficulty, decreasing block yield, and exchange rates. Also assume that the miners are in it for the money, and don't care about the health of the currency except in so far as they want to maximize their income.
This mining union decides to impose a 1btc minimum on transactions they include in their blocks. The miners keep working, thus keep solving blocks and getting paid for doing so, but they're not doing any useful work as far as the bitcoin network is concerned, they're just dead weight slowing down the transaction processing for everyone.
Because transaction fees are currently insignificant compared to the block reward miners will not lose a significant amount of money as a result of their strike and so the union members will not break the strike.
If few pay the extortion transaction fees then the strike constitutes a DOS attack on the bitcoin currency—transactions would be confirmed 50% slower on average—, but still doesn't hurt the striking miners, they still get paid about the same. There would be no reason (except to protect the network) that other mining unions wouldn't join the strike too— and unions will not compete on transaction price because there currently can be no reasonable transaction cost (e.g. wouldn't be disproportionate with mining costs, and wouldn't kill bitcoin) which would be significant compared to the block reward for the next few years.
I don't see any elegant solutions to this risk. I don't think the obvious tweaks work.. e.g. Changing the longest chain rule to make blocks with the most transactions win would just be gamed by the strikers adding in their own dummy transactions.
Cooperating bitcoin users could join together add more mining capacity in order to make the striking group(s) small with respect to the overall mining capacity. For example, I estimate that it would currently cost $2.5 million dollars to reduce 50% of the current capacity to 10%, (or twice that to convert 100% of the current capacity to 10%)— changing a large DOS to a more tolerable one. Assuming they paid for the hardware with bitcoins at todays exchange rate (744300 BTC) on loan with 6% APY, they'd need to make about 6.6BTC per block to pay off the hardware in three years. But since this is less than the current (and near term) built-in block payoff the strikers would rationally add capacity too.
The equilibrium point of this system is the point where 100% of the block reward was being spent on mining and at only at that point miner unions would actually compete on transaction fees, making striking no longer profitable. At current exchange and block reward amounts the equilibrium point would be a worldwide mining spend of $8.9 million dollars per year. Thats one _hell_ of an overhead for a currency with a total value of only $20million dollars.
I'm concerned that this outcome may be an inevitable consequence of the large amount of for-profit mining combined with the upcoming point change in mining returns which will leave a large number of math impaired commercial miners regretting their financial decisions. No one would have started out intending to create this situation, but if you're sitting on a lot of expensive hardware then trying to shake people down on fees might look pretty attractive.
Pools provide a trivial hook for this. We could enter this state slowly through pools agreeing to initially impose increasingly higher transaction minimums. They don't even have to collude, but it would be more profitable for them to do so. We're already seeing new pools imposing higher transaction minimums as a result of the current policy of pools to keep the transaction fees for themselves (and then competing on the how much of the block reward they leave to members).
Is there some point that I'm missing before I go and invest in fab capacity to arm the impending mining war?
TL;DR: I'm pointing out that miners can't compete on transaction prices until the mining costs rises to consume 100% of the block bonus, because of this miners can hold the bitcoin market hostage by refusing to process transactions. This isn't a risk further in the future as the block bonus goes away, but at the moment I think there is a risk of a break-away mining arms race which will disrupt the network and only be profitable for GPU makers.
