For sure, that's much simpler, and I mentioned low hanging fruit to enable us to keep doing this.  I only brought this up to point out that if the block reward (in $) continues to rise faster than we can lower block propagation times, then Bitcoin would become uncompetitive with alternate payments systems under the "greedy and short sighted" miner strategy, but that there alternative strategies that could be implemented.

Actually, it's this minting that's the source of the "cost" * of transactions.  There is a drop in expected revenue for a miner by including an extra transaction due to increased orphan probability, and this drop is proportional to the revenue from the block.

OTOH, mining is a zero sum game, and there are other possible equilibria than "miners individually maximize revenues", which could be reinforced through block discouraging schemes.  For example, miners might find it in their collective interest to keep fees lower than orphan "costs" in order to stay competitive with alternative payment systems.

Though there's plenty of low hanging fruit that can be tackled first to bring orphan rates way down, so hopefully this kind of thing won't be necessary.  E.g. a new block's transactions are currently re-broadcast with the block to peers, even if they've already seen them.

* It's not a cost, it's a drop in expected revenues, which may or may not lead to a drop in expected profits, depending on the behaviour of the rest of the network.

BofAML's David Woo recently published a "fair value" for bitcoin which included, "Bottom-line: maximum market capitalization for Bitcoin’s as a store of value = $5bn".  This was based on an assumption that Bitcoin will likely not compete meaningfully with gold as a store of value, because it's so volatile and new.

But I wonder how important gold's current volatility is to its owners.  I've been operating under the assumption that gold's modern role in the economy has largely been a hedge against the tail risk of systemic failure of the financial system, and that this is because it's been safe to assume that in a post-fiat world, gold would be remonetized.  Ben Bernanke stated this in response to Ron Paul asking him whether he thought gold was money, and it seems kind of obviously correct to me.  But if gold were to become remonetized, then its volatility would presumably be significantly less than it is currently.

It seems to me that the existence of Bitcoin brings into serious question the assumption that gold would be king in a post-fiat world, and that bitcoin's current relative volatility is rather meaningless for this question.  This would mean that if you're holding gold as a hedge, then you also need to diversify into bitcoin to "hedge your hedge".  I have no idea what percentage, but can it really be assumed to be zero, as Woo implicitly assumed in his analysis?  Even a single percent would introduce massive error in Woo's analysis.

Sharding the operation of a full node amongst mutually trusting participants seems like an easy enough way to scale.  It's not the ideal, and there appear to be more clever ways, but its certainly better than any centralized outcome, if that actually turns out to be the only alternative.  So I don't really believe centralization of fully verifying nodes is a realistic long-term fear, except in the case of ridiculously high loads and very unreasonable expectations of the blockchain.

Otherwise I agree, and expect this is pretty much how things will play out: keep kicking the block size limit can down the road until the problem solves itself (it just doesn't need to be raised any more), and build micropayment channel networks for microtransactions, where the point that micro becomes macro is defined by reality, and not what we wish it to be (not that we can't push the envelope with clever scaling solutions).

Yes they're all recorded in the blockchain, but no they're not downloaded by every wallet.  Satoshi laid out a lightweight p2p mode called Simplified Payment Verification (SPV) in his whitepaper, which has been implemented in the bitcoinj library, and used in the Multibit and Bitcoin Wallet apps, among others.  Neither of these apps need to download any other transactions than are relevant to the user.
Only for full nodes, which most end users probably won't be running.  All the groundwork has been laid for blockchain pruning, it's just a matter of rolling it out such that there are always enough "archive nodes" present.
If you're running a full node, then you're "giving back" to the network while you take, so this is scalable.  But too many SPV nodes (which don't give back to the network) might end up overburdening the full nodes that serve them.  In this event you could connect to a full node you personally run, or maybe micropayment channels will end up being built in to incentivize full nodes to serve SPV nodes.

Centralized services like Electrum and blockchain.info will also compete with the p2p approach, and may be good for picking up slack, but I think there are good reasons to be wary of a few centralized services ending up as the "gatekeepers to the blockchain" for most people.  Though this could be pretty difficult to prevent, and has to a large degree already happened.

I was talking about our international currency system talked about in the article PinkPotatos posted.

I like to think this is just a pathology caused by the shitty post Bretton Woods system, and that the world market would otherwise naturally converge on a standard currency if left to its own devices, which it can't do because nation states won't give up their regional currency monopolies.  I guess we're currently seeing this experiment happen on a small scale with Bitcoin and the alt-coins.  

Oh don't be so shallow in your understanding of your opponents here.  As I mentioned in my post above, the worry is that by demonstrating a willingness to adopt random copycats to a significant degree, "the cryptocurrency market will prove to be too fickle to stably contain its liquidity, and the store of value promise ("gold 2.0") dies."  That would be a damn shame just to enrich a few additional early adopters.

You won't convince many people to stop doing something they're currently making a bunch of money at.  But unlike with Bitcoin the story driving their speculation is relatively unconvincing, so I suspect that when prices begin to stagnate or consolidate, people will get bored and nervous, and we'll see a flight to (relative) safety in bitcoin.  Actually it seems like this is exactly what happened throughout the summer with litecoin.

And like Erik mentioned, the alt-coins draw the bottom of the barrel speculator away from Bitcoin, creating a stabilizing effect.  Unfortunately this will lead to alt-coins getting pumped up during bitcoin hype phases, but likely this stored value will "gravitate back toward the centre" during periods of consolidation.  That or the cryptocurrency market will prove to be too fickle to stably contain its liquidity, and the store of value promise ("gold 2.0") dies.

Something funny I noticed on Erik's reddit post.  Top voted comment:
Notice the resemblance

What in God's name does this even mean?

Yeah, makes sense to get to "full selfishness" in a kind of quasistatic process in order to avoid any significant loss of revenue during the transition.

Electricity could be effectively free for a home mining rig in a house with electric heat (air and water), since they would otherwise be spending the same on electricity to produce it from their actual heaters.

All that tells me is the industry is very immature still.

The pictures made it look expensive.  And the OP mentioned the coolant being expensive.  Numbers would be more persuasive though.  In any case, the heat is still expensive to make, and long-term, competitive mining operations will have to make good use of the heat they produce.  Versatility will be a strong advantage here, and scaling up would appear to diminish from this.

Getting from a non-selfish steady state to a selfish one would certainly be risky and expensive for the attacker - he'd have to struggle to maintain his fraction of the overall hashing power along the way - but it might be worthwhile for him in the long run.  I guess that's one reason why a simulator would be nice to have

Not sure I understand your point.  Running costs are a separate issue from manufacturing costs.

I think the idea is that if the attack can be sustained long enough for the difficulty to adjust downward to reflect the much higher orphan rates induced by the attack, then that higher percentage of revenue will equate to a higher overall revenue.

To me it just illustrated bitcoin mining's diminishing returns to scale.  I doubt this kind of operation will be viable long-term.  Heat is a waste product for these guys that's clearly expensive to dispose of.  But for small home mining operations, that heat can be put to good use heating the air and water.  Distributed mining also distributes financial risk.  These kinds of operations strike me as fat that the industry will trim as it matures.

This post by Satoshi makes me very skeptical of such a claim (that DPR and Satoshi are the same person):

I started writing my simulation because this one didn't appear to be fast enough to do proper Monte Carlo simulations.  I think there'd be a lot of value in being able to do this.

A network of micropayment channels * seems to me like a good way to go.  Though as Mike Hearn said somewhere on the forum, it's a lot of work, and they're still working on getting single micropayment channels right.

* https://bitcointalk.org/index.php?topic=244656.0

I'm not sure if they were seeking the bounty, but these two were posted to the mailing list a few days ago:
https://github.com/rbrune/btcsim
https://github.com/christophebiocca/bitcoin-network-simulator

I'm also working on a discrete event simulation using SimPy, but not because of the bounty, so don't worry about mine regarding that.  It's more of a learning exercise.

Speculation generally doesn't happen in a vacuum.  There has to be some story driving it.  As I said above, the gold 2.0 folks are speculating that some fraction of the value stored in gold will have to diversify into bitcoins.  Will they be correct?  I like to think so, but nobody knows for sure.  You seem to be "speculating" in the other direction, but all you've got is wild guesses as well (I don't actually think the other side is operating on wild guesses).  If it ends up competing to some not insignificant degree with gold, then Bitcoin is money.  If not, it's a bubble.  Pretty simple.

Use as a currency rather than just money, i.e. a store of value, is ancillary to the valuation.  E.g. gold is pretty much never used as a currency, yet it retains extraordinary value.  I like to use the example where you've got 1000 people using it for daily purchases, each storing $100 in bitcoins at any given time, and a single person storing $100,000 of savings in bitcoins.  The latter contributes the same amount to the total valuation as the former, yet he's outnumbered by them by three orders of magnitude.  Now consider millionaires and billionaires, and you'll quickly see why use as a currency doesn't really matter in terms of valuation (though it matters a ton when it comes to building political capital, and staving off government attacks).

Edit: To give you some numbers: all the gold in the world is worth ~$8T.  Bitcoin is currently valued at ~$9B.  So the market seems to be saying Bitcoin should supplant 9/8000 ~ 0.1% of gold's role in the economy.  The speculators just disagree with this number, and think it should be higher.