Why I support Jeff's BIP100

[HostFat]

One simple reason is that without this option miners may be too relucant to increase the limit, as the decision could not be reversed.

This is a good reason to not give them any possibility to vote.
Anyone of them can chose, individually, if they want to make blocks bigger or smaller.

Another potential reason is a cyclical fall in demand for using bitcoin.

This isn't a good reason, miners can always lower the size of their block, none is forced to make them bigger, neither with the BIP101.

Just to remember everyone, that the limit for the block was put on the protocol only to avoid DoS attack, blocks bigger than the network (nodes) can spread between them self.

Satoshi was probably worried because at the time a fund or a government was able to make a big pool full of GPU, without spending so much and making big blocks (32 MB) to DoS the network.

[jonny1000]

Anyone of them can chose, individually, if they want to make blocks bigger or smaller.

Miners can always lower the size of their block, none is forced to make them bigger, neither with the BIP101.

Your view appears to be that miners are not forced to make blocks bigger and therefore miners can make small blocks if they want anyway, so why have BIP100?  This is probably the consensus view in the community at the moment.  It could be correct, however I think it is likely to be wrong.

Each individual miner will try to maximize their own profit and share of revenue.  Miners will therefore be incentivized to sweep up as large a share of the transaction fees as they can.  In the example I made above, there is little downside in doing this as the level of technology could enable blocks far greater than the blocksize limit, due to  insignificant propagation costs.  The is just like the classic tragedy of the commons scenario, each individual miner produces larger blocks, in the hope that other miners produce smaller blocks, to maintain a reasonable average fee level.  However the Nash equilibrium ensures that each miner makes larger blocks.  Miners need to maximise their own profit to remain competitive and they would have little choice but to produce larger blocks.  Fee levels would then fall and the equilibrium difficulty would be too low.

The consensus response in the community is that this line of thought is too theoretical and has too much unproven game theory.  I disagree and think this is highly likely to be the outcome.  In fact this is the behavior that is currently occurring in the global commodity space, and has happened time and time again.  Each individual miner producers more and more resources, to maximise their own profit, in the hope that other producers reduce production to allow prices to increase.  Each individual miner acts against the interests of the whole industry and increases production.

Why can miners not voluntarily individually produce smaller blocks?  

This is the common question, but who is this question about, each individual miner or the whole mining industry?  I could ask the analogous questions:

• In 2015, why is Iran increasing oil production?  Can Iran not voluntarily individually produce less oil to support the price, as the industry is currently loss making?
• In 2015, why is BHP Billiton increasing iron ore production?   Can BHP Billiton not voluntarily individually  produce less iron ore to support the price, as the industry is currently loss making?
• In 2015, why is Goldcorp increasing gold production?   Can Goldcorp not voluntarily individually produce less  gold to support the price, as the industry is currently loss making?
• In 2015, why is Freeport-McMoRan increasing copper production?   Can Freeport-McMoRan not voluntarily individually produce less copper to support the price, as the industry is currently loss making?

Or what about these questions:

• In 2015, why are oil producers increasing oil production?  Can they not voluntarily produce less oil to support the price, as the industry is currently loss making?
• In 2015, why are iron ore miners increasing iron ore production?   Can they not voluntarily produce less iron ore to support the price, as the industry is currently loss making?
• In 2015, why are gold miners increasing gold production?   Can they not voluntarily produce less  gold to support the price, as the industry is currently loss making?
• In 2015, why are copper miners increasing copper production?   Can they not voluntarily produce less copper to support the price, as the industry is currently loss making?

The answer, (to all of the above questions) is of course, no.  The Nash equilibrium is for each miner to increase production or produce bigger blocks.  Miners keep producing large volumes until they close the mine, or in the case of Bitcoin, miners keep producing larger blocks until they stop mining altogether.

In the examples above, had there been an effective cartel of producers, miners would be able to collaborate and keep production down to support the price.  The industry would have been supported.  This would be against the interests of consumers.  Luckily in 2015, any cartels have mostly broken down and the prices of these commodities are crashing.  The consumer wins and gets lower prices.  As a result, we see a global commodity super cycle, we see periods where prices fall and industry players fail, capacity then falls and the commodity prices increase again.  Producers then over invest in capacity and the cycle repeats.  This may be a reasonably healthy cycle.

However, Bitcoin mining is different in two respects, first we need a healthy and viable mining industry at all times and secondly, the above cycle cannot occur, because when transaction fees start to fall and miners begin to fail, this will not reduce capacity.  Any one miner can provide all the capacity we need.  All that will happen is we enter a downward spiral when fees fall and miners fail and then difficulty falls.  There are several ways this can be prevented:
1 - A low blocksize limit
2 - Hoping a cartel naturally emerges, which implies mining is centralized
3 - Adopt BIP100 and allow cartel like prices to occur, without an actual centralized cartel

I favor BIP100, which I consider the only viable option.

[HostFat]

Your view appears to be that miners are not forced to make blocks bigger and therefore miners can make small blocks if they want anyway, so why have BIP100?  This is probably the consensus view in the community at the moment.  It could be correct, however I think it is likely to be wrong.

They like it more for two reasons

- The BIP101 is limited to 8GB.
Miners don't like all this fork drama, and they want to avoid it again as long as possible.

- Miners want a BIT100 without the 32 MB limit.

So what they really want is something more huge then the BIP101, and something the Core team will NOT like it even more.

If you go around looking at their replies and even the last one from BitFury, you will find this


I'm kinda ok on all about this, I just don't like at all the possibility to decrease the block size.

[jonny1000]

Your view appears to be that miners are not forced to make blocks bigger and therefore miners can make small blocks if they want anyway, so why have BIP100?  This is probably the consensus view in the community at the moment.  It could be correct, however I think it is likely to be wrong.

They like it more for two reasons

- The BIP101 is limited to 8GB.
Miners don't like all this fork drama, and they want to avoid it again as long as possible.

- Miners want a BIT100 without the 32 MB limit.

So what they really want is something more huge then the BIP101, and something the Core team will NOT like it even more.

If you go around looking at their replies and even the last one from BitFury, you will find this


I'm kinda ok on all about this, I just don't like at all the possibility to decrease the block size.

Please explain why we should let miners increase the limit to meet increasing demand, but not lower the limit with falling demand?

Also I would be happy supporting BIP100 with BIP101, or something even more aggresive as the upper bound.

[HostFat]

Please explain why we should let miners increase the limit to meet increasing demand, but not lower the limit with falling demand?

Because there is no economic reason, it has only disadvantages.

It is like asking for "more features! more features!", even the bads.

I've already wrote, if there is demand, a business can't make a long plan in the future if there is the fear that an unpredictable time, the miners will force a smaller block, making fees enormously, slow confirmations, breaking plans and investments.

It's full of competitors to Bitcoin that are waiting every seconds to take away users/market from it.

Even the uncertainty that the miners will vote for a bigger blocks is bad, but not so bad as the possibility of decreasing it.

[teukon]

As a result, we see a global commodity super cycle, we see periods where prices fall and industry players fail, capacity then falls and the commodity prices increase again.  Producers then over invest in capacity and the cycle repeats.  This may be a reasonably healthy cycle.

You've lost me here.  You explained that prices were artificially high due to cartels.  However, you then say that a cycle is complete when "producers over invest".  How does over investment necessarily lead back to cartels?

However, Bitcoin mining is different in two respects, first we need a healthy and viable mining industry at all times and secondly, the above cycle cannot occur, because when transaction fees start to fall and miners begin to fail, this will not reduce capacity.  Any one miner can provide all the capacity we need.

Another difference to bear in mind: block space is not treated as a fungible commodity the way oil, iron, gold, and copper are.  Many people are willing to pay more for a faster first confirmation.

[jonny1000]

 
You've lost me here.  You explained that prices were artificially high due to cartels.  However, you then say that a cycle is complete when "producers over invest".  How does over investment necessarily lead back to cartels?

Sorry I was not clear.  There were never cartels in my examples.  I just said "had there been" cartels.  In commodity markets copper and oil prices, ect, will recover when supply falls as firms in the industry shut down

[jonny1000]

Another difference to bear in mind: block space is not treated as a fungible commodity the way oil, iron, gold, and copper are.  Many people are willing to pay more for a faster first confirmation.

I am not sure about this.  With no economic blocksize limit, every miner will include as many transactions in the block as possible.  The mempool will be empty and you will not need to outbid anyone to get a fast confirmation.

An economically relevant blocksize limit is therefore required.

[teukon]

Another difference to bear in mind: block space is not treated as a fungible commodity the way oil, iron, gold, and copper are.  Many people are willing to pay more for a faster first confirmation.

I am not sure about this.  With no economic blocksize limit, every miner will include as many transactions in the block as possible.  The mempool will be empty and you will not need to outbid anyone to get a fast confirmation.

Honestly, I'm not sure either.  I'm applying the same elasticity of demand thinking you described above but to a single miner.

Imagine a world where basically all fees are <= 1 satoshi.  Suppose Alice is a miner with 5% of the network's total hashrate.  Alice could advertise that she will no longer be processing all transactions but only those that pay at least 10 satoshis.  Each bitcoin user now has the option of paying 9 extra satoshi to reduce the expected first transaction waiting time by about 30 seconds.  Supposing this extra utility is worth the 9 satoshi in enough cases, Alice would increase her revenue.

I also wonder about store of value.  The commodities you listed can all store value but I don't think this can be done with block space.  Supposing commodity super cycles are driven by speculation, what is the equivalent mechanic in Bitcoin?

[goatpig]

Imagine a world where basically all fees are <= 1 satoshi.  Suppose Alice is a miner with 5% of the network's total hashrate.  Alice could advertise that she will no longer be processing all transactions but only those that pay at least 10 satoshis.  Each bitcoin user now has the option of paying 9 extra satoshi to reduce the expected first transaction waiting time by about 30 seconds.  Supposing this extra utility is worth the 9 satoshi in enough cases, Alice would increase her revenue.

Not necessarely. You should look at the problem the other way around. If all miners will only mine fee F transactions, and suddenly one of them decides to just indiscriminately wipe the mempool for every block it finds, then the average fee will go down.

You should also consider the tapering of inflation. Currently the coinbase reward composes the grand majority of miner revenue, so they can afford to mine small blocks as a result of refusing to integrate any transaction with fee < F. That will certainly push the average fee up. However, as the coinbase reward keeps diminishing, we will eventually reach an equilibrium where a miner cannot afford to mine too small a block (based on the fee density he expects) and will either have to take on these transactions paying below F, or not mine blocks until the mempool is "plump" enough (which is not viable).

[teukon]

Imagine a world where basically all fees are <= 1 satoshi.  Suppose Alice is a miner with 5% of the network's total hashrate.  Alice could advertise that she will no longer be processing all transactions but only those that pay at least 10 satoshis.  Each bitcoin user now has the option of paying 9 extra satoshi to reduce the expected first transaction waiting time by about 30 seconds.  Supposing this extra utility is worth the 9 satoshi in enough cases, Alice would increase her revenue.

Not necessarely. You should look at the problem the other way around. If all miners will only mine fee F transactions, and suddenly one of them decides to just indiscriminately wipe the mempool for every block it finds, then the average fee will go down.

Agreed.  The miner that sweeps the mempool would profit from this action.  Thus, all miners accepting only fee F transactions is an unstable situation.

What I was arguing is that all miners processing any fee-paying transactions could also be unstable.  It may be profitable for a miner to increase the minimum fee they will accept.  These two situations do not contradict one another.

You should also consider the tapering of inflation. Currently the coinbase reward composes the grand majority of miner revenue, so they can afford to mine small blocks as a result of refusing to integrate any transaction with fee < F. That will certainly push the average fee up.

Yes.

However, as the coinbase reward keeps diminishing, we will eventually reach an equilibrium where a miner cannot afford to mine too small a block (based on the fee density he expects) and will either have to take on these transactions paying below F, or not mine blocks until the mempool is "plump" enough (which is not viable).

Even with no block subsidy and assuming all other miners always sweep the mempool I expect F will be greater than zero.  I think Alice from the example above could still find a viable mining strategy in only accepting 10-satoshi transactions and waiting for the mempool to grow sufficiently "plump" before beginning to hash.

I can try posting a clearly specified, concrete example if anyone is interested.

[goatpig]

Even with no block subsidy and assuming all other miners always sweep the mempool I expect F will be greater than zero.  I think Alice from the example above could still find a viable mining strategy in only accepting 10-satoshi transactions and waiting for the mempool to grow sufficiently "plump" before beginning to hash.

That's assuming block size demand is superior to block size supply. Otherwise the mempool would essentially be empty after every block. Clearly there is a debate on the projected supply vs demand, but in the absence of a block size limit, I'm expecting the technological gain from fast relay networks will keep the supply way ahead of the demand for pretty much ever.

My expectation is that as long as there is a realistic block size limit in place, the Nash equilibrium will put upward pressure on fees. With the absence of a realistic limit, the Nash equilibrium will induce the opposite effect and fees will be not be sufficiently high to support proper difficulty.

So my response to this:

It may be profitable for a miner to increase the minimum fee they will accept

would be "only if the Nash equilibrium supports it". Which is the same as saying that demand will outgrow supply, which implies there is not enough block space to wipe the mempool of fee paying transactions.

The corollary to this statement would be that if a miner can wipe the mempool, then competing miners cannot afford to do any less.

[teukon]

Even with no block subsidy and assuming all other miners always sweep the mempool I expect F will be greater than zero.  I think Alice from the example above could still find a viable mining strategy in only accepting 10-satoshi transactions and waiting for the mempool to grow sufficiently "plump" before beginning to hash.

That's assuming block size demand is superior to block size supply. Otherwise the mempool would essentially be empty after every block.

No, I was assuming that the mempool would be completely emptied with each block.

Clearly there is a debate on the projected supply vs demand, but in the absence of a block size limit, I'm expecting the technological gain from fast relay networks will keep the supply way ahead of the demand for pretty much ever.

Fair enough.  I expect that demand will catch up with and put pressure on supply myself.

My expectation is that as long as there is a realistic block size limit in place, the Nash equilibrium will put upward pressure on fees. With the absence of a realistic limit, the Nash equilibrium will induce the opposite effect and fees will be not be sufficiently high to support proper difficulty.

Just to be clear, I don't argue that with no block size limit that fees could support "proper difficulty".  I just don't see why each miner clearing the mempool with each of their blocks as the only stable, competitive outcome.

So my response to this:

It may be profitable for a miner to increase the minimum fee they will accept

would be "only if the Nash equilibrium supports it". Which is the same as saying that demand will outgrow supply, which implies there is not enough block space to wipe the mempool of fee paying transactions.

The corollary to this statement would be that if a miner can wipe the mempool, then competing miners cannot afford to do any less.

As far as this Nash equilibrium is concerned, I'm not sure exactly what the game is.  I suspect that by taking into account long-term thinking and the utility of faster confirmations that there could be more than one Nash equilibrium.

I'll post a draft example to better explain what I'm thinking.  Perhaps you'd be kind enough to pick a hole in it for me.

[teukon]

Draft example:
    1. Assume that at all points in time, difficulty is such that blocks are found once every 10 minutes on average.
    2. Suppose all transactions pay a fee of 1 satoshi (ignore free transactions and fee per kB for simplicity).
    3. Suppose these transactions are produced at a constant rate.
    4. Suppose there is no block subsidy (so all miner revenue comes from transaction fees).
    5. Suppose each miner has the resources to completely empty the mempool with each block.  Suppose that this is the strategy currently employed by each miner.
    6. Suppose each miner only hashes when it is economically beneficial to do so (miners wait for a suitably plump mempool).
    7. Suppose at least 50% of all transactions are such that, to the creator, a reduction of the time to first confirmation by 10 seconds is worth more than 9 satoshis.

At this point we have a Nash equilibrium.

    8. Let Alice be a miner.
    9. Suppose that under the current scheme, Alice finds 5% of all blocks.
    10. Suppose Alice employs a new strategy: she only accepts transactions paying 10 satoshis.
    11. Suppose no transaction creators or other miners change their strategies.

At this point, Alice is doing worse than she was before (definition of Nash equilibrium).  From (6) we can see that Alice will in fact mine no blocks.

    12. Suppose transaction creators learn of Alice's strategy and co-ordinate a new strategy for themselves: the 50% of all transactions which would most benefit from a reduced time to first confirmation are broadcast with a 10 satoshi fee instead.
    13. Suppose that these 10-satoshi-fee transactions are distributed uniformly with time.

At this point, we can reasonably assume that Alice will find it profitable to hash at certain times.  She will be at a disadvantage relative to other miners, both for claiming smaller rewards and for having to wait for a larger mempool before she can begin mining.

    14. Suppose Alice finds 4% of all blocks.

At this point, Alice is earning much more than she was before (10) (Her revenue has increased dramatically.  Her costs also increase (1) but so do her profits (3), (13), (6)).  From (1), (5), (10), and (14) we can calculate that 1-satoshi-fee transactions must, on average, wait 25 seconds longer than 10-satoshi-fee transactions for their first confirmation (and suffer a higher waiting time variance).  By (7) and (12) we see that each of the 10-satoshi-fee transaction creators are better off than they were paying 1-satoshi fees.

Transaction creators continue to pay 10-satoshi fees frequently because, in this new scenario, the higher fee yields them utility.  Alice will be tempted to revert to her old strategy for even greater short-term profits but this will cause transaction creators to stop creating 10-satoshi-fee transactions, leaving Alice worse off in the long term.  Alice maintains her new strategy simply in caring about her long-term profitability.

[goatpig]

(1), (4), (5) and (6) imply that all miners are withholding all hash power until the total fee in mempool hits a desired threshold. I don't think that equilibrium can exists. Indeed any miner has the opportunity to orphan the last top to "steal" the transaction in that block while the network is waiting for the mempool to fill. Consequently any miner has to "defend" their block after finding a solution by mining on top of it, and will naturally add all fee paying transactions they can get on the way, forcing every other miner to commit at least some hashing power as soon as a new block is propagated.

You could rework your example with the assumption that miners are throttling their hash rate based on total fees in the mempool but even that may not stand in view of this previous counter argument.

13. Suppose that these 10-satoshi-fee transactions are distributed uniformly with time.

(13) coupled with (6) will reduce the average time it takes for every miner to start committing hash power, not just Alice. Generally, it means (7) is true with or without Alice. It also means that Alice may never hit her expected fee density.

In the Bitcoin network, block space suppliers compete for market share only by lowering prices, since the notion of quality does not apply to block bytes. You are speculating that Alice can exist in this market at a higher sell price only by waiting for demand to periodically outweigh supply. However (5) contradicts that strategy, as it suggest supply is infinite for intents and purposes. As stated previously, other miners will not sit at this equilibrium.

Assume my counter argument does not stand and Alice can still build "fat" blocks periodically regardless of the implications of (5). If she chooses to stick to this strategy despite the current equilibrium, the rest of the network will have a double incentive to orphan her:

1) Because of the first counter argument, as other miners know she is withholding all hash power until the mempool is attractive enough (according to (12), tx emitters know of her strategy, so there is no reason to believe other miners won't)
2) Because her blocks have higher than average fee density.

[teukon]

(1), (4), (5) and (6) imply that all miners are withholding all hash power until the total fee in mempool hits a desired threshold. I don't think that equilibrium can exists. Indeed any miner has the opportunity to orphan the last top to "steal" the transaction in that block while the network is waiting for the mempool to fill. Consequently any miner has to "defend" their block after finding a solution by mining on top of it, and will naturally add all fee paying transactions they can get on the way, forcing every other miner to commit at least some hashing power as soon as a new block is propagated.

I'd not considered the strategy of attempting to orphan existing blocks.  Good point.  I'll need to think about this.

Is this not a general problem with (4) and (5)?  Ignoring Alice, is sweeping the mempool always economically unwise absent a block subsidy?

You could rework your example with the assumption that miners are throttling their hash rate based on total fees in the mempool but even that may not stand in view of this previous counter argument.

13. Suppose that these 10-satoshi-fee transactions are distributed uniformly with time.

(13) coupled with (6) will reduce the average time it takes for every miner to start committing hash power, not just Alice. Generally, it means (7) is true with or without Alice. It also means that Alice may never hit her expected fee density.

I imagine the global stock of mining hardware will remain fairly heterogeneous.  I expect that some hardware will be more efficient than other hardware and so will be put to work sooner.  Alice, being a very large miner, would likely have some very efficient miners as well as some more aged hardware which can only earn its electricity consumption as the mempool grows large.

I certainly don't expect a situation where all miners have equally efficient hardware worldwide and all this hardware is put to work in unison at some special threshold.

(13) coupled with (6) will indeed reduce the average time the moment (13) comes into play.  By (1) I intend at each step to allow difficult to adjust appropriately to look for long-term stabilities.

In the Bitcoin network, block space suppliers compete for market share only by lowering prices, since the notion of quality does not apply to block bytes.

This is the simplification I'm challenging with my example.

You are speculating that Alice can exist in this market at a higher sell price only by waiting for demand to periodically outweigh supply.  However (5) contradicts that strategy, as it suggest supply is infinite for intents and purposes.

Yes, I'm assuming infinite supply in this sense.  However, while transaction creators demand the space, they also care about the time they must wait for the space.  Alice can do nothing about the first but she can have a small effect on the second.  For the lowest possible expected time to first confirmation of 10 minutes, a transaction creator needs every last miner willing to process their transactions.

As stated previously, other miners will not sit at this equilibrium.

I honestly haven't thought much about what other miners will do in this situation.  I guess that the most they could do to undermine Alice's strategy is to simply continue with their own, sweeping up every transaction they can find.

Assume my counter argument does not stand and Alice can still build "fat" blocks periodically regardless of the implications of (5). If she chooses to stick to this strategy despite the current equilibrium, the rest of the network will have a double incentive to orphan her:

1) Because of the first counter argument, as other miners know she is withholding all hash power until the mempool is attractive enough (according to (12), tx emitters know of her strategy, so there is no reason to believe other miners won't)
2) Because her blocks have higher than average fee density.

Given (5), I wouldn't expect miners to care only about fee mass and pay no attention to fee density.

I admit it seems rational that miners would try to orphan Alice's blocks in this scenario.  I'll need to think a bit harder about what might happen.  However, at this point I expect that another miner, Bob say, would experience an even greater burden.  Breaking one of Bob's blocks would give another miner access to all the transactions of the previous round, not just the 10-satoshi transactions.  When trying to break one of Alice's blocks, a miner is forgoing the opportunity to try and grab the 1-satoshi transactions she left on the table.

[jonny1000]

In the above example Alice has 5% of the hashing power, therefore if she refuses to include transactions with a fee of less than 10 satoshis, users have a choice to pay 10x more in fees to be confirmed on average c5.3% faster.  Whether users choose to do this depends on their preferences, maybe c5.3% is enough and maybe it is not, clearly the higher the percentage the more compelling this is for users.  However, you need to also consider the game theory at play here, if users are willing to pay 10x the price for 5.3% faster confirmations, in the long term the best strategy could be to only create 1 satoshi fee transactions and wait it out, for Alice to go out of business or back down.  Therefore the dynamic is more complicated, a kind of game of chicken between Alice and the users.

It is clear that if Alice has a high enough proportion of the hashpower, she can win and drive fees up.  We cannot say what this level is.  Another possibility is that Alice forms a "cartel" of other miners and they all demand 10 satoshi fees.  The key point is that it is in the interests of users and coin holders, for many reasons other than fee market dynamics, for the mining industry not to consolidate and to have a wide distribution of hashing power.  A distributed mining industry is a necessary but not sufficient condition for Bitcoin to succeed, otherwise it will lack enough distinguishing characteristics from more traditional forms of money. Therefore, for the purposes of discussing these fee dynamics many years away, we should assume the mining industry is decentralized, otherwise this discussion is not relevant as Bitcoin would have failed.  Therefore, its likely that Alice will not have enough hashing power, or will be unable to form a cartel to drive up prices in the way you suggest.

BIP100 may therefore be necessary to allow miners to restrict supply, but at the same time remain decentralized and avoid forming an actual cartel.

[teukon]

Thanks for taking a look at this.  I'm aware that my posts are getting lengthy.

In the above example Alice has 5% of the hashing power, therefore if she refuses to include transactions with a fee of less than 10 satoshis, users have a choice to pay 10x more in fees to be confirmed on average c5.3% faster.  Whether users choose to do this depends on their preferences, maybe c5.3% is enough and maybe it is not, clearly the higher the percentage the more compelling this is for users.  However, you need to also consider the game theory at play here, if users are willing to pay 10x the price for 5.3% faster confirmations, in the long term the best strategy could be to only create 1 satoshi fee transactions and wait it out, for Alice to go out of business or back down.  Therefore the dynamic is more complicated, a kind of game of chicken between Alice and the users.

True, but this would require actual co-ordination between the bulk of the transaction creators to achieve (the co-ordination in (12) is technically unnecessary and was assumed for simplicity).  The spirit of the situation is to assume that the miners do not collude; I consider it only natural to assume the same of the transaction creators.

Given (7), I see no way for Alice to lose a game of chicken with a payment processing entity responsible for about 5% of all transactions.

It is clear that if Alice has a high enough proportion of the hashpower, she can win and drive fees up.  We cannot say what this level is.  Another possibility is that Alice forms a "cartel" of other miners and they all demand 10 satoshi fees.  The key point is that it is in the interests of users and coin holders, for many reasons other than fee market dynamics, for the mining industry not to consolidate and to have a wide distribution of hashing power.  A distributed mining industry is a necessary but not sufficient condition for Bitcoin to succeed, otherwise it will lack enough distinguishing characteristics from more traditional forms of money. Therefore, for the purposes of discussing these fee dynamics many years away, we should assume the mining industry is decentralized, otherwise this discussion is not relevant as Bitcoin would have failed.  Therefore, its likely that Alice will not have enough hashing power, or will be unable to form a cartel to drive up prices in the way you suggest.

Agreed.  I'll note that I consider the existence a single mining entity that acquires about 5% of all blocks to be well in line with "a wide distribution of hashing power" (Pareto distribution and all that).  I'd be interested to hear if you see "wide distribution of hashing power" differently.

BIP100 may therefore be necessary to allow miners to restrict supply, but at the same time remain decentralized and avoid forming an actual cartel.

Certainly, BIP100 creates a framework for miner coordination, setting cartel-like prices but not creating an actual cartel.  I also believe that in some situations, BIP100 will actually function to prevent miner centralisation.  However, I think there are other natural situations where BIP100 without limits will be powerless to stop miner centralisation (situations where there is a lot of demand for block space).

[teukon]

Given (7), I see no way for Alice to lose a game of chicken with a payment processing entity responsible for about 5% of all transactions.

In a game of chicken, Alice could have zero revenue whilst playing the game, all the payment processing entity has to bear is 10x lower fees and confirmations 5% slower.  Users may have a "loss" of at least 9 satoshis of benefit per transaction, but Alice losses everything.  Alice could lose the game.

Perhaps there is a resistance here.  My intuition still tells me that Alice would win but I'll admit it's not clear cut.

For example, there are some cases when some miners could actually benefit from a lower bitcoin price.  Please consider the following example:
1. A large proportion of the active network hashrate is earning bitcoin at a cost very marginally below the current market spot price of bitcoin.  Please see the below image for this hypothetical industry cost curve:
...

2. Miners with lower costs could cynically vote for a smaller size limit, in the hope the bitcoin price/mining revenue falls.  Lets say the bitcoin price falls to $900 in the above chart
3. The miners with higher costs start to lose the money and become inactive
4. The network difficulty falls, and therefore mining costs fall
5. The profit margins of the remaining lower cost miners increase, despite the lower bitcoin price/mining revenue.  Therefore these miners benefit in the short term

Interesting idea.  As you note, such an exotic situation is unlikely to occur and probably couldn't be sustained.  I'd imagine the costs of mining capital would change to reflect the risks of this potential attack (more efficient miners would become slightly more valuable and less efficient miners slightly less).  Still, I agree with you that it would be better to robustly block these niggling attack possibilities for a more predictable and efficient system overall.

As a defense against this and other similar voting based attack vectors, in the long term I think the voting period should significantly increase.  This could make it more likely more miners vote for the long term strength of the system, as short term attack based voting is likely to have less of an impact.

Possibly, but there may be a trade-off here.  Miners would also have less power to track changing demand (seasonal surges and declines) and so the voting mechanic will be less effective in increasing network security.

Maybe there are other ways the proposal could be made robust against such attacks.  Maybe an annual voting scheme could be combined with a new protocol mechanism to smooth out miner income across the year.  Maybe it can be shown that these medium-term surges and declines are no big deal.

[teukon]

One possibly silly idea: Could BIP100 come along with a protocol rule making coinbase outputs unspendable for 4 years?  I'd be a bit more comfortable were votes undivorcably attached to long-term investments in Bitcoin.

It would be good to get your thoughts on this.  Could it work?  Is there something obvious I've overlooked?

Edit:
Transaction creators could channel their fees to miners using an OP_TRUE output, avoiding the coinbase lock described above.