Transaction speed / Blocksize limit, an unintended feature for market stability?

[GingerAle]

This is just general musings, but I find it interesting. There are no capital controls in bitcoin, its only protocol parameters. Thus, there is no means to address a "panic" of any kind, or any kind of economic crisis.

Or is there?

As a broad generalization, one could conclude that most economy/market related disasters are due to the swift action of many individuals acting at once. Indeed, this is the definition of a panic. Jimmy's dumping everything, so I should dump everything, and now Bob will dump everything because he sees me and Jimmy dumping everything. In order for this panic to occur, me, Jimmy and Bob all need to be able to move our money immediately.

Enter the blocksize.

Now Bob can't join the panic, because his transactions won't confirm immediately... so his panic action is delayed by however long it takes for his money to move. Its essentially a form of smoothing.

Of course, one can move their money faster, but it will require a larger fee in times of panic. So essentially the blocksize functions as a panic tax. And finally, this only functions as a tax for those that have their money outside of the exchanges. So essentially this panic-tax effect of the blocksize limits the "fuel" of a panic to those funds that are liquid in the exchanges.

[AgentofCoin]

Interesting idea.
It does indeed seem to be like a "panic tax" during a massive sell off.
This would in theory, slow down the sell off and allow users and miners
time to think things through.


I would like to add that the bitcoin market is not like the stock markets.
BTC is the only traded asset here and if the price gets too low in sell offs,
miners are potentially bankrupt and are forced to shut down.

Of course, over some time the miners could start up again,
but that is assuming the massive sell off isn't related to a discovered
fundamental problem in Bitcoin that is not correctable and kills the experiment.

If that happens, no "panic tax" can stop the inevitable.

But overall, I agree with your theory.

[Kprawn]

Nothing will stop people or slow them down, if something big happens... They will just increase their miners fee to ridiculous amounts and the miners will sweep up the bigger fees. The only mechanism

that might slow it down, is if all miners gets a alert message to stall mining in a attack or when the thing goes upside down. They could effectively slow down the process, but not stop it indefinitely.

The fees, is a counter for this kind of response. 

[ebliever]

Even if people jack up their fees, they will still find themselves in a queue. I agree that this "panic tax" effect will tend to slow things down. People will be upset at the long confirmation times, but it will give them a chance to gather additional information and maybe make a different decision before selling on an exchange.

So yeah, I can see how this effect ends up moderating price fluctuations of bitcoin (at least under extreme conditions/pressure). But I'd still vote for a transaction volume capacity way higher than we have now, given the choice.

(A little anecdote: When the NYT and Washington Post broke with their "Bitcoin is dead" obits in the wake of Hearns' departure and bitcoin dropped 15%, I assessed the situation. Decided it was a stupid overreaction and not reflective of some new fundamental reality, and tried to buy some BTC on Coinbase. Whereupon I discovered they had disabled my account for reasons that are still totally mysterious to me. It took a couple weeks of back-and-forth to finally get it re-enabled, and when all was said and done I got my BTC for $15/BTC less than if I'd been able to purchase instantly. And then the price bounced back and we are now higher than things were just before Hearns' departure. So I've learned that patience is a virtue, and sometimes having it imposed on you by circumstances does work in your favor.)

[aso118]

Interesting. The block size limits the number of transactions and not the amount, so its effect on market stability might be limited.
Bob might be able to move a million bitcoins during the panic, while Jimmy's transaction with a few mBTC might be stuck. The movement of Bob's coins might crash the market.