Economics of block size limit

[conv3rsion]

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?

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?

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[n8rwJeTt8TrrLKPa55eU]

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?

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.

[markm]

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-

[twolifeinexile]

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 out 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......

[n8rwJeTt8TrrLKPa55eU]

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...

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

[markm]

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.



-MarkM-

[conv3rsion]

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.

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?

[markm]

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-

[oleganza]

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.

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.

[oleganza]

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.

[markm]

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

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-

[conv3rsion]

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

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

[oleganza]

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.)

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.

[markm]

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-

[twolifeinexile]

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.

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.

[markm]

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-

[notig]

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.

[markm]

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-

[markm]

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)?

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-

[misterbigg]

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

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.