This is all assuming that transactions volume hasn't increased by the time the block reward dropoff occurs. Pretty far fetched imo.
No, I don't think it is. It's a more general argument: That miners only compete on transaction costs if all/almost-all of the block-bonus (whatever it is) is being spent on the cost of mining. Until that point is reached, miners can demand whatever transaction cost they like and continue to hold their position in the market by adding mining capacity.
Basically, the rewards make all mining, even anti-social mining profitable. It doesn't really matter how much potential value there is in transactions if you can make basically as much money churning out nearly empty blocks.
It's very, very, very hard to get a lot of people to collude without cheating and with no enforcement.
"Oh sure, I'll only accept transactions with a fee of 1 BTC". Then accept anything over a bitcent.
Yes, but they don't actually have to collude. You can claim that, then do otherwise, this means you and I both won't profit as much from extortion. But I won't actually lose anything by doing it while you don't, because miners don't compete on transaction costs. Even if you don't cooperate some people will still offer the higher fees, because they don't want the risk of me solving the newest block and slowing down their transaction confirmations.
Some of the miners will also be retailers or exchangers, and will have an interest in getting transactions into blocks.
Absolutely. This is why I described this as being a problem resulting from for-profit mining by people that don't care much about the success of bitcoin overall. Still, there is nothing preventing striking miners from giving priority access to blocks from their friends. In fact, such a scheme would be perfectly compatible with crediting contributed mining effort as equal to a transaction fee. In this manner a bad mining pool could suck away contributing miners from other pools. "Contribute at least a GH/s to pool X and your transactions will get priority".
Anyway the horrible risk you have described which is also impossible to fix as you say, is not a bug it is a feature. The worst it can do eventually is that the higher fee you pay the higher speed of transfer you get. Here we go I've just coined a new term TMYPTQUT meaning The More You Pay The Quicker You Transact. And TMYPTQUT, frankly, does not appear to be patently unfair principle.
If free markets say that 10 minute transaction cost is 1 BTC, so be it. If free markets say that time it takes for a free transaction to propagate is 1 week so be it too.
I agree that the long term behavior is the correct one, and I understand that it's intended. What is bothering me is that the block rewards distort the market for the TMYPTQUT service. The lottery effect isolates mining from the value of the service that transaction processing provides. I'm pretty sure TMYPTQUT can only reach a pricing equilibrium (with transaction pricing fairly reflecting the cost of operating the infrastructure) only after all of the block reward profit is being spent on infrastructure costs.
This would be fine, except for the fact that at current exchange rates and hardware costs that equilibrium point would require almost half of the current total value of the bitcoin market being spent on mining every year, which is obviously unsustainable. It'll still be unsustainable when the reward goes to 25 btc. As the market grows and once the rewards go down far enough it won't be an issue, but I think there are probably a good couple years of exposure right now.
I think there is also another dynamic - if the miners strike as you describe it causes the transaction speed to slow down this would impact the usefulness of bitcoin and hence reduce its value. So the 50btc the miners for solving a block would be worth less.
Go on strike and hope to extort extra tx fee revenue but the 50btc bounty is worth less
or
Don't go on strike the the 50btc bounty value is worth more
Absolutely— and this is why you'd never start off buying mining hardware with the intention of going on strike. But what happens when you've bought a ton of mining hardware and poor planning, greed, or market dynamics leave you unhappy with your returns?
At the moment the marginal risk of collapsing the market in the short term is fairly small. The bitcoin transaction rates are fairly low compared to the dollar value of the market. Investors/speculators don't really care much if the networks is currently slow. Of course, you would plan to exit the market before the arms race breaks it.
It seems clear enough to me from the threads in the mining forum that people are buying non-trivial amounts of hardware based on assuming the current rates of return and ignoring the _known_ factors which will inevitably reduce the returns in mining investments, much less the unknown ones (like all the other people, making the same purchasing decisions). I've seen quite a few people that don't understand that there will only be a fixed number of coins created per day on average which will be spread proportionally among the miners (e.g. that adding mining workers is zero-sum— and in fact the pools with the dumb sha-cracking GPU workers actually _decrease_ the network's total transaction handling ability— GPUs are not very useful for transaction handling, but we've now difficulty-ied CPUs which _are_ good for that right out of the market).
