Keep in mind that when we talk about off-blockchain transactions, we are talking about alternate block chains. These would be separate crypto-currencies with different properties. Ripple is one example (it relies on trust, unlike Bitcoin). I'm sure there will be others when the opportunity for profit arises.


There are a lot of things we'd rather see but the point being made is that there are limits to what can be done with Bitcoin, while keeping it Bitcoin (global consensus, proof of work, etc...) Raising the block limit by a non-trivial amount may not be practical.

It should be easy to see that if there was no limit on block sizes, that fees would trend towards zero (ignoring the OP's original stated problem of miners attacking other miners by producing large padded blocks). Do you understand that with increasing block sizes come smaller fees?

For that matter I've seen a lot of talking about bandwidth, storage, and processing power but it seems everyone has overlooked that:

Fees will decrease as block size is increased (all else being equal)

Do people not get this, or am I wrong?

It's because VISA and MasterCard are not Bitcoin. They are each a centralized, private payment system. There's no limit on the number of transactions they can process.

Do you understand that it is only scarcity of transaction space that guarantees a non-zero equilibrium level of fees (in the Bitcoin system)? When miners are forced to choose which transactions to exclude in a candidate block, due to limited space, they will obviously discard the transactions with the lowest fees (per kilobyte). This creates competition and drives the fees up to a new equilibrium level.

See my earlier post which predicts the future of block size and transaction fees.

Or maybe when people can't get their transactions processed in a timely fashion, regardless of how much they pay in fees, they'll just abandon Bitcoin entirely and the miners will get nothing.

Seriously though, if reducing the number of transactions will increase miner revenue then why stop at seven transactions per second? Reduce the limit so that only one transaction is allowed per block and watch miner profitability go through the roof.

I beg to differ. There are plenty who feel that there should be no limit, so that Bitcoin will "scale" to accommodate any amount of transaction volume. It should be clear that, storage and bandwidth issues aside, this will result in fees trending to zero.


Agreed, and I posted a simple method of adjusting MAX_BLOCK_SIZE based on measured scarcity.


It seems obvious that all miners will converge on the same algorithm for producing blocks: Include all transaction with fees. This maximizes mining revenue. But only in the short term. Once ALL miners start doing this, then we have the equivalent of no limit and my comment earlier applies: fees will trend towards zero. Giving "freedom" to miners isn't really a choice. We already know what strategy miners will use. It will be to maximize their fees. Anyone who doesn't follow this strategy will go bankrupt.


At which point, miners will again converge on the same algorithm: Attempt to fill each block up to the hard limit of size, choosing the transactions which offer the highest fee per kilobyte.


Which goes against what you earlier agreed to, that scarcity is a requirement for fees to reach a non zero equilibrium See, there ARE some people who are rooting for limits to be removed!  


Keep in mind that the soft limit is just an artificial barrier. The instant that it becomes profitable for miners to comment out that piece of code and substitute it with the "winning" strategy (fill the block with transactions having the highest fees per kilobyte), they will do so.


Any scheme for dynamically adjusting the block size should be based ONLY on the information contained in the block chain, and not any other information like the "speed" of nodes, or more importantly attributes of the memory pool of pending transactions.

The block size limit doesn't have much meaning if there are other systems in place that make it impossible or impractical to create super large blocks. However my favorite solution right now is to simply link the max size with difficulty in some fashion, that makes most sense to me.

Another possible solution to the scarcity of transaction space versus an infinately growing transaction queue (with infinately growing free transaction confirmation delays) is to permit an unlimited (or massively huge limit) block to legally occur under specific conditions that would not incentivise miners towards anti-competitive activities.

For example, there could be an exception rule for the blocksize limit if zero fee paying transactions were included into the block.  This rule would permit a miner to queue dump for his own reasons, be it that his queue is too large, it's owned by a major bitcoin holder that simply wishes to help the network at his own expense, or a major retailer (think WalMart) that has a huge amount of free transactions from customers to process, and mining isn't directly their business model.

Another method would be to permit an un-limited block based upon an interval that miners could not depend upon.  For example, the difficulty is adjusted every two weeks or so, but the difficulty adjustment block could also be an unlimited block, also permitting (perhaps expecting) the miner that finds that block to not only include every single fee paying transaction in the block, but also every single transaction still in his queue.  This would limit the delay for free transactions to a two week maximum, and only burden the bandwidth challenged clients and miners once every two weeks and on a predictable schedule.

Occasionally flushing the transaction queues would benefit all players, without significantly impacting the scarcity of transaction space for the remainder of the time period.  However, the second method is likely to encourage free transactions leading up to the unlimited block's expected arrival; whereas the prior method of permitting unlimited blocks based upon a fee-less transaction queue would not encourge same, but nor could users be certain that their free transactions be processed in any reasonable time frame, as there is not way to be certain that any miner would be willing to do this.

I don't think you thought it through. It does take scarcity into account. Whenever fees start trending towards zero, it will eventually lead to a decrease in mining power. Miners will stop mining. This will decrease difficulty, thus lowering the block size. Eventually there will be scarcity again, thus leading to increased fees, and thus more mining, and a larger block size. There would be an equilibrium and a market.

The problem is the baseline and how much of a difficulty change equals how much of a block size limit change. The baseline could be how much difficulty is at the time of the change (for example), but the other part is tricky. Maybe it could be done as a percentage change, it would change the same percentage as difficulty?

Or it could be a hybrid of your two ideas.  The increase in difficulty triggers an increase in the blocksize, but not linerally.  For example, no matter how much the difficulty increases (beyond a minimum), the blocksize increases by 10%.  No matter how much the difficulty decreases (beyond a minimum) the blocksize decreases by 5%.  Or vise versa, depending upon which is more likely to result in a favorable sscarcity.

Throw in my unlimited-if-all-free transactions rule.

Miners like lots of paying transactions, but payment processors like lots of transactions that pay the payment processor, and if they can get those transactions into the blockchain without paying miners heck that is a nice bonus for them, is it not?

So it seems to me that outfits that make money by spamming as many transactions as they can into the blockchain, making their money on what they can charge whoever their customers are for either that spamming or the effects of that spamming or even the ultimate long term effects/results of that spamming, are another group of actors who stand to gain by the largest blocks they can convince miners to create. I am not sure whether they would also ally with miners in the forcing out of competing miners, but maybe if miners demand such co-operation in return for preference in getting into that miner's mined blocks maybe they would happily go along with it?

Mike suggested somewhere that one (such a one as Google, to give you an idea of the kind of one he is accustomed to) can handle massive numbers of transactions, even using commodity hardware (which Google is wont to do) by processing them with many machines in parallel, so no matter how many transactions pour in one can simply add more machines. Obviously for one such as Google, with their databases designed and proven for handling huge chunks (aka blocks) of data, handling large blocks is also not a problem.

So if we scale up to a point where only the Googles of the world are capable of keeping up, what does that buy us? Nice high value for our hoards of bitcoins, hopefully, but what else? And at what cost in terms of freedom, accountability and the like?

Maybe acquire deepbit while one is at it, maybe a couple of other pools? How many would one need to acquire, if even any at all, to reach a point where one's specialised ability to verify transactions, possibly accompanied by enough miner co-operation or aquisition of enough mining pools and/or ASIC fleets, lets you squeeze/force everyone else other than maybe Microsoft (would they even care?), Yahoo (would they?), Amazon (hmm they have a payment processor, would they maybe put up some resistance or be just another don't care?) Paypal/Ebay (would even they care, really? Isn't an unverifiable competitor better for them than a verifiable one, one whose work/transactions they are not a party to verifying better than one whose they are?) and so on and so on out of the business?

Why the heck did we ever want more than just the single most-equipped-to-do-it player on the planet to verify transactions, again?

Can we leave watching over them to backwards-looking approaches, maybe? Never be able to catch up to where the blockchain is actually at but with a fleet of accounting/audit firms on the job be able to determine within a few weeks or months of some slipup that a slipup has happened, leaving the last several weeks of the chain invalid with respect to all transactions downstream of some erroneous one the accountants eventually discovered?

What if that "error" turned out to be a failure of a large number of silk road's coins to arrive at silk road's wallet?

Etc... All this push toward eliminating more and more of the population's chance of being able to verify makes me wonder why the heck we ever cared about verifying anything in the first place? Can't we just let Big Brother take care of everything as he always did/does, maybe even trusting that if blockchain technology has any application in such fields Big Brother will make use of it on our behalves?

A skeptical cynical little voice in me scoffs ha ha you'd be lucky to only be halved, more likely you'll be quartered or decimated or worse...

-MarkM-

The fundamental market logic behind that idea seems solid enough that it actually doesn't matter too much how the relation is calculated. There could be some limit for how much the block size can change which is what MoonShadow suggested, if it's feared that the change can be suddenly too drastic. Otherwise it's all irrelevant since the market will balance the block size regardless. If it's too high miners will stop due to lack of fees and incentive, leading to a smaller block size, if it's too low it will lead to more fees, more miner incentive, more miners, and a higher difficulty and higher block size.


What you described isn't a bad idea either. I don't have more advanced opinions on it yet, but it looked decent.