From the article:
Quote
The relevance to Bitcoin is a hypothetical market failure that might happen in the far future when the block reward from mining drops near zero. In the current Bitcoin design, the only fees miners earn at this time are Transaction fees. Miners will accept transactions with any fees (because the marginal cost of including them is minimal) and users will pay lower and lower fees (in the order of satoshis). It is possible that the honest miners will be under-incentivized, and that too few miners will mine, resulting in lower difficulty than what the public desires. This might mean various 51% attacks will happen frequently, and the Bitcoin will not function correctly.
There is a possible solution for this problem (if it really is so). The solution is to gracefully push transaction fees to match electricity cost. I think SolidCoind tried that, by manually adjusting the block reward. This is obviously completely undesirable and opposed to the “not centrally controlled” idea behind Bitcoin.
A realistic and simpler solution is to give some extra reward to miners proportional to the number of bytes unused of the 1M available bytes in a block. This extra reward should be fixed forever, and should be much lower than the initial reward of 50 BTC. Obviously this will break the deflationary base of Bitcoin. But anyway, the effect of very little inflation would be almost imperceptible for users, so from any practical point of view the coin would still be deflationary.
Example:
Initial reward (prize) = 50 BTC, halved every X blocks.
Extra reward “e” = 0.000005 BTC for each unsent byte. (Maximum = 1M*0.000005 = 5 BTC )
If a transaction of size “s” specifies a fee lower than (s*e) then no miner will include it, since they would prefer getting the extra reward for those bytes unused. The extra reward can reach a maximum of 262800 BTC/year, which is 1.2% of the 21M maximum coins created by prizes (but it will be probably much lower, at 0.12% since blocks will be almost full, e.g. 90%). This is a very low inflation rate.
Let me show how equilibrium is reached when prize goes down to almost zero.
1. If the coin value goes up →
transaction cost (in USD) goes up →
people sell coins because fees are to high to transfer money →
coin price goes down
(equilibrium is reached)
Obviously the opposite direction implication is also true, inverting the actions.
2. Too many coins in circulation →
merchant increase prices since people are willing to pay more →
coin price goes down →
transaction cost (in USD) goes down →
new people buy coins because it's cheap to transfer money →
coin price goes up
(equilibrium is reached or price goes down very gracefully)
Please forgive me for my little knowledge in economics, but this implications seems to be for me very straightforward.
It would be very easy to modify the behavior for Bitcoin (1 line of code). But it's obviously a hard-fork and needs large consent.
What do you think?
Best regards, Sergio.
Note to the moderator: Fell free to move this thread to the Economics section if you think it should be there.