Why not remove the block size entirely was discussed somewhat recently here;
https://bitcointalksearch.org/topic/m.11439896This is a succinct way to put it;
If the block space is infinite then transaction costs, through competition, would fall to roughly the rate needed to operate [a] single node (when inflation stops), because this is the most competitive configuration in a free market.
This is a refined way to put it
;
There is zero incentive for miners to not fill the blocks entirely; almost any non-zero fee would be sufficient.
There are physical limits and costs that would prevent this. Each additional transaction increases the size of the block. There are costs associated with increasing the size of a block. At a minimum, there is a (very small) increase in the chance that the block will be orphaned.
The only _fundamental_ cost is communicating the discrepancy between the transactions included and the assumed included transactions. This can be arbitrarily low, e.g. if miners delay a little to include only somewhat older well propagated transactions-- the cost then is not a question of "size" but in breaking rank with what other miners are doing (and, in fact, producing a smaller block would be more costly).
Even without optimal differential transmission, and only looking at techniques which are nearly _universally_ deployed by large miners today; with the
relay network protocol the marginal cost of including an already relayed transaction is two bytes per transaction. I can no longer measure a correlation with block size and orphaning rate; though there was a substantial one a few years ago before newer technology mostly eliminated size related impact on orphaning.
Importantly, to whatever extent residual marginal cost exists these costs can be completely eliminated by consolidating the control of mining into larger pools. We saw people intentionally centralizing pooling as a response to orphaning already (two years ago) which prompted the creation of the block-relay-network/protocol to try to remove some of that centralization pressure by reducing the cost of block relay so there was less gain to lowering the cost by centralizing. Moreover, any funds being spent coping with these costs (e.g. paying for faster connectivity to the majority of the hash-power) cannot be funds spent on POW security. So I would refine DumbFruit's argument to point out that it isn't that "fees would naturally be priced at zero" but that the equilibrium is one where there is only a single full node in the network (whos bandwidth costs the fees pay for) and no POW security, because the that is the most efficient configuration and there is no in system control or pressure against it, and no ability to empower the users to choose another outcome except via the definition of the system. I believe this is essentially the point that he's making with "the most competitive configuration in a free market"-- even to the extent those costs exist at all they are minimized through maximal centralization. This is why it is my believe that its essential that the cost of running a node be absolutely low and relatively insignificant compared to POW security, or otherwise centralizing is a dominant strategy for miners.
