Here is a new vulnerability I just realized exists in Bitcoin. This is pretty fucking bad news unless someone can refute it. I am very surprised no one thought of this before, or did they?
Note I am very sleepy (been awake 24 hours) and I just thought of this, so I could possibly be mistaken.
This goes in the Economics thread, because it an economically driven attack, not a protocol attack.
This is going to be counter-intuitive to your instincts, so stop and think deeply rather than rashly posting some nonsense that I will easily refute.
This is basically a Tragedy of the Commons effect, or perhaps Tragedy of the Anticommons.
The problem is that as more people buy mining hardware they increase the difficulty. This dilutes the profitability of everyone. At some point, any miner can become unprofitable and they must decide to continue losing money or quit.
But they have another option. They can see the available transactions and fees offered for the block before they start computing the proof-of-work solution. So they could optionally only attempt to compute it when the fees are high enough to make them profitable. In other words, they idly listen and filter the transactions by fees and only burn big electricity when fees are adequate.
Thus the collective difficulty is not a barrier to buying more mining hardware. If the miner sees that percentage of blocks of transactions are sometimes sufficient to mine, they have an incentive to add more network difficulty and mine part-time as explained above.
This effect is exasperated by the exponentially rising value of Bitcoin, which makes ROI very high even if part-time, because of future expectation of rising returns on mining. But the price drops, then miners have to stay alive until it gets back up to expected exponential trendline again.
So this is a spiral upwards. The customers can't choose to not pay transaction fees, they will offer fees high enough to get their transactions processed. But the percentage of the network which will process for any fee will always be falling off due to the asymmetric relationship between the collective difficulty and the individual part-time miner's incentive of when to add more mining hardware.
Thus transactions fees will perpetually rise as a percentage until eventually it becomes too costly to do any transactions.
And then Bitcoin dies.
End of story.
P.S. There may be evidence this is happening already. Coin rewards are still high at 12.5% per year, so the transaction fee effect is only just minimal so far, but this will worsen as coin rewards decline in 3 more years, if I am correct in my theory above.
P.S.S. The basic problem is that there is no limit on mining hardware, and no limit on transactions fees. Customers don't have a choice. And the miner's individual profit calculation is not symmetric with the overall difficulty scaling. And the adding of hardware is a one-way function, you can't return it after you already bought it. So much better to part-time mine and filter on fees. The Bitcoin prices sometimes drop below trend too. But the hardware can't be returned.
I guess a rebuttal could be that as they part-time mine the difficulty drops but not immediately, and still more will add hardware when the difficulty drops since that is the new level and fees have increased due to the filtering before the difficulty dropped, which drives demand for more hardware.
See the basic problem is the asymmetry both in the collective difficulty versus individual part-time, and the irreversible (coinductive) function of buying new hardware. And the oscillations always push up the hardware on the upside, but can't remove the hardware on the downside. So miners filter mine once they realize what I have written if they are not already doing it. They may not be doing this yet, because of the still high coin rewards.
