Balanced compromiseRational miners will vote to maximise their revenue. When the block reward is low, this can be calculated from the following equation.
Mining revenue = the economic value of network security = bitcoin fx rate * transaction volume * average fee
BIP100 is a balanced, dynamic and market driven compromise, which maximises the product of these three important metrics. Many people are arguing about the relative importance of these three metrics, BIP100 could be the long term solution we are after.
Reacting to demandBIP100 does reflect adoption/demand. If demand increases the price elasticity of demand may fall, therefore miners may vote to increase the limit. Miners vote to maximise their revenue and they therefore need to evaluate the price elasticity of demand when they vote. BIP100 enables capacity to adjust to meet demand. Over time miners will become better at voting. This method is better than estimating what demand will look like now for the next 20+ years, which is very difficult for anybody to do.
Why can't miners apply their own voluntary size limit?For example, a miner may prefer smaller blocks so that fees are higher. i.e. the miner thinks the negative impact from a reduction in volume would be smaller than the positive impact of a fee increase from the smaller blocks. Therefore the miner wants smaller blocks.
However, the miner could make a large block anyway to benefit from larger fees in the short term, from that block, in the hope other miners make smaller blocks. This plan will fail because each miner will also operate in their own selfish interest and make larger blocks. Fees then downwardly spiral to zero and network security falls.
This is happening in the oil market right now, loss making oil companies are pumping more and more oil to get cash in the short term and the oil price keeps falling. Oil firms then get more desperate for short term cash. Each oil company hopes other firms will reduce production so the price increases, but the nash equilibrium is for each oil producer to keep pumping. We must not allow this race to the bottom to occur in bitcoin mining. Lets learn the lesson from oil production and the mining of other commodities.
For oil of course this does not matter, eventually oil firms go bankrupt and shut down, then supply falls and the oil price rises. This correction can not occur in bitcoin because supply does not correct. Bitcoin miners keep the network secure, they do not supply capacity. One remaining miner can provide all the capacity we need, but not the security. Due to this imbalance, a blocksize limit is required.
If the above is true, why fees are not zero now, despite blocks not being full?.
It is for the following four reasons:
- Orphan risk costs are high, however in the long term these may fall due to bandwidth improvements and other technology like IBLT.
- Mining is not competitive enough. There are currently a few large pools, however if Bitcoin is to succeed in the long term, there needs to be many miners and a high level of competition.
- Miners are not mature businesses yet. Miners are often pro bitcoin people or bitcoin speculators, miners often care about the health of bitcoin. In the long term they may be more focused on margins and profit.
- The block reward is high, therefore miners don't worry much about fee income as it is small relative to revenue. The block reward will fall in the long term and miners will therefore focus on maximising fee income.
Is BIP100 like a price cartel?Yes, BIP100 is like a cartel for price fixing in some ways. What BIP100 does is allow the price to be fixed as if a cartel like structure existed, but actually have many competing miners. This is why BIP100 is quite clever. It is ironic like Bitcoin in a way. Bitcoin is about achieving abosolute order, while at the time ensuring everyone has freedom to do what they want. BIP100 has cartel like pricing, but with many members who have freedom to do what they want.
Without BIP100, the only way for price fixing to occur is if there was a very small group of miners who controlled the network. BIP100 would not be needed then and the price would be fixed. Without BIP100, if there were too many miners the cartel would fall apart, as members would defect from the cartel.
BIP100 kind of provides a framework for a cartel like structure to apply, but with many competing members.
As Meni pointed out when BIP100 was released, under many assumptions as to what Bitcoin is for, this may mean volumes are too low or suboptimal. I still think BIP100 is the best proposal out there, although its far from perfect or even complete.List of points requiring further clarification1. What voting options will be available? e.g. choices between -50%, -10%, -5%, 0%, +10%, +50% and +100%?
2. Will the miner vote for the size limit be rolling or happen every set number of blocks?
3. Over how many blocks will the miner vote occur?
4. Will there be a lower bound 1MB cap on the size limit?
5. How will voting take place? Is it the lowest 20% + 1 for an increase and the lowest 80% - 1 for a decrease?
