Response to Roger Ver on the “block size blockade”

Comments on a post published by Roger Ver at FEE.org.

‘Miners should always supply enough block space to meet the demands of Bitcoin users.’

It would seem that this statement:

Just as it would be a mistake for Starbucks to intentionally not have enough coffee to meet the demands of their customers, it would also be a mistake for Bitcoin miners to not supply enough block space to meet the demands of their users.

is contradicted by this later statement:

Downward pressure on the block size that miners are willing to create… would still likely [result in] a practical maximum block size.

Should the miners “supply enough block space to meet the demands of their users,” or should miners yield to the “downward pressure on the block size that miners are willing to create”? Are miners making a “mistake” by yielding to this “downward pressure” and building smaller blocks?

There is virtually unlimited demand for cheap, highly replicated, timestamped data storage. Add cryptographic certainty about the integrity of stored data, and we have a powerful tool for digital record-keeping. We should not be surprised if demand for this tool outstrips supply given the “downward pressure” faced by miners.

If Bitcoin is successful, there will always be more demand for block space than supply. Luckily, this demand doesn’t have to be serviced by strictly on-chain transactions. Transactions can be aggregated off-chain via payment channels or merkle trees and added to the blockchain in batches, all without the need for a trusted third party. This takes pressure off the miners while servicing demand for Bitcoin transactions.

‘Inefficient miners will drop off the network’

An important negative externality that you left off your list is that of hashpower centralization. This externality was mentioned in passing throughout your post, but deserves further examination.

The least efficient miners and nodes will drop off the network, just as the least efficient producers in any industry would.

I agree that this would happen, and I find it troubling. Given that so much hashpower is already concentrated behind the Great Firewall of China, I am concerned about any change that would give Chinese miners even more of an advantage than they already have. I would be equally concerned about any change which unfairly disadvantages them and puts their hashpower out of commission. Ideally, changes will grow the Bitcoin mining network and further decentralize it throughout the world. But more likely, this cannot be accomplished with software alone (a topic for another post).

Bitcoin only has value if the miners do not collude to censor or double-spend transactions. If changes are made to the protocol that cause a majority of the hashpower to concentrate in one legal jurisdiction then the risk of the miners being nationalized or de facto nationalized through regulation to attack Bitcoin is significant and, in my opinion, not worth it.

Here is one example of a positive feedback loop that could result from an unsafe* block size limit increase:

  • Well-connected miners in China create large blocks and propagate them to each other.
  • Blocks produced by miners from outside China propagate slowly across the Great Firewall, and are therefore seen by Chinese miners later than blocks built by other Chinese miners.
  • Chinese miners build on blocks from outside China less often, meaning that less blocks from outside China are added to the blockchain.
  • Miners outside China, not winning enough block rewards, have their already razor-thin margins slashed. They eventually go out of business.
  • Chinese miners gain a larger percentage of the overall hashrate.
  • Repeat.

This feedback loop will only intensify as the coinbase reward continues to diminish and miners begin to rely heavily on transaction fees for revenues. At the point that fees become more important than the coinbase reward, miners that can produce the biggest blocks will be the most profitable. The argument that “downward pressure… would still likely [result in] a practical maximum block size” will then be less an argument for a larger block size limit and more an argument for a smaller block size limit, lest we allow this positive feedback loop to spiral out of control and end in disaster.

* Unsafe in this context means a change that would significantly increase the likelihood of a 51% attack. Only a very small number of Bitcoin experts are against a safe block size limit increase (I am not one of them).

There is nothing advantageous to artificially limiting the block size.

The positive feedback loop described above shows that there are serious game theoretical concerns resulting from an unsafe increase or outright removal of the block size limit. Bitcoin was engineered to remain decentralized, and removing the limit on this parameter could break that key functionality. Is it really worth breaking Bitcoin just so a few extra transactions can fit into each block? Maybe these concerns are overblown, but I’m personally not willing to take the risk to find out.

Bitcoin is scaling on- and off-chain

Thanks to the tireless efforts of dozens of contributors from around the world, the Bitcoin block size blockade (if that is what we are calling Satoshi’s decision to implement the 1MB limit) is coming to an end. Capacity increases are coming to Bitcoin Core, the reference implementation of Bitcoin. A byproduct of the recently-merged Segregated Witness proposal is an effective block size limit increase to 1.6MB – 2MB. Some Core developers have also agreed to submit a hard fork proposal for an increase to 2MB for the non-witness data shortly after SegWit is activated. Other Bitcoin client developers are experimenting with their own methods for increasing transaction capacity, some of which may make it into Core.

If Bitcoin does not scale, then it will lose out to a competitor. This would invalidate hundreds of millions of dollars that have been invested into bitcoin mining equipment, and further billions that have been invested in bitcoins. The stakeholders behind these investments have a large financial incentive to cooperate to find mutually agreeable solutions. I am confident that solutions will be found and that these solutions will enable Bitcoin to maintain its position as the leading cryptocurrency.

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