- Mar 13, 2016
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Bitcoin Unlimited's approach to resolving the blocksize debate once and for all, provides the right ingredients for a healthy block space fee market to from. This post will identify the technological and economical factors that come into play when/if Emergent Consensus is used, and examine how this could result in a stable fee market with a low and slow growing Blocksize limit.
A well known paper written by Peter R, suggests that miners are at risk of getting blocks orphaned if they create blocks which takes to long to propagate. A mathematical model proves, at some point, cost of orphen risk outweigh the reward the fees provide. This theory has become less relevant because of BU's Xthin blocks greatly improving block propagation time. However the theory still holds even with Xthin block, and outlines a theoretical absolute upper limit ( XGB Blocks have a 100% chance of being orphaned ), and also expresses a "profitability limit", in which, if crossed, miners would lose more income then they stand to gain, due to a higher orphen rate, and become unprofitable. most notably the theory attributes a very real cost / byte for TX.
Another idea floating around the forum considers block validation time. The theory goes that given BU's ability to do parallel validation, any block which takes a long time to validate is at risk of being orphaned by a sibling block which takes less time to validate. This is a similar idea to Peter R's paper but using validation time instead of propagation time, and also offers an upper limit (blocks taking >10mins to validate will always be orphaned by siblings), cost / byte and profitability limit too.
Both these theories identify a naturally occurring cost / byte, based on software and or hardware technological limitations, which sets the bar for how many TX a miner can include in his blocks and not go bankrupt. Obviously miners need to not go bankrupt, and want to be as profitable as they can. So... how will individual nodes and miners choose their EB setting? and how will this effect block generation size? It's all about maximizing profit, and for nodes its all about being able to gracefully keep up with the network's growing throughput. luckily, for the nodes, the miners attempt at maximizing profit will end up greatly limiting blocksize and limit its rate of incress.
Miners will be faced with a classic economic problem, how do I price my services? Demand for on-chain bitcoin TX are nearly limitless, but the amount of fees all these use cases are willing to pay is not limitless. meaning, if fees grow to high TX demand will go down, and if fees are too low miners will start to lose profitability, to the point where they start to hit the technological limitations and quickly become unprofitable.
Maximizing profits will require miners to create a fee market with enough fee pressure ( but not to much fee pressure!) to hit an "Optimum price" as the overly simplified graph above demonstrates. 1MB blocks were at one point, very positive for miners, they raked in more fees due to fee pressure building. of course when fee pressure is too high, they are losing out on potential profits,by dealing more TX vol at a lower fee / byte, and raking in even more fees in total. But if we jumped to 20MB today, fee pressure would be very low, and almost all TX could get in a block with 0.0000001BTC fee, increasing cost to miners ( orphen risk ) while lowering total fees/block; It's in the miners best interest to maintain fee pressure at a precise level. Emergent consensus will be utilized to do just that, miners will set and EB (Excivies Blocksize) which tries to hit this theoretical "optimal block size to maximize fee revenue" right on the head.
For this balanced fee market to emerge, Only a small % of miners need to see the very real value in setting an EB which aims to balance the fee market. With Emergent consensus, miners cannot produce a blocksize which violates >51% of EB values, the minute they attempt that they end up on a fork! miners are extremely unlikely to violate so much as >15% of other minning nodes EB, This dynamic ensures only a block size which benefit the vast majority will be generated.
Conclusion,
technological limitations create costs to miners for including TX's in blocks, economical incentives create a balanced fee market based on these costs and TX demand. As subsidy halves again, and again maximizing fee revenue becomes the name of the game for miners, and as competition for collecting these fees grow, so does the NEED to keep a well balanced fee market which yields optimal fees / block. Blocksize cannot outpace TX demand, blocksize cannot outpace bitcoin adoption, node decentralization is in no way threatened by Bitcoin Unlimited's Emergent Consensus.
A well known paper written by Peter R, suggests that miners are at risk of getting blocks orphaned if they create blocks which takes to long to propagate. A mathematical model proves, at some point, cost of orphen risk outweigh the reward the fees provide. This theory has become less relevant because of BU's Xthin blocks greatly improving block propagation time. However the theory still holds even with Xthin block, and outlines a theoretical absolute upper limit ( XGB Blocks have a 100% chance of being orphaned ), and also expresses a "profitability limit", in which, if crossed, miners would lose more income then they stand to gain, due to a higher orphen rate, and become unprofitable. most notably the theory attributes a very real cost / byte for TX.
Another idea floating around the forum considers block validation time. The theory goes that given BU's ability to do parallel validation, any block which takes a long time to validate is at risk of being orphaned by a sibling block which takes less time to validate. This is a similar idea to Peter R's paper but using validation time instead of propagation time, and also offers an upper limit (blocks taking >10mins to validate will always be orphaned by siblings), cost / byte and profitability limit too.
Both these theories identify a naturally occurring cost / byte, based on software and or hardware technological limitations, which sets the bar for how many TX a miner can include in his blocks and not go bankrupt. Obviously miners need to not go bankrupt, and want to be as profitable as they can. So... how will individual nodes and miners choose their EB setting? and how will this effect block generation size? It's all about maximizing profit, and for nodes its all about being able to gracefully keep up with the network's growing throughput. luckily, for the nodes, the miners attempt at maximizing profit will end up greatly limiting blocksize and limit its rate of incress.
Miners will be faced with a classic economic problem, how do I price my services? Demand for on-chain bitcoin TX are nearly limitless, but the amount of fees all these use cases are willing to pay is not limitless. meaning, if fees grow to high TX demand will go down, and if fees are too low miners will start to lose profitability, to the point where they start to hit the technological limitations and quickly become unprofitable.
Maximizing profits will require miners to create a fee market with enough fee pressure ( but not to much fee pressure!) to hit an "Optimum price" as the overly simplified graph above demonstrates. 1MB blocks were at one point, very positive for miners, they raked in more fees due to fee pressure building. of course when fee pressure is too high, they are losing out on potential profits,by dealing more TX vol at a lower fee / byte, and raking in even more fees in total. But if we jumped to 20MB today, fee pressure would be very low, and almost all TX could get in a block with 0.0000001BTC fee, increasing cost to miners ( orphen risk ) while lowering total fees/block; It's in the miners best interest to maintain fee pressure at a precise level. Emergent consensus will be utilized to do just that, miners will set and EB (Excivies Blocksize) which tries to hit this theoretical "optimal block size to maximize fee revenue" right on the head.
For this balanced fee market to emerge, Only a small % of miners need to see the very real value in setting an EB which aims to balance the fee market. With Emergent consensus, miners cannot produce a blocksize which violates >51% of EB values, the minute they attempt that they end up on a fork! miners are extremely unlikely to violate so much as >15% of other minning nodes EB, This dynamic ensures only a block size which benefit the vast majority will be generated.
Conclusion,
technological limitations create costs to miners for including TX's in blocks, economical incentives create a balanced fee market based on these costs and TX demand. As subsidy halves again, and again maximizing fee revenue becomes the name of the game for miners, and as competition for collecting these fees grow, so does the NEED to keep a well balanced fee market which yields optimal fees / block. Blocksize cannot outpace TX demand, blocksize cannot outpace bitcoin adoption, node decentralization is in no way threatened by Bitcoin Unlimited's Emergent Consensus.
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