Breaking Satoshi

What is the ideal block size and fee cost?

January 19, 2020·Deryk Makgill

Dan Held writes in his latest Medium post:

A decentralized economy complements the dispersed nature of information spread throughout society. Each company is an attempt to take the local knowledge that it has and create a good or service that ultimately is the correct capital allocation (aka profit).

This is correct, which makes me think he must not understand the point he’s trying to make very much and found the quote on Goodreads, because Held also argues that Bitcoin developers must impose production quotas on block space in order to maintain an ideal block size in Bitcoin and ensure miner profitability and network security.

Price fixing like this breaks Bitcoin for the same reason any form of price fixing doesn’t work. It distorts the local information economic actors have that would allow them to properly allocate their own capital and energy. This often leads to an overproduction of a particular economic good and an underproduction of another, or, shortages and bloat.

In Bitcoin, the result of this central planning of block space are externalities like the mempool clogs we saw in 2017 that effectively plunged BTC into a two year dark age of stagnating prices and regressing merchant adoption. It was the predictable outcome of a tiny developer committee overprioritizing ‘security’ instead of letting the whole market work out exactly how much security is really needed to protect the network while allowing fees to remain low enough for users and merchants to continue using Bitcoin as peer-to-peer electronic cash.

A market can work instead to govern block sizes and transaction fees better than a committee of developers. We don’t need to know the ideal block size or the ideal transaction fees in advance, or even worry about it, the market will tell us. All that is necessary is to remove the arbitrary limits imposed by developers and to allow all the transactors on the network and all the miners to work out the cost of fees and the “ideal” size of the blocks themselves.

This is how Bitcoin was designed, markets, not developer cartels making decisions for everyone on the network. As Hayek wrote in The Use of Knowledge in Society,

A centrally planned economy could never match the efficiency of the open market because what is known by a single agent is only a small fraction of the sum total of knowledge held by all members of society

It works in Bitcoin like this.

A. Miners want to make the most money off of fees possible while reducing risk and cost of doing business.

B. Users want to get the cheapest and fastest deal on block space possible.

C. Both parties know their own interests better than any developer could sitting outside of their exchange.

If blocks are too big, miners might assume unnecessary cost and risk, or cause security or synching issues with the broader market of businesses involved in Bitcoin running their own nodes. If blocks are too small, miners limit their profitability and the potential growth of the network. If fees are too low, miners can’t make money. If fees are too high, miners won’t make much money either because users will simply stop transacting.

Somewhere in between the needs of the miner and the user, there is an answer to the ideal transaction fee and the ideal block size. Neither too big or small, nor too cheap or too expensive. There may be some problems here and there, but this is the only way these questions can be decided if we want the network to scale globally.

In BTC, we can’t even know the answer because because the limits imposed by Core developers prevent this discovery process from happening. Until they are removed, BTC will continue to struggle growing, because artificial limits on scaling create artificial limits on demand potential.

The opportunity for a Bitcoin free from production quotas, price fixing, and developer committees has never been better. The fork of Bitcoin that wins mass adoption will be the one that recognises that there is no ideal transaction fee and no ideal block size. There is only the market and economic actors in that market making rational, self-interested decisions.

Relevant Books

Individualism and Economic Order

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