November 4, 2014

In the future when Bitcoin mining is no longer as heavily subsidized as it
is today, the problem is compounded by the fact that the network’s security is
relative to the amount of transaction fees assessed. If transaction fees are low,
the comparative network security must be low. If transaction fees are high,
it is likely that fewer transactions will be performed on-chain14 which would
also contribute to lower network security and an easier opportunity to attack.
It may very well be the case that older, less efficient pieces of silicon known as
ASICs that can only perform Bitcoin POW may find new life and profitability
in attacking the Bitcoin network.

I finally had a spare moment to contemplate the variables.

A key factor is the block size. If the block size is unlimited (and bandwidth is an insignificant cost), then unless miners have a monopoly they will accept transactions with fees as low as don't constitute a DoS attack, in order to maximize revenue.

In other words, they would have no pricing power at all (a Tragedy of the Commons) and the system would devolve into a partial-monopoly in order to gain pricing power.

A partial-monopoly in this case is enough % of the network hashrate to delay transactions (by that % of blocks) which do not include a sufficient fee.

If we limit block size, then the system doesn't scale.

If we let the Bitcoin foundation decide when to increase block size, then they control the economic market function, i.e. we've centralized Bitcoin.

Let us assume unlimited block size and partial-monopolies. Thus the transaction fee can always be forced higher in order to generate more revenue for the miners. Thus Bitcoin devolves (as coin rewards diminish) to a system that presents spenders with a choice between include a very high transaction fee or accept an ever increasing delay for confirmation. This will exacerbate as coin rewards diminish and volume of transactions increase.

If we instead assume limited block size, then the Bitcoin foundation will set the transaction fees, not the market.

Bitcoin is a broken design.

In any P2P currency, there are only 3 choices, or combination of them.

You fund miners from savers.
You fund miners from spenders.
You let the government provide the mining. A public need so the economy doesn't stop.
1 is not available to Bitcoin long-term, because debasement is halving every four years.

2 penalizes economic activity, which is more important than burying money, ahem saving. Also it doesn't scale, unless it is uniform in the protocol. Gavin wrote making it uniform won't work in the market.

3 is thus the outcome for Bitcoin. (as designed by Satoshi)