Here are example scenarios, with made up values for the penalty function. I assume for simplicity (not a necessary assumption) that there is endless demand for transactions paying 1mBTC fee, that typical blocks are around 2K txs, and that there are no minted coins. The pool clears at 1% per block.
Scenario 1: The network has 100 1% miners.
Every 1% miner knows he's not going to claim much of any penalty he pays, so he includes a number of transactions that maximize fees-penalty for the block. This happens to be 2K txs, with a total fee of 2 BTC and penalty of 1 BTC.
The equilibrium for the pool size is 100 BTC.
Miners get 2 BTC per block (2 fees + 1 pool collection - 1 penalty).
There are 2K txs per block.
Scenario 2: The network has 1 90% miner, and 10 1% miners.
The 1% miners build blocks with 2K txs, fee 2 BTC, penalty 1 BTC, like before.
The 90% miner knows that if he includes more txs, he'll be able to reclaim most of the penalty, so the marginal effective penalty exceeds the marginal fee only with larger blocks - say, which have 4K txs, 4 BTC fees, 4 BTC penalty.
The average penalty per block is 3.7 BTC. The equilibrium pool size is 370 BTC.
There are on average 3.8K txs per block.
A 1% miner gets, per block he finds, (2 + 3.7 - 1) = 4.7 BTC - more than in scenario 1!
The 90% miner gets, per block he finds, (4 + 3.7 - 4) = 3.7 BTC - less than small miners get in this scenario, but more than miners get in scenario 1!
Those examples do not stand. They hinge on the premise that
there is endless demand for transactions paying 1mBTC fee. I understand the need to simplify these demonstrations but that defeats the underlying premise of this entire discussion. You example assumes there is no competition over fees, which is the premise of a "no block limit + hard fees" system. Your system sets both soft and hard caps to the block size, so there is no reason to believe people will sit at a 1mBTC fee when there is an
endless demand for transactionsModel your demonstration with a fee structure using the Pareto principle i.e. 20% of the transactions pay for the 80% of the total fees available in the mempool (which is a lot closer to the current network's fee distribution than your examples), and the system falls apart. Anyone building blocks large enough to get penalized is just giving his rewards away to miners that prioritize big fee transactions and make a point of staying under the soft cap.
The issue with your proposal is not the penalty per say, it's the reward: there is a point where it is more profitable to let others get penalized. The existence of this point creates a threat that keeps all miners functioning below the soft cap. The threat is that they lose profitability in comparison to other pools, and those pools start siphoning away their hash rate as miners migrate.
I'm sorry, but I disagree. The scenarios don't "hinge" on this assumption, I just had to assume something in order to give concrete numbers. The effects I discussed should remain intact whatever the true transaction demand curve is.
The assumption also does not defeat the premise of the discussion, either. There is some demand curve for txs which depends on the real-world usage of the system, and we're talking about matching a supply curve to it. It's completely legitimate (though of course grossly exaggerated) to assume the demand curve is - infinite demand for txs with fee <1mBTC, and 0 for higher fees. With this hypothetical demand curve, fees will remain at 1mBTC because no one is willing to pay a higher fee, and no tx with lower fee will be accepted. In other words, the supply curve must intersect demand at its vertical drop line.
I'll try to repeat the calculations with a different demand curve, to demonstrate my point. But this will take some time and Shabbat is in soon, so that will have to wait.
As for the analysis, I also disagree. You can't "let others get penalized", every miner chooses his own penalty. The best you can do is penalize yourself, knowing that you'll reclaim the penalty later - but in so doing, you also increase the rewards for others.
The drawback is that since there is no reward, obviously the penalties are just destroyed. I'm not sure that's a drawback per say, for the following reasons:
1) It's trivial to blackhole bitcoins and it's been agreed that this is not damaging to the system. So this method isn't introducing some new DOS attacks on the system.
2) By destroying the penalty, the value of every other BTC just went up. As opposed to your system where you want to reward other miners from the penalties, this time everyone is getting rewarded, albeit in a much smaller magnitude. This means both miners, but everyone else holding coins is rewarded when a miner builds a block above the soft cap. Incidentally, that also means people running nodes (as long as they hold BTC, which is expectable).
Destroying coins in small amounts is not very harmful. But if done continuously as part of the system, it has negative macroeconomic implications.
per say
Grammar Nazi regulations state that if you make the same error twice in a discussion, you must be corrected. We're already at 4. It's "per se".