Right. If miners all agreed to behave in this way (e.g., pre-consensus by mining a practice chain first), then the fee market based on orphaning risk would break down. It would be equivalent to the propagation impedance in my fee-market paper falling to zero.
Assuming negligible block subsidies, why would miners agree to behave this way if that would collapse the fee market? How would security be funded?
First let's ask if they would behave this way with
today's block subsidies (the other question is harder to answer).
In order for the fee market to collapse (due to the propagation impedance falling to zero), no new information about the transactions included in the block may be transmitted during block-solution announcement. But if no new information was transmitted, then the miners must have already come to consensus on the state of the ledger. If that were case, then what purpose did mining the blocks fulfil?
Haha but there's a better way to show that the fee market won't collapse even if you ignore the absurdity in the previous paragraph. It goes like this:
1. In order for the miners to know another miner's block contents before that lucky miner finds a proof-of-work, all miners must somehow agree to what the possible block contents are
beforehand. Since coming to this agreement cannot happen instantly, this means that the transactions included in the block must all be delayed by at least time
T, where
T is the
consensus time. The current block would never include a transaction that was announced only a second before the block was found, because the miners couldn't have come to pre-consensus on it. In other words, if a miner included that new transaction it would mean that he'd have to transmit a non-zero amount of new information with his block solution announcement (he'd have to send the new TX as well), thereby violating the condition required for the fee market to collapse.
2. However, maybe that new transaction had a big juicy fee attached to it! If miners are free to build blocks according to their own volition--and if miners are rational profit maximizing agents--then there should exist some fee that would entice the miner to include that brand new TX in the block he's working on
even though doing so increases the amount of information he might have to send with his block solution announcement.
3. Lastly, if there are lots of transactions occurring on the network, then there will be a corresponding increase in the number of new TXs that pay decent fees that miners will want to immediately include in the blocks they're working on (i.e., they won't bother waiting for pre-consensus on some of those new TXs). If rational miners make the decision to immediately include those TXs (and they would because it would earn them more money than by never included brand new transactions) then the block solution announcements will contain an amount of information that also depends roughly linearly on the transactional throughput of the network (i.e., on the avg block size)!
TL/DR: A transaction fee market exists without a block size limit
assuming miners act rationally.