This is one of the most interesting threads I've seen here -- made an account to reply.

A lot of people have different ideas about the importance of this block size limit, and I think it's useful to separate opinions about what "should" happen, and more objective analysis of what "will" happen.

And thinking about it, to me it looks like the 1MB block size is here to stay.  I'm not really sure what that means for bitcoin, if it's "good" or "bad", but here's why I think it's permanent.

First, it's a hard fork.  Every node right now, to my knowledge, will reject any block coming in at over 1MB.  Miners included.  ANY kind of hard fork is going to be really hard to implement due to the size of the network.  But if a hard fork does benefit everyone, or almost everyone, it could be planned in advance and switched to at some date.  As long as most (substantially more than 51%) of nodes switch to the new protocol in a coordinated way, a hard fork change could work. (BTW, has this ever happened?  I haven't heard of it but maybe it has?)

But in the case of removing the 1MB limit, I don't think the agents involved here will agree.  Specifically, the miners.  SatoshiDice would certainly be on board for 1GB blocks, as would BitPay, Gox, and I'd imagine most end users.  But I think miners have incentive to maintain the 1MB limit.  The limit creates an (artificial?) scarcity for what they are providing / selling: inclusion in the block chain.  If there's only room for ~4K transactions per block, thus only ~1M transactions a day, a spot in that blockchain is going to be quite valuable if millions of people want in.  Transaction fees could be quite high, making only large transfers feasible.

A transition to larger block sizes would thus be resisted by miners.  While you might say, "Well, at 10MB / block there's potential for 10X as many transactions, thus 10X the fees" I don't think it would work that way.  But in fact, I don't think this will ever be tested; all you need is miners to resist this change due to uncertainty.  Some miners might like to increase the size limit, but many won't.  Having large groups of miners disagreeing on fundamental protocol aspects sounds like a disaster for bitcoin.  Basically, to me, the network of miners IS bitcoin; they provide the power to run the network, and are compensated to do so.  If the miners aren't 100% for it, it's just not going to happen.

So I'd like to hear from people who agree, but mostly who disagree with me; how do you think this modification of the protocol could play out?  How would the miners get on board?  Do you think miners would in fact want bigger blocks, and why?  This seems like a very relevant discussion to have right now.  We could be hitting 1MB blocks in a matter of months.