Problem is, how do you measure the number of bitcoins transmitted?...This also opens it up to manipulation...So while I think the fees as % of transfer is a nice number to work with in theory, in practice its not really available.
Whoops! You're right of course, and I was expecting at least a hole or two. Here's an alternative:
1)
Block size adjustments happen at the same time that network difficulty adjusts (every 210,000 tx?)2)
On a block size adjustment, the size either stays the same or is increased by a fixed percentage (say, 10%). This percentage is a baked-in constant requiring a hard fork to change.3)
The block size is increased if more than 50% of the blocks in the previous interval have a sum of transaction fees greater than 50BTC minus the block subsidy. The 50BTC constant and the threshold percentage are baked in.Example:
A block size adjustment arrives, and the current subsidy is 12.5BTC. The last 210,000 blocks are analyzed, and it is determined that 62% of them have over 37.5BTC in transaction fees. The maximum block size is increased by 10% as a result.
Instead of targeting a fixed percentage of fees (1.5% in my original proposal), this targets a fixed block value (measured in BTC). This scheme still creates scarcity while allowing the max block size to grow. One interesting property is that during growth phases, blocks will reward 50BTC regardless of the subsidy. If transaction volume declines, fees will be reduced. Hopefully this will be the result of Bitcoin gaining purchasing power (correlating roughly to the fiat exchange rate). For this reason, the scheme does not allow the block size to shrink, or else the transaction fees might become too large with respect to purchasing power.
Another desirable property is that a client can display a reasonable upper limit for the default fee given the size of the desired transaction. It is simply 50BTC divided by the block size in bytes, multiplied by the size of the desired transaction.
Someone could mine otherwise empty blocks with enormous looking fees... which, since they mined the block, they get back, costing them nothing. They could then work to expand the block size for whatever nefarious reason.
I believe this problem is solved with the new proposal. If someone mines a block with a huge fee, it still counts as just one block. This would be a problem if the miner could produce 50% of the blocks in the interval with that property, but this is equivalent to a 51% attack and therefore irrelevant.
The expected behavior of miners and clients is a little harder to analyze than with the fixed fee, can someone help me with a critique?
There is no reason to stick the total reward to 50 BTC because you need to consider the purchasing power. Although we only have 25 BTC block reward at this moment, finding a block now will give you >1000x more in USD than a 50 BTC block in 2009. A future miner may be satisfied with 1 BTC block if it is equivalent to US$10000 of today's purchasing power. However, the purchasing power is not mathematically determined and you cannot put it into the formula.
Also, requiring a total reward of 50BTC means requiring 25BTC in fee NOW. As the typical total tx fee in a block is about 0.25BTC, the fee has to increase by 100x and obviously this will kill the system.