I think we need to have a block size limit. My original objection against removing the block size limit was that, as the number of new coins per block drops to zero, mining incentive will also drop to zero, if you have nothing to keep transaction fee above zero (transaction capacity has to be "scarce"). The OP showed an entirely new way how things can go wrong if there is no block size limit.
I don't see how making the block size limit "auto-adjustable" is different in this respect from having no block size limit at all.
In my opinion, the future block size limit can be very high, to allow for very high (but not unlimited) transaction volume. But it has to be low enough to prevent all the problems related to unlimited block sizes.
See the paper I presented in this thread:
https://bitcointalk.org/index.php?topic=94674.0. In chapter 3, it contains some estimations about scalability of different concepts. I mention it here, because it contains some estimates about the number of transactions needed for different technologies, when used worldwide for all transactions. When assuming 2 transactions pppd for 10^10 people, these are some conclusions:
- normal Bitcoin system: 1e8 transactions/block
- when my proposed system is widely used: 1e5 transactions/block
That should give you an idea of how high the block size limit should be. Maybe it should even be a bit lower, to increase scarcity a bit, and for the current level of technology, to allow normal-PC users to verify the entire block chain. For comparison: the current limit is around 1e3 transactions/block.
So, as I've said before: we're running up against the artificial 250K block size limit now, I would like to see what happens. There are lots of moving pieces here, so I don't think ANYBODY really knows what will happen (maybe miners will collectively decide to keep the block size low, so they get more fees. Maybe they will max it out to force out miners on slow networks. Maybe they will keep it small so their blocks relay through slow connections faster (maybe there will be a significant fraction of mining power listening for new blocks behind tor, but blasting out new blocks not via tor)).
I'd like to see that too, since it's IMHO such an important piece of Bitcoin, and I'd rather have it tested now than when the whole world starts using Bitcoin; after successful halving of the block reward, this is the next big step.
I think we should put users first. What do users want? They want low transaction fees and fast confirmations. Lets design for that case, because THE USERS are who ultimately give Bitcoin value.
I think the users want more than that, at least in the current Bitcoin community. Bitcoins most unique characteristics come from its decentralized nature; if you lose that, everything else is in danger. If you just want low fees and fast confirmation, Bitcoin is not the right technology: it would be far more efficient to have a couple of centralized debit card issuers who issue properly secured cards without chargeback: every transaction only needs to be verified and stored once or twice, so there would be almost no costs (and hence almost no transaction fees) and confirmation would be near-instantaneous.