Thanks Peter for the detailed explanation of your position. I do understand the thrust of your arguments but disagree over a number of areas...
There isn't going to be a single service that does this, that's my whole point: if you achieve scalability by just raising the blocksize, you wind up with all your trust is in a tiny number of validating nodes and mining pools. If you achieve scalability through off-chain transactions, you will have many choices and options.
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On the other hand, if the blocksize is raised and it leads to centralization, Bitcoin as a decentralized currency will be destroyed forever.
I am already concerned about the centralization seen in mining. Only a handful of pools are mining most of the blocks, so decentralization is already being lost there. Work is needed in two areas before the argument for off-chain solutions becomes strong: first blockchain pruning, secondly, initial propagation of headers (presumably with associated utxo) so that hashing can begin immediately while the last block is propagated and its verification done in parallel. These would help greatly to preserve decentralization.
MtGox and other sites are not a good place for people to leave their holdings permanently. As has been pointed out, most people will not run nodes to support the blockchain if their own transactions are forced or priced away from it. Bitcoin cannot be a store of value without being a payment system as well. The two are inseparable.
It might not be sexy and exciting, but like it or not leaving the 1MB limit in place for the foreseeable future is the sane, sober and conservative approach.
Unfortunately, this is the riskiest approach at the present time. The conservative approach is to steadily increase it ahead of demand, which maintains the status quo as much as market forces permit. The dead puppy transaction sources have forced this issue much earlier than would otherwise be the case.
You mention your background in passing, so I will just mention mine. I spent many years at the heart of one of the largest TBTF banks working on its equities proprietary trading system. For a while 1% of the shares traded globally (by value) was our execution flow. On average every three months we encountered limitations of one sort or another (software, hardware, network, satellite systems), yet every one of them was solved by scaling, rewriting or upgrading. We could not stand still as the never-ending arms race for market-share meant that to accept a limitation was to throw in the towel.
The block limit here is typical of default/preset software limits that have to be frequently reviewed, revised or even changed automatically.
The plane that temporarily choked on 700 passengers
may now be able to carry 20,000. Bitcoin's capacity while maintaining a desired level of decentralization may be far higher than we think, especially if a lot of companies start to run nodes. It just needs the chance to evidence this.