1. The ten-minute limit: The Bitcoin system is designed so that a block is produced, on average, every ten Most restaurants aren't going to want to wait 30 minutes to make sure your money's good before giving you your cup of coffee.
Perhaps a move to a block per minute or two,
Bitcoin wasn't meant to allow instant confirmation. That 10 minute wait was determined as the length necessary due to latency on a global network.
Obviously, that type of payment represents a lot of payment volume that bitcoin is leaving on the table. There have been multiple ideas on how to allow bitcoin to serve this function. None of the ideas address reducing the length of time to confirm blocks as there's no lower value that would solve the "point of sale" problem yet would still allow Bitcoin to work. As [Mike] from the forum put it, you either are "< 5 seconds or > 5 seconds". So neither 1 minute nor 10 minutes to confirm makes a difference for making point of sale more possible.
Right now, there is a solution. As long as both the merchant and customer use the same ewallet provider, transactions can be instantaneous. MyBitcoin works this way already today. Similarly, another solution might be simply to advance some amount to an account with the merchant or with some other intermediary. Consider if the mobile point of sale vendor Tabbed Out were to add bitcoins as a payment method, for example. They would hold your coins in their wallet so those coins would be spendable instantly regardless of which restaurant you dined at. With those solutions, however, you have the drawbacks where you must extend trust to an intermediary and also will lose some privacy.
One other idea includes a pure bitcoin method where low value transactions might be accepted as payment on receipt by the merchant with no confirmations. This method assumes however that there are listening posts on the network that would monitor for double spends and alert the merchants after any double spend attempts were discovered.
Additionally, there have been reports that work is underway to integrate bitcoin with the Open Transactions platform to allow transactions that are both anonymous (as far as the merchant knowing the buyer) and also are instant, requiring no confirmations. This too requires pre-paying bitcoins to the OT account that will be used for spending.
2. It seems like having a drastic drop like that could lead to some nasty effects.
With that drop, it's hard to imagine a substantial fraction not taking their machines offline and scaling down.
When it happens the drop from 50 to 25 will not come as a surprise.
Considering the worst case you describe (50% of mining capacity drops in response), instead of 14 days of 10 minute block confirmations it is 28 days of 20 minute block confirmations. Since transaction fees reflect a growing part of the block bounty, a 50% reduction in currency issued will not have a 50% reduction of income to the miners. Even so, is this big drop to the miners going to be felt? Yes. Is it a serious enough problem to force a change to the protocol? I wouldn't think so.
The fact that miners "get hit" is really not a concern. Bitcoin is likely already well beyond the amount of mining necessary to be protected from an attacker with lots of hashing power. It likely could survive just fine if half the the miners it currently has were to disappear at any point in time.
I'm aware that these limits and algorithms are hardcoded into the system now, and would require a change to every client in existence. However, that's not a sufficient reason to not have them implemented.
it's part of the algorithm, it can't be changed. :-)