Quote from: db on November 22, 2010, 12:33:50 AM

Close to 100%. You will get few generators who selflessly sacrifice their own profits to keep prices up for their competitors.

Ill try and explain it more formally. (The entire system is quite complex, but Ill give it a go).

Limited and Unlimited domains:
Demand: Number of transactions. (Limited)
Demand Restriction: Amount that the bitcoin community is willing to spend on transactions. (Limited)
Demand Modifier: Priority to record transaction in block chain. (Choice)
Supply: Recording transactions in block chain. (Unlimited or limited, depending on block size, variable of interest.)
Supply Restriction: Cost of generating block. (Variable, Limited)
Supply Restriction, Restriction: Number of block generated / time. (Fixed, Limited)

Now, supply and demand would dictate that an unlimited resource (space in block chain) with a limited demand (Number of transactions) will tend towards no cost. This is the entire basis of the argument to limit the size of the block, to create a market to be included in such block. Ill explain later (another post, this is already getting long) that this effectively is an artificial tax on the entire bitcoin community, and will diminish the performance of the economy.

The main fallacy is that happening is that the real cost isnt just resource cost (dictated by supply and demand):

Resource Cost = Demand (transactions) / Resource Supply (space in block chain)
Supply Cost = Supply Restriction (Generation cost) * Supply Amount (Number of Transactions)
Cost = Resource Cost + Supply Cost + Profit

Even if the resource cost is 0, there still is a supply cost. This can is because of the restricted supply domain. (A restriction on supply is the inverse of supply)

But why doesnt the Supply Cost tend to zero also, through competition? This is a slightly less obvious, it depends on the time Doman: (number of block generated / time) fixed at around 1/10 bock per minute.

There is an unlimited supply of block in the timeless domain; this would normally push the price down to 0, making no incentive to produce blocks. However there is a restriction in the time domain: the number blocks generated per time.

Therefore the calculations can be summarized as the first partial derivative, in respect to time.

See Attachment eq1 and eq2.

Where c = cost, d = demand, s = supply, t = time.

you can see for any time period (t), the demand and supply can be non zero. (eq2) as s, and d are for the prescribed t.

So simply, a selfish generator will always be better off by charging the real cost of transactions. (In the time domain). That means that the selfish thing in the long run is to not accept low fee transactions.

Hope this heps. It is a bit of an over simplification, but I think it gets the basic message across.

Edit: Note, this is a simplification of supply and demand that works in percentage changed, and therefore limits and trends can be gleaned from it... It is _NOT_ useful in predicting absolute price.