Quote from: zatoichi on December 29, 2013, 04:44:50 PM

I'm not sure I understand the economics here. I'm concerned about the final stage which is fee-based. I'm not sure how this fee would get set. Would the fee structure mimic the profitabity of mining for bitcoins? If not, would that drive out a lot of the network perhaps to the detriment of security?

There is limited space in the blockchain. As such, transaction creators that want their transactions confirmed in the next block will voluntarily offer a higher than average fee with their transaction to provide an incentive for miners to include the transaction in the next block. Those who want their transaction confirmed in the next few blocks will offer an average fee to provide an incentive for miners to include the transaction before including those transactions that offer a less than average fee. The transactions with a below average fee will have to waif until the transaction volume is low and there is spare space available in the block. If the fee offered is less than the cost of increased orphan risk, then most miners will never include the transaction in the block (providing a floor to the acceptable transaction fee if the sender, or receiver, ever wants the transaction to be confirmed).

Bitcoin is an experiment to see if the interaction of these economic forces are sufficient to provide incentive for a secure system.

There are several economic forces all influencing each other:

Diminishing block subsidy
Voluntary transaction fees
Limited block size
Target difficulty
Limited total bitcoin supply
Initial inflationary circulating supply
Eventual deflationary circulating supply
Random distribution of "winning" blocks weighted by hashing power
Perhaps some forces I haven't thought to include?

Only time will tell if the experiment is a success or not. Either way, it will be interesting to watch.