Quote from: jonny1000 on October 17, 2014, 11:35:45 PM

Let take a step back and consider why we even have the option for transaction fees in the first place? In this post I attempted to outline four possible reasons:

https://bitcointalk.org/index.php?topic=669243.0

If there is no scarcity in block space and it is not to incentivise miners then the primary reasons for the transaction fee seem to disappear. In reality this is not the case, transaction fees are an integral, necessary and crucial part of Bitcoin.

The market for transaction fees can be considered in some ways which make it appear to look fundamentally different from a normal market from certain perspectives, however I understand many viewpoints expressed which imply it is a normal type of market. I personally struggle with both of these concepts a lot.

Lets consider again the two primary reasons for the transaction fee: (Once the block reward becomes low)

All users of Bitcoin benefit from a secure network and a tragedy of the commons type problem could occur, in the sense that Why should I pay a transaction fee for my transaction, when others could pay the higher fee to incentivise miners? This problem clearly occurs for the second "reason" and not the first.

A market based mechanism could work for the first reason for the transaction fee, but not the second. This is why I propose that an artificial scarcity is required, this would manipulate the otherwise normal market for transaction fees, such that mining incentivisation occurs as an indirect benefit of users wanting their transactions included in blocks. The arrow in the above image represents the transactions fees being used to incentivise an activity/"reason" which the users are not directly paying for.

I understand that in many peoples minds, the distinction between reasons for the transaction fee is not necessary or relevant and mining is just mining, whatever the "reason". However, I think the above illustrates the economic dynamics of the transaction fee is not as simple as some people think and the network can be analysed in a number of valid ways. When the block reward does fall to an economically low level I do not know what will happen, but it is important to try to look at the system from many different angles now to prepare for this.

Transaction fees also serve an anti-spam (by non-miner) function. Miners can of course insert as many transactions into their own blocks and only pay themselves the fees, or no fees, limited to the MAX_BLOCK_SIZE.

Gavin's paper does a very good job of describing some of the motivations and incentives in the blocksize economics. It does not address any of the economics outside of the bitcoin economy which may have incentives to do things against the interests of the success of Bitcoin network. It may make sense to mention some of these for purpose of example as a 3rd.

Allowing arbitrarily large block size could result in non-economic acts, or rather economic acts within a larger economy than is constrained to the scope of the Bitcoin economy.
For example with an arbitrarily large MAX_BLOCK_SIZE, a mining group hostile to the success of Bitcoin with 1.1% of the network could feasibly solve 1.45 blocks per day on average. If they did so with very large blocks, such that fully 1/3 of their blocks were orphaned and was sending 1GB blocks, this could grow the block chain by 1GB per day.
Such activity could isolate hobbyists, many of the small nodes, as well as much of the Southern Hemisphere due to bandwidth constraints. So some nationalist interest that seeks to advance its Bitcoin presence WRT what it may see as its competitors could accomplish this.

Also there do exist "Free" computing and network resources (resources not paid for by those that control them), such that mining activity can be conducted by non-economic actors at below the bandwidth and computing costs. The deployment of such "Free" resources cuts into the profitability of ALL miners. Thus making marginal cost = zero for this population.