Economically limited resource
Jeff Garzik wrote in February:
“Block size is VERY MUCH like bitcoin’s 21M limit, so a lot of care must be taken when changing MAX_BLOCK_SIZE logic. Block size is an economically limited resource whose production is tightly defined and controlled by algorithm, with an intentionally steady production rate (the 1MB limit).”
I have a number of comments on this statement.
21M of coins is an arbitrary non-economical limit which basically defines divisibility of the total amount of money. Actually, we have around 2100 trillion smallest units (1 Bitcoin is 100 000 000 units). If the limit was 42M it would only mean higher divisibility, not that we have more money in any useful sense.
“Economically limited” is not the phrase for something arbitrarily limited. There are things in the world that are arbitrarily scarce (e.g. amount of gold in the ground). Sometimes these limits can be stretched when it’s economically interesting. E.g. if we use up all the gold and need some more, we may find it profitable (or not) to synthesize it.
Block size is not even economically defined. Transaction fees are economically defined: you pay whatever fee you want and someone else will decide if it’s enough or not. Transaction fees are defined by the market. Miners compete for the fees, users compete for the place in a block. We may say that transaction fees are “economically limited”.
Bitcoin parameters (block size, hashing algorithms, block time interval) are more-or-less arbitrarily defined and all are economically changeable. If everyone finds it more useful to switch from SHA2 to SHA3 (e.g. because of some security threat) comparing to the costs of global transition, then we will switch. Block interval of 10 minutes was chosen to minimize the amount of orphaned blocks (wasted work) while the fresh block is being propagated over the network. Everyone wants lower latency, but no one wants to waste resources. It is unlikely that someday it will be useful to cut the time interval: for expensive transactions people may want to wait for several hours, so it does not matter how many blocks are created during that time: 10 or 100.
Likewise, the block size limit was introduced to prevent situation when blockchain gets too big before it is widely adopted. Imagine if in early days the whole chain was not 1 Gb, but 100 Gb, how many people would want to play with it? But in the long run blockchain will be huge anyway and it will be managed by specialised nodes (mining pools, shops, banks etc.) Miners would be paid out of transaction fees, so they (like in any other business) would tend to increase their throughput as much as economically possible. When amount of transactions will start hitting 1 Mb limit, transaction fees will go up and various clearing houses would start competing with the miners for the fees by clearing transactions outside the blockchain. If miners are capable of propagating bigger blocks with extra costs covered from the extra transaction fees, then they will be interested in raising the limit. Also, every clearing house, escrow, bank and shop would be interested in raising the block limit too as it will lower their costs. Of course, by extension, regular users will pay lower price and will be able to transact directly on the chain with lower fees. So they would desire bigger blocks too. Block size will thus be limited economically: it will grow as long as transaction fees cover extra costs.
Today block size is nominally limited by the protocol, but since most of the blocks are well below 1 Mb limit, the block size is really economically limited. When the hard limit starts manifesting itself in higher transaction fees, everyone involved will find it useful to increase the block size. Even Satoshi mentioned that hard block size limit is temporary to prevent blockchain from bloat before it is mature enough. So there is no point in political debates around the issue. We don’t know when exactly we will have a problem (maybe never), but when we do, almost everyone invested in Bitcoin will vote with their resources for raising the limit.