Return-Path: Received: from smtp1.linuxfoundation.org (smtp1.linux-foundation.org [172.17.192.35]) by mail.linuxfoundation.org (Postfix) with ESMTPS id 4876CEC5 for ; Wed, 16 Dec 2015 14:54:01 +0000 (UTC) X-Greylist: whitelisted by SQLgrey-1.7.6 Received: from mail-ig0-f180.google.com (mail-ig0-f180.google.com [209.85.213.180]) by smtp1.linuxfoundation.org (Postfix) with ESMTPS id 2B0BCEC for ; Wed, 16 Dec 2015 14:53:59 +0000 (UTC) Received: by mail-ig0-f180.google.com with SMTP id to4so67593537igc.0 for ; Wed, 16 Dec 2015 06:53:59 -0800 (PST) DKIM-Signature: v=1; a=rsa-sha256; c=relaxed/relaxed; d=gmail.com; s=20120113; h=mime-version:date:message-id:subject:from:to:content-type; bh=FNw+wQ7B5ztY3w9lknjzBgPemtkP8XuTLr+bGjR5vz8=; b=YIu4Z+SLP0ag5eW+ktJpn2WDA2RzkNHep8PcN6JxN0pzNB12DE0DkUSMky6HIlIZX1 JbrhOeaRwxBMMKVTzTx8NzvoO73m3/RhkWPoZ9+/Brc2UUl7tcl+EzodUZdQdts4LvPR zpBlqNzFqpAjpSHUzqSEa8tNKMzX5DYcfwyRo3EGCfyf48IP+f851dxx3/vca8TDnNfh 85Fs68k4laRldn/LM1b65oc47DR3x9Y+sN2LfIpeyA4/ZPCupQba+1KCdBB3XDQL3kT9 AzQRIvv5ykkvlDF0MRlu90DutkYQetlevtp4tWjIKPYUuKs915P8ImmwzIyuMyjl2Bk8 WSgg== MIME-Version: 1.0 X-Received: by 10.50.111.193 with SMTP id ik1mr9911551igb.23.1450277638543; Wed, 16 Dec 2015 06:53:58 -0800 (PST) Received: by 10.79.8.198 with HTTP; Wed, 16 Dec 2015 06:53:58 -0800 (PST) Date: Wed, 16 Dec 2015 09:53:58 -0500 Message-ID: From: Jeff Garzik To: Bitcoin development mailing list Content-Type: multipart/alternative; boundary=047d7b3a9c1478a1440527051382 X-Spam-Status: No, score=-2.7 required=5.0 tests=BAYES_00,DKIM_SIGNED, DKIM_VALID,DKIM_VALID_AU,FREEMAIL_FROM,HTML_MESSAGE,RCVD_IN_DNSWL_LOW autolearn=ham version=3.3.1 X-Spam-Checker-Version: SpamAssassin 3.3.1 (2010-03-16) on smtp1.linux-foundation.org Subject: [bitcoin-dev] Block size: It's economics & user preparation & moral hazard X-BeenThere: bitcoin-dev@lists.linuxfoundation.org X-Mailman-Version: 2.1.12 Precedence: list List-Id: Bitcoin Development Discussion List-Unsubscribe: , List-Archive: List-Post: List-Help: List-Subscribe: , X-List-Received-Date: Wed, 16 Dec 2015 14:54:01 -0000 --047d7b3a9c1478a1440527051382 Content-Type: text/plain; charset=UTF-8 All, Following the guiding WP principle of Assume Good Faith, I've been trying to boil down the essence of the message following Scaling Bitcoin. There are key bitcoin issues that remain outstanding and pressing, that are* orthogonal to LN & SW*. I create multiple proposals and try multiple angles because of a few, notable systemic economic and analysis issues - multiple tries at solving the same problems. Why do I do what I do -- Why not try to reboot... just list those problems? Definitions: FE - "Fee Event", the condition where main chain MSG_BLOCK is 95+% to hard limit for 7 or more days in row, "blocks generally full" This can also be induced by a miner squeeze (collective soft limit reduction). Service - a view of bitcoin as a decentralized, faceless, multi-celled, amorphous automaton cloud, that provides services in exchange for payment Users - total [current | future] set of economic actors that pay money to the Service, and receive value (figuratively or literally) in return Block Size - This is short hand for MAX_BLOCK_SIZE, the hard limit that requires, today, a hard fork to increase (excl. extension blocks etc.) Guiding Principle: Keep the Service alive, secure, decentralized, and censorship resistant for as many Users as possible. Observations on block size (shorthand for MAX_BLOCK_SIZE as noted above): This is economically modeled as a supply limited resource over time. On average, 1M capacity is available every 10 minutes, with variance. Observations on Users, block size and modern bidding process: A supermajority of hashpower currently evaluates for block inclusion based, first-pass, on tx-fee/KB. Good. The Service is therefore responsive to the free market and some classes of DoS. Good. Recent mempool changes float relay fee, making the Service more responsive to fast moving markets and DoS's. Good progress. Service provided to Users can be modeled at the bandwidth resource level as bidding for position in a virtual priority queue, where up-to-1M bursts are cleared every 10 min (on avg etc.). Not a perfectly fixed supply, definitionally, but constrained within a fixed range. Observations on the state of today's fee market: On average, blocks are not full. Economically, this means that fees trend towards zero, due to theoretically unlimited supply at <1M levels. Of course, fees are not zero. The network relay anti-flood limits serve as an average lower limit for most transactions (excl direct-to-miner). Wallet software also introduces fee variance in interesting ways. All this fee activity is range-bound on the low end. Let the current set of Users + transaction fee market behavior be TFM (today's fee market). Let the post-Fee-Event set of Users + transaction fee market behavior be FFM (future fee market). *Key observation: A Bitcoin Fee Event (see def. at top) is an Economic Change Event.* An Economic Change Event is a period of market chaos, where large changes to prices and sets of economic actors occurs over a short time period. A Fee Event is a notable Economic Change Event, where a realistic projection forsees higher fee/KB on average, pricing some economic actors (bitcoin projects and businesses) out of the system. *It is a major change to how current Users experience and pay for the Service*, state change from TFM to FFM. The game theory bidding behavior is different for a mostly-empty resource versus a usually-full resource. Prices are different. Profitable business models are different. Users (the set of economic actors on the network) are different. Observation: Contentious hard fork is an Economic Change Event. Similarly, a fork that partitions economic actors for an extended period or permanently is also an Economic Change Event, shuffling prices and economic actors as the Service dynamically readjusts on both sides of the partition, and Users-A and Users-B populations change their behavior. Short-Term Problem #1: No-action on block size increase leads to an Economic Change Event. Failure to increase block size is not obviously-conservative, it is a conscious choice, electing for one economic state and set of actors and prices over another. Choosing FFM over TFM. *It is rational to reason that maintaining TFM is more conservative* than enduring an Economic Change Event from TFM to FFM. *It is rational to reason that maintaining similar prices and economic actors is less disruptive.* Failure to increase block size will lead to a Fee Event sooner rather than later. Failure to plan ahead for a Fee Event will lead to greater market chaos and User pain. Short-Term Problem #2: Some Developers wish to accelerate the Fee Event, and a veto can accomplish that. In the current developer dynamics, 1-2 key developers can and very likely would veto any block size increase. Thus a veto (e.g. no-action) can lead to a Fee Event, which leads to pricing actors out of the system. A block size veto wields outsize economic power, because it can accelerate ECE. *This is an extreme moral hazard: A few Bitcoin Core committers can veto increase and thereby reshape bitcoin economics, price some businesses out of the system. It is less of a moral hazard to keep the current economics [by raising block size] and not exercise such power.* Short-Term Problem #3: User communication and preparation The current trajectory of no-block-size-increase can lead to short time market chaos, actor chaos, businesses no longer viable. In a $6.6B economy, it is criminal to let the Service undergo an ECE without warning users loudly, months in advance: "Dear users, ECE has accelerated potential due to developers preferring a transition from TFM to FFM." As stated, *it is a conscious choice to change bitcoin economics and User experience* if block size is not advanced with a healthy buffer above actual average traffic levels. *Raising block size today, at TFM, produces a smaller fee market delta.* Further, wallet software User experience is very, very poor in a hyper-competitive fee market. (This can and will be improved; that's just the state of things today) Short-Term Problem #4: User/Dev disconnect: Large mass of users wishes to push Fee Event into future Almost all bitcoin businesses, exchanges and miners have stated they want a block size increase. See the many media articles, BIP 101 letter, and wiki e.g. https://en.bitcoin.it/wiki/Block_size_limit_controversy#Entities_positions The current apparent-veto on block size increase runs contra to the desires of many Users. (note language: "many", not claiming "all") *It is a valid and rational economic choice to subsidize the system with lower fees in the beginning*. Many miners, for example, openly state they prefer long term system growth over maximizing tiny amounts of current day income. Vetoing a block size increase has the effect of eliminating that economic choice as an option. It is difficult to measure Users; projecting beyond "businesses and miners" is near impossible. Without exaggeration, I have never seen this much disconnect between user wishes and dev outcomes in 20+ years of open source. Short-Term Problem #5: Higher Service prices can negatively impact system security Bitcoin depends on a virtuous cycle of users boosting and maintaining bitcoin's network effect, incentivizing miners, increasing security. Higher prices that reduce bitcoin's user count and network effect can have the opposite impact. (Obviously this is a dynamic system, users and miners react to higher prices... including actions that then reduce the price) Short-Term Problem #6: Post-Fee-Event market reboot problem + general lack of planning Game it out: Blocks are now full (FFM). Block size kept at 1M. How full is too full - who and what dictates when 1M should be increased? The same question remains, yet now economic governance issues are compounded: In FFM, the fees are very tightly bound to the upper bound of the block size. In TFM, fees are much less sensitive to the upper bound of block size. Changing block size, when blocks are full, has a more dramatic effect on the market - suddenly new supply is magically brought online, and a minor Economic Change Event occurs. More generally, the post-Fee-Event next step has not been agreed upon. Is it flexcap? This key "step #2" is just barely at whiteboard stage. Short-Term Problem #7: Fee Event timing is unpredictable. As block size free space gets tighter - that is the trend - and block size remains at 1M, Users are ever more likely to hit an Economic Change Event. It could happen in the next 2-6 months. Today, Users and wallets are not prepared. It is also understandably a very touchy subject to say "your business or use case might get priced out of bitcoin" But it is even worse to let worse let Users run into a Fee Event without informing the market that the block size will remain at 1M. Markets function best with maximum knowledge - when they are informed well in advance of market shifting news and events, giving economic actors time to prepare. Short-Term Problem #8: Very little testing, data, effort put into blocks-mostly-full economics *We only know for certain that blocks-mostly-not-full works.* We do not know that changing to blocks-mostly-full works. Changing to a new economic system includes boatloads of risk. Very little data has been forthcoming from any party on what FFM might look like, following a Fee Event. Observation: In the long run, it is assumed we need a "healthy fee market" Yes, absolutely. In the long run, bitcoin was intended to be supported by transaction fees and not the minting of new supply, and the design of the system is to slowly wean Users off new supply and onto transaction fees for supporting the Service. While agreeing with the goal, it must be acknowledge that this is a vague and untested goal with many open economic questions -- more of a hope, really. It is more conservative to preserve current economics than to change to a new system with new economics and no notion of what-comes-next (flexcap?) in terms of system security, healthy sustainable market levels, and impact of changes during and following an ECE. Core recommendations: 1) "Short term bump" Block size increase to maintain buffer. I've no special BIP preference. This avoids moral hazard and avoids a major Economic Change Event, as well many other risks. 2) If block size stays at 1M, the Bitcoin Core developer team should sign a collective note stating their desire to transition to a new economic policy, that of "healthy fee market" and strongly urge users to examine their fee policies, wallet software, transaction volumes and other possible User impacting outcomes. 3) Even if can is kicked down the road, Fee Event will come eventually. Direct research, testing and simulations into the economics and user impact side of the equation. Research and experiment with pay-for-burst (pay to future miner), flexcap and other solutions ASAP. The worst possible outcome is letting the ecosystem randomly drift into the first Fee Event without openly stating the new economic policy choices and consequences. The simple fact is *inaction* on this supply-limited resource, block size, will change bitcoin to a new economic shape and with different economic actors, selecting some and not others. It is better to kick the can and gather crucial field data, because next-step (FFM) is very much not fleshed out. --047d7b3a9c1478a1440527051382 Content-Type: text/html; charset=UTF-8 Content-Transfer-Encoding: quoted-printable
All,

Following the guiding= WP principle of Assume Good Faith, I've been trying to boil down the e= ssence of the message following Scaling Bitcoin.=C2=A0 There are key bitcoi= n issues that remain outstanding and pressing, that are orthogonal to LN= & SW.

I create multiple proposals and try multiple angles because = of a few, notable systemic economic and analysis issues - multiple tries at= solving the same problems.=C2=A0 Why do I do what I do -- Why not try to r= eboot... just list those problems?

<= /div>
Definitions:

FE - "Fee Event", the condition where= main chain MSG_BLOCK is 95+% to hard limit for 7 or more days in row, &quo= t;blocks generally full" =C2=A0 This can also be induced by a miner sq= ueeze (collective soft limit reduction).

Service - a view of bitcoin as a decentralized, facel= ess, multi-celled, amorphous automaton cloud, that provides services in exc= hange for payment

Users - t= otal [current | future] set of economic actors that pay money to the Servic= e, and receive value (figuratively or literally) in return

Block Size - This is short hand for MAX_BLOCK_SI= ZE, the hard limit that requires, today, a hard fork to increase (excl. ext= ension blocks etc.)

Guiding Principle:

<= /div>
Keep the Service alive, secure, decentralized, and censorshi= p resistant for as many Users as possible.

Observations on block size (shorthan= d for MAX_BLOCK_SIZE as noted above):
This is economically modeled as a supply limited resource= over time.=C2=A0 On average, 1M capacity is available every 10 minutes, wi= th variance.

Observations on Users, block size and modern bidding process:

A supermajority of = hashpower currently evaluates for block inclusion based, first-pass, on tx-= fee/KB.=C2=A0 Good.

The Ser= vice is therefore responsive to the free market and some classes of DoS.=C2= =A0 Good.

Recent mempool changes= float relay fee, making the Service more responsive to fast moving markets= and DoS's.=C2=A0 Good progress.

Service provided to Users can be modeled at the bandwidth reso= urce level as bidding for position in a virtual priority queue, where up-to= -1M bursts are cleared every 10 min (on avg etc.).=C2=A0 Not a perfectly fi= xed supply, definitionally, but constrained within a fixed range.

Observations on the state of today's fee market:

On average, blocks are not full.=C2=A0= Economically, this means that fees trend towards zero, due to theoreticall= y unlimited supply at <1M levels.

Of course, fees are not zero.= =C2=A0 The network relay anti-flood limits serve as an average lower limit = for most transactions (excl direct-to-miner).=C2=A0 Wallet software also in= troduces fee variance in interesting ways.=C2=A0 All this fee activity is r= ange-bound on the low end.

Let the current set of Users + transactio= n fee market behavior be TFM (today's fee market).
Let the post-Fee-= Event set of Users + transaction fee market behavior be FFM (future fee mar= ket).

Key observation:= =C2=A0 A Bitcoin Fee Event (see def. at top) is an Economic Change Event.<= /b>

An Economic= Change Event is a period of market chaos, where large changes to prices an= d sets of economic actors occurs over a short time period.

A Fee Event is a notable Economic Change Event, = where a realistic projection forsees higher fee/KB on average, pricing some= economic actors (bitcoin projects and businesses) out of the system.
It is a major change to how current Users experience and pay for the S= ervice, state change from TFM to FFM.

The game theory bidding be= havior is different for a mostly-empty resource versus a usually-full resou= rce.=C2=A0 Prices are different.=C2=A0 Profitable business models are diffe= rent.=C2=A0 Users (the set of economic actors on the network) are different= .

Observation: =C2=A0Contentious hard fork is an Economic Chang= e Event.

Similarly,= a fork that partitions economic actors for an extended period or permanent= ly is also an Economic Change Event, shuffling prices and economic actors a= s the Service dynamically readjusts on both sides of the partition, and Use= rs-A and Users-B populations change their behavior.


Short-Term Problem #1: =C2=A0No-action on block s= ize increase leads to an Economic Change Event.

Failure to increase block size is not = obviously-conservative, it is a conscious choice, electing for one economic= state and set of actors and prices over another.=C2=A0 Choosing FFM over T= FM.

It is rational to reason that maintaining TFM is more conserv= ative=C2=A0than enduring an Economic Change Event from TFM to FFM.
<= b>
It is rational to reason that maintaining similar prices and economic= actors is less disruptive.

Failure to increase block size will = lead to a Fee Event sooner rather than later.

Failure to plan ahead = for a Fee Event will lead to greater market chaos and User pain.

Short-Term=C2=A0Problem #2: =C2=A0Some Developers wish= to accelerate the Fee Event, and a veto can accomplish that.

In the current developer dyn= amics, 1-2 key developers can and very likely would veto any block size inc= rease.

Thus a veto (e.g. no= -action) can lead to a Fee Event, which leads to pricing actors out of the = system.

A block size veto wields outsize economic = power, because it can accelerate ECE.

This is an extreme moral hazard: =C2=A0A few Bitcoin C= ore committers can veto increase and thereby reshape bitcoin economics, pri= ce some businesses out of the system.=C2=A0 It is less of a moral hazard to= keep the current economics [by raising block size] and not exercise such p= ower.

Short-Term=C2= =A0Problem #3: =C2=A0User communication and preparation

The current trajectory= of no-block-size-increase can lead to short time market chaos, actor chaos= , businesses no longer viable.

In a $6.6B economy, it is criminal to= let the Service undergo an ECE without warning users loudly, months in adv= ance: =C2=A0"Dear users, ECE has accelerated potential due to develope= rs preferring a transition from TFM to FFM."

As stated,=C2=A0it is a conscious choice to change bitcoin economics and User experience=C2=A0if block size is not advanced with a healthy buffer above actual av= erage traffic levels.

Raising block size today, at TFM, produces = a smaller fee market delta.

Further, wallet software User experi= ence is very, very poor in a hyper-competitive fee market. =C2=A0 (This can= and will be improved; that's just the state of things today)
Short-Term Problem #4: =C2=A0User/Dev disconnect: =C2=A0 Large = mass of users wishes to push Fee Event into future

Almost all bitcoin businesses, ex= changes and miners have stated they want a block size increase.=C2=A0 See t= he many media articles, BIP 101 letter, and wiki e.g.=C2=A0https://en.bitcoin.it/wiki/Block_size_limit_controversy#Entit= ies_positions

The curre= nt apparent-veto on block size increase runs contra to the desires of many = Users. =C2=A0(note language: "many", not claiming "all"= )

It is a valid and rational = economic choice to subsidize the system with lower fees in the beginning.=C2=A0 Many miners, for example, openly state they prefer long term syste= m growth over maximizing tiny amounts of current day income.

Vetoing= a block size increase has the effect of eliminating that economic choice a= s an option.

It is di= fficult to measure Users; projecting beyond "businesses and miners&quo= t; is near impossible.

Without= exaggeration, I have never seen this much disconnect between user wishes a= nd dev outcomes in 20+ years of open source.

Short-Term Problem #5: =C2=A0Higher= Service prices can negatively impact system security

Bitcoin depends on a virtuous cycle = of users boosting and maintaining bitcoin's network effect, incentivizi= ng miners, increasing security.

=
Higher prices that reduce bitcoin's user count and network effect = can have the opposite impact.

(O= bviously this is a dynamic system, users and miners react to higher prices.= .. including actions that then reduce the price)

Short-Term Problem #6: =C2=A0Post-Fee-Event market= reboot problem + general lack of planning

Game it out: =C2=A0 Blocks are now full (FFM).= =C2=A0 Block size kept at 1M.

How full is too full - who and what dictates when 1M should be increased= ?

The same question remains, yet= now economic governance issues are compounded: =C2=A0In FFM, the fees are = very tightly bound to the upper bound of the block size.=C2=A0 In TFM, fees= are much less sensitive to the upper bound of block size.

Changing block size, when blo= cks are full, has a more dramatic effect on the market - suddenly new suppl= y is magically brought online, and a minor Economic Change Event occurs.
More generally, the post-Fee-Event next step has not been agreed upon.= =C2=A0 Is it flexcap?=C2=A0 This key "step #2" is just barely at = whiteboard stage.

Short-Term Problem #7: =C2=A0 Fee Event timing is unpre= dictable.

As= block size free space gets tighter - that is the trend - and block size re= mains at 1M, Users are ever more likely to hit an Economic Change Event.=C2= =A0 It could happen in the next 2-6 months.

Today, Users and wallets are not prepared.

<= /div>
It is also understandably a very touchy subject= to say "your business or use case might get priced out of bitcoin&quo= t;

But it is even worse to le= t worse let Users run into a Fee Event without informing the market that th= e block size will remain at 1M.

Markets functio= n best with maximum knowledge - when they are informed well in advance of m= arket shifting news and events, giving economic actors time to prepare.=C2= =A0

Short-Term Problem #8: =C2=A0 Very litt= le testing, data, effort put into blocks-mostly-full economics

We only know for certain that blocks-most= ly-not-full works.=C2=A0 We do not know that changing to blocks-mostly-= full works.

Changing to a new economic system includes boatloads of = risk.

Very little data has been forthcoming from any party on what F= FM might look like, following a Fee Event.

Observation: =C2=A0 In the long run, it is assumed we ne= ed a "healthy fee market"

Yes, absolutely.=C2=A0 In the long run, bitcoin was intended to be suppor= ted by transaction fees and not the minting of new supply, and the design o= f the system is to slowly wean Users off new supply and onto transaction fe= es for supporting the Service.

<= div>While agreeing with the goal, it must be acknowledge that this is a vag= ue and untested goal with many open economic questions -- more of a hope, r= eally.

It is more conservative t= o preserve current economics than to change to a new system with new econom= ics and no notion of what-comes-next (flexcap?) in terms of system security= , healthy sustainable market levels, and impact of changes during and follo= wing an ECE.


Core recommendations:

1) "Short term bu= mp" =C2=A0Block size increase to maintain buffer.=C2=A0 I've no sp= ecial BIP preference.

This avoids moral hazard and= avoids a major Economic Change Event, as well many other risks.
=

2) If block size stays at 1M, the Bitcoin Core developer team sh= ould sign a collective note stating their desire to transition to a new eco= nomic policy, that of "healthy fee market" and strongly urge user= s to examine their fee policies, wallet software, transaction volumes and o= ther possible User impacting outcomes.
<= br>

3) Even if can is kicked down the road, Fee Event will come eventually.= =C2=A0 Direct research, testing and simulations into the economics and use= r impact side of the equation.=C2=A0 Research and experiment with pay-for-b= urst (pay to future miner), flexcap and other solutions ASAP.


The worst possible outcome is letting the ecosys= tem randomly drift into the first Fee Event without openly stating the new = economic policy choices and consequences.

The simple fact is=C2=A0inacti= on=C2=A0on this supply-limited resource, block size, will change bitcoi= n to a new economic shape and with different economic actors, selecting som= e and not others.

It is better to kick the can and gather crucial field d= ata, because next-step (FFM) is very much not fleshed out.


--047d7b3a9c1478a1440527051382--