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From: Peter R <peter_r@gmx.com>
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To: Benjamin <benjamin.l.cordes@gmail.com>
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Cc: Bitcoin Dev <bitcoin-dev@lists.linuxfoundation.org>
Subject: Re: [bitcoin-dev] "A Transaction Fee Market Exists Without a Block
	Size Limit"--new research paper suggests
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Thank you for the feedback, Benjamin.

> When you talk about a market, what are you referring to exactly?

I define what I mean by healthy, unhealthy, and non-existent markets in =
Section 7, and I show a figure to illustrate the supply and demand =
curves in each of these three cases.  A healthy market is defined as one =
where a rational miner would be incentivized to produce a finite block.  =
An unhealthy market is one where a miner would be incentivized to =
produce an arbitrarily large block.  A non-existant market is one where =
a miner is better off publishing an empty block.  I show that so long as =
block space in a normal economic commodity that obeys the Law of Demand, =
and that the Shannon-Hartley theorem applies to the communication of the =
block solutions between miners, that an unhealthy market is not =
possible. =20

>  A market means that demand and supply are matched continuously, and =
Bitcoin has no such mechanism.

Take a look at my definitions for the mempool demand curve (Sec 4) and =
the block space supply curve (Sec 5).  I show that the miner's profit is =
a maximum at the point where the derivatives of these two curves =
intersect.  I think of this as when "demand and supply are matched."

> ...I don't think a fee market exists and that demand or supply are not =
easily definable.

Do you not find the definitions presented in the paper for these curves =
useful?  The mempool demand curve represents the empirical demand =
measureable from a miner=92s mempool, while the block space supply curve =
represents the additional cost to create a block of size Q by accounting =
for orphaning risk. =20

> Ideally supply of transaction capability would completely depend on =
demand, and a price would exist such that demand can react to longterm =
or shorterm supply constraints.

Supply and demand do react.  For example, if the cost to produce block =
space decreases (e.g., due to improvements in network interconnectivity) =
then a miner will be able to profitably include a greater number of =
transactions in his block. =20

Furthermore, not only is there a minimum fee density below which no =
rational miner should include any transactions as Gavin observed, but =
the required fee density for inclusion also naturally increases if =
demand for space within a block is elevated.  A rational miner will not =
necessarily include all fee-paying transactions, as urgent higher-paying =
transactions bump lower-fee transactions out, thereby bidding up the =
minimum fee density exponentially with demand.

> In such a scenario there would be no scalability concerns, as scale =
would be almost perfectly elastic.

Agreed. =20

Best regards,
Peter

>=20
> On Tue, Aug 4, 2015 at 8:40 AM, Peter R via bitcoin-dev =
<bitcoin-dev@lists.linuxfoundation.org> wrote:
> Dear Bitcoin-Dev Mailing list,
>=20
> I=92d like to share a research paper I=92ve recently completed titled =
=93A Transaction Fee Market Exists Without a Block Size Limit.=94  In =
addition to presenting some useful charts such as the cost to produce =
large spam blocks, I think the paper convincingly demonstrates that, due =
to the orphaning cost, a block size limit is not necessary to ensure a =
functioning fee market. =20
>=20
> The paper does not argue that a block size limit is unnecessary in =
general, and in fact brings up questions related to mining cartels and =
the size of the UTXO set.  =20
>=20
> It can be downloaded in PDF format here:
>=20
> https://dl.dropboxusercontent.com/u/43331625/feemarket.pdf
>=20
> Or viewed with a web-browser here:
>=20
> =
https://www.scribd.com/doc/273443462/A-Transaction-Fee-Market-Exists-Witho=
ut-a-Block-Size-Limit
>=20
> Abstract.  This paper shows how a rational Bitcoin miner should select =
transactions from his node=92s mempool, when creating a new block, in =
order to maximize his profit in the absence of a block size limit. To =
show this, the paper introduces the block space supply curve and the =
mempool demand curve.  The former describes the cost for a miner to =
supply block space by accounting for orphaning risk.  The latter =
represents the fees offered by the transactions in mempool, and is =
expressed versus the minimum block size required to claim a given =
portion of the fees.  The paper explains how the supply and demand =
curves from classical economics are related to the derivatives of these =
two curves, and proves that producing the quantity of block space =
indicated by their intersection point maximizes the miner=92s profit.  =
The paper then shows that an unhealthy fee market=97where miners are =
incentivized to produce arbitrarily large blocks=97cannot exist since it =
requires communicating information at an arbitrarily fast rate.  The =
paper concludes by considering the conditions under which a rational =
miner would produce big, small or empty blocks, and by estimating the =
cost of a spam attack. =20
>=20
> Best regards,
> Peter
>=20
> _______________________________________________
> bitcoin-dev mailing list
> bitcoin-dev@lists.linuxfoundation.org
> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>=20
>=20


--Apple-Mail=_82C09D11-AEC1-497F-BA05-2290BD7F7896
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	charset=windows-1252

<html><head><meta http-equiv=3D"Content-Type" content=3D"text/html =
charset=3Dwindows-1252"></head><body style=3D"word-wrap: break-word; =
-webkit-nbsp-mode: space; -webkit-line-break: after-white-space; =
"><div>Thank you for the feedback, Benjamin.</div><div><br =
class=3D"Apple-interchange-newline"><blockquote type=3D"cite"><div =
dir=3D"ltr">When you talk about a market, what are you referring to =
exactly?</div></blockquote><div><br></div><div>I define what I mean by =
healthy, unhealthy, and non-existent markets in Section 7, and I show a =
figure to illustrate the supply and demand curves in each of these three =
cases. &nbsp;A healthy market is defined as one where a rational miner =
would be incentivized to produce a finite block. &nbsp;An unhealthy =
market is one where a miner would be incentivized to produce an =
arbitrarily large block. &nbsp;A non-existant market is one where a =
miner is better off publishing an empty block. &nbsp;I show that so long =
as block space in a normal economic commodity that obeys the Law of =
Demand, and that the Shannon-Hartley theorem applies to the =
communication of the block solutions between miners, that an unhealthy =
market is not possible. &nbsp;</div><div><br></div><div><blockquote =
type=3D"cite"><div dir=3D"ltr">&nbsp;A market means that demand and =
supply are matched continuously, and Bitcoin has no such =
mechanism.</div></blockquote><br></div><div>Take a look at my =
definitions for the mempool demand curve (Sec 4) and the block space =
supply curve (Sec 5). &nbsp;I show that the miner's profit is a maximum =
at the point where the derivatives of these two curves intersect. =
&nbsp;I think of this as when "demand and supply are =
matched."</div><div><br></div><blockquote type=3D"cite"><div =
dir=3D"ltr">...I don't think a fee market exists and that demand or =
supply are not easily definable. =
</div></blockquote><div><br></div><div>Do you not find the definitions =
presented in the paper for these curves useful? &nbsp;The mempool demand =
curve represents the empirical demand measureable from a miner=92s =
mempool, while the block space supply curve represents the additional =
cost to create a block of size Q by accounting for orphaning risk. =
&nbsp;</div><div><br></div><blockquote type=3D"cite"><div =
dir=3D"ltr">Ideally supply of transaction capability would completely =
depend on demand, and a price would exist such that demand can react to =
longterm or shorterm supply =
constraints.</div></blockquote><div><br></div>Supply and demand do =
react. &nbsp;For example, if the cost to produce block space decreases =
(e.g., due to improvements in network interconnectivity) then a miner =
will be able to profitably include a greater number of transactions in =
his block. &nbsp;</div><div><br></div><div>Furthermore, not only is =
there a minimum fee density below which no rational miner should include =
any transactions as Gavin observed, but the required fee density for =
inclusion also naturally increases if demand for space within a block is =
elevated. &nbsp;A rational miner will not necessarily include all =
fee-paying transactions, as urgent higher-paying transactions bump =
lower-fee transactions out, thereby bidding up the minimum fee density =
exponentially with demand.</div><div><br></div><div><blockquote =
type=3D"cite"><div dir=3D"ltr"> In such a scenario there would be no =
scalability concerns, as scale would be almost perfectly =
elastic.</div></blockquote><div><br></div>Agreed. =
&nbsp;</div><div><br></div><div>Best =
regards,</div><div>Peter</div><div><br></div><div><blockquote =
type=3D"cite"><div class=3D"gmail_extra"><br><div class=3D"gmail_quote">On=
 Tue, Aug 4, 2015 at 8:40 AM, Peter R via bitcoin-dev <span =
dir=3D"ltr">&lt;<a href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" =
target=3D"_blank">bitcoin-dev@lists.linuxfoundation.org</a>&gt;</span> =
wrote:<br><blockquote class=3D"gmail_quote" style=3D"margin:0 0 0 =
.8ex;border-left:1px #ccc solid;padding-left:1ex"><div =
style=3D"word-wrap:break-word"><div>Dear Bitcoin-Dev Mailing =
list,</div><div><br></div><div>I=92d like to share a research paper I=92ve=
 recently completed titled =93A Transaction Fee Market Exists Without a =
Block Size Limit.=94 &nbsp;In addition to presenting some useful charts =
such as the cost to produce large spam blocks, I think the paper =
convincingly demonstrates that, due to the orphaning cost, a block size =
limit is not necessary to ensure a functioning fee market. =
&nbsp;</div><div><br></div><div>The paper does not argue that a block =
size limit is unnecessary in general, and in fact brings up questions =
related to mining cartels and the size of the UTXO set. =
&nbsp;&nbsp;</div><div><br></div><div>It can be downloaded in PDF format =
here:</div><div><br></div><div><a =
href=3D"https://dl.dropboxusercontent.com/u/43331625/feemarket.pdf" =
target=3D"_blank">https://dl.dropboxusercontent.com/u/43331625/feemarket.p=
df</a></div><div><br></div><div>Or viewed with a web-browser =
here:</div><div><br></div><div><a =
href=3D"https://www.scribd.com/doc/273443462/A-Transaction-Fee-Market-Exis=
ts-Without-a-Block-Size-Limit" =
target=3D"_blank">https://www.scribd.com/doc/273443462/A-Transaction-Fee-M=
arket-Exists-Without-a-Block-Size-Limit</a></div><div><br></div><div><b>Ab=
stract. &nbsp;</b>This paper shows how a rational Bitcoin miner should =
select transactions from his node=92s mempool, when creating a new =
block, in order to maximize his profit in the absence of a block size =
limit. To show this, the paper introduces the block space supply curve =
and the mempool demand curve.&nbsp; The former describes the cost for a =
miner to supply block space by accounting for orphaning risk.&nbsp; The =
latter represents the fees offered by the transactions in mempool, and =
is expressed versus the minimum block size required to claim a given =
portion of the fees.&nbsp; The paper explains how the supply and demand =
curves from classical economics are related to the derivatives of these =
two curves, and proves that producing the quantity of block space =
indicated by their intersection point maximizes the miner=92s =
profit.&nbsp; The paper then shows that an unhealthy fee market=97where =
miners are incentivized to produce arbitrarily large blocks=97cannot =
exist since it requires communicating information at an arbitrarily fast =
rate.&nbsp; The paper concludes by considering the conditions under =
which a rational miner would produce big, small or empty blocks, and by =
estimating the cost of a spam attack. =
&nbsp;</div><div><br></div><div>Best =
regards,</div><div>Peter</div></div><br>__________________________________=
_____________<br>
bitcoin-dev mailing list<br>
<a =
href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org">bitcoin-dev@lists.li=
nuxfoundation.org</a><br>
<a href=3D"https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev"=
 rel=3D"noreferrer" =
target=3D"_blank">https://lists.linuxfoundation.org/mailman/listinfo/bitco=
in-dev</a><br>
<br></blockquote></div><br></div>
</blockquote></div><br></body></html>=

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