Subject: Re: [bitcoin-dev] "A Transaction Fee Market Exists Without a Block Size Limit"--new research paper suggests

From: Hector Chu <[email-masked]>
Date: Wed, 5 Aug 2015 10:18:28 +0100

On 5 August 2015 at 09:33, Benjamin via bitcoin-dev <
[email-masked]> wrote:

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

Not all markets need to have highly liquid trading outlets in order to be
thought of as such. Inefficient markets are where there is an imperfect
matching mechanism.

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

Demand and supply are reflected in the market in the following two prices:
- BTC/USD
- Average transaction fee levels * Average transaction volume rate. In
other words, this is the block-by-block, remainder of the block reward
after subtracting the subsidy and priced in BTC.

Actually the first one is the only proxy reflecting the current and future
promise of Bitcoin, while the second only reflects the present. Miners
would be uniquely placed to know how best to vary the block size to
maximize their profit resulting from these two prices. The fact that they
are unable to is limiting their collective profits, reducing competition
between miners and increasing the average tx fee for users.

In that respect a dynamic block size voted on by miners periodically would
go some way to rectify this inefficiency. This needn't have to happen on
the block chain itself; we could have a continuous prediction market for
the block size, and the informed participants (miners) would stand to
profit from the uninformed from trading in such a market. How to get the
block chain to use the block size thus determined is another technical
matter.