On Wed, Feb 13, 2013 at 10:38 PM, Gregory Maxwell <gmaxwell@gmail.com> wrote:
On Wed, Feb 13, 2013 at 6:44 PM, Stephen Pair <stephen@bitpay.com> wrote:
>(by which I mean the fee or cost associated with the bandwidth and validation that a transaction requires) with some amount of profit.  This means that the relay node will not fetch and propagate those transactions whose fee is too small (unless there was some other fee structure outside the miners fee).

The only fee-or-cost they're worrying about is their own marginal
costs.  This says nothing about the externalized cost of the hundreds
of thousands of other nodes which also must validate the block they
produce, many of which are not miners— if we are well distributed— and
thus don't have any way to monetize fees.  

But this is exactly the point I'm making...the thousands of other nodes do have a way to monetize the work they do in relaying and validating transactions.  Miners will pay them for the prompt delivery of profitable transactions.  So, in effect, the block reward and transactions fees will be paying not only for the mining work, but also the validation and relaying work.  Such nodes would get paid in micro transactions from the miners for that service.  This would be one way that full nodes could operate profitably (there may be many other indirect ways).  I think decentralization is pretty much guaranteed because anyone with profitable transactions would only deliver them to miners or other peers that are willing to pay for them.  This is in effect a rebate of a portion of the transaction fee to the network for delivering the transaction to the miner.  Wallet software might cut out the middle men and submit directly to miners...other nodes with access to a large amounts of transactions and good infrastructure might be able to reduce the infrastructure a miner has to maintain and deliver a larger volume of fee bearing transactions.  And everyone would have a very good sense of the market price for transaction fees for a given level of service (speed of block inclusion).

The other side of it is that wallets will need to receive valid, wallet relevant transactions.  They may also need to connect with multiple nodes for independent verification of the validity of their transactions.  But I think that cost would be more than covered with fees they include in any transactions they originate (but if they rarely originate fee bearing transactions, they might need to pay something to keep receiving an incoming transaction feed...it could be as simple as an artificial transaction they pay to themselves, but that includes a fee).

A while back everyone was worried that a tragedy of the commons situation would develop whereby all transactions that carried any fee at all would get included by miners, thus destroying the mining business as the block reward diminished...but I think the cost involved in relaying and validating transactions ensures that situation won't develop...mining nodes will have to only connect to relaying and validating nodes such that they can filter down the volume to something that's profitable for them...and relaying and validating nodes will ignore transactions with fees that are too low to be profitable.

It will be a few years before we see the kinds of volumes that will force this infrastructure to evolve...I don't think there is an issue with lifting or even eliminating the block size limit...there may be a point at which the volume is sufficient enough that full nodes start dropping offline...and the nodes that do remain will have to increasingly find ways to cover their costs...which will be a forcing function for solutions similar to these.  There is no doubt that Bitcoin will be a lot more valuable if it can handle very large volumes of transactions.  

Also, Mike Hearn has done some analysis that suggests that even at Visa scales, the hardware requirements to do full validation and relay may not all that substantial (enabling lots of small, but profitable, node operators and low transactions fees...the key to profitability would be access to a sufficient number of original transactions bearing fees).