On Wed, Nov 29, 2017 at 6:38 PM, Ben Kloester <benkloester@gmail.com> wrote:

Something similar to this has been proposed in this article by Ron Lavi, Or Sattath, and Aviv Zohar, and discussed in this bitcoin-dev thread https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2017-September/015093.html

They only discussed changing the fee structure, not removing the block size limit, as far as I know.

"Redesigning Bitcoin's fee market"
https://arxiv.org/abs/1709.08881

Ben Kloester

Thanks. Marginal pricing is equivalent to the "Monopolistic Price Mechanism" discussed in https://arxiv.org/abs/1709.08881. The mechanism is the same, including the block size adjustment, but as you noted the prior discussion only concerns the fee structure.

It looks like the prior proposal broke down because of Peter Todd's concern with out-of-band payments (https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2017-September/015103.html). Restated, miners can circumvent the system through out of band payments. Mark Friedenbach argues that out-of-band payments are penalized in part because the end-user could have just as easily bid higher instead of paying OOB. Peter Todd argues that a miner could mine only out-of-band transactions. Such transactions could have no on-chain fees and thus be disregarded by other miners.

I believe this OOB scenario is imaginary. Either it would be more profitable for a miner to mine fairly, or cheaper for the end-user to pay the fee in-band. Consider MINFEE to the the effective fee paid for the block mined by the OOB-incentivized miner. Consider MARKFEE to the the market fee collected by non-OOB-incentivized miners. Call the OOB effective tx fee OOB. Then,

For a user to prefer OOB: MINFEE+OOB<MARKFEE

For a miner to prefer OOB: MINFEE+OOB>MARKFEE

It is impossible for both scenarios to be true. As previously argued by Mark Friedenbach, the system disincentivizes OOB tx fees.

I don't think there is any more centralization pressure with marginal fees than before. What prevents miners from colluding to move tx fees OOB is the value of the on-band pending tx fees. The hashpower of individual miners is not impressive compared to the entire network, so individual miners could not offer a service to speed up confirmation that would be superior to simply doing a RBP. OOB fees are perhaps a symptom of the current setup, wherein there is no penalty for arbitrarily favoring individual transactions with lower fees.