To clarify once more, I'm all for people researching and building ways to make Bitcoin better and safer. And debating that here is cool too.

The "replace by fee" patches don't do this; as you said yourself the whole scorched earth thing makes no sense. It's not a solution to anything and it's important people realise that.

Perhaps it will help if I spell out why this whole approach won't work (but can easily damage bitcoin a lot along the way).

Normal Bitcoin nodes pick which transaction to put into a block by simply selecting whichever they saw arrive first, as determined by the arrival order of network packets. This rule is simple and has multiple advantages for people using Bitcoin to buy and sell things.

Replace-by-fee changes this so nodes select whichever chain of unconfirmed transactions pays the highest miner fees. Up until the point that a transaction appears in a block, anyone can broadcast a double spend (or a spend of an unconfirmed transaction) which pays higher fees than before, causing that tx chain to become the candidate for chain inclusion.

Peter argues that this is stable and makes unconfirmed transactions safe because a fraudster can buy something, walk out of the shop, and broadcast a double spend with a higher fee. But then the merchant can re-spend the original payment back to themselves with an even higher fee than that. Then the fraudster can re-spend their double spend with an even higher fee than that, and so on back and forth, until all the money has been spent to miner fees. Thus the merchant loses their goods but the fraudster has still "paid" in some sense because they don't get the money either.

This argument makes no sense for two reasons.

The first is that this setup means miners can steal arbitrary payments if they work together with the sender of the money. The model assumes this collaboration won't happen, but it will. Because no existing wallet has a "double spend this" button, to make the scheme work the dishonest miners must create and distribute such a wallet that implements the whole scorched-earth protocol. At that point it's easy for miners to reward the payment fraudster with some of the stolen money the merchant lost, meaning it now makes sense for the fraudster to always do this. The situation isn't stable at all.

The second is that it incentivises competitors to engage in payment fraud against each other. A big rich coffee shop chain that is facing competition from a small, scrappy newcomer can simply walk into the new shop and buy things, then trigger the "scorched earth". Even with no miner collaboration, this means the big company is down the cost of the product but so is the little company who lost everything. Whoever can outspend the other wins.

We don't really need game theory to tell us that this plan is a bad idea. Just imagine trying to explain it to an actual shop keeper. They would think you were crazy. Bitcoin is already a hard enough concept to understand without throwing into the mix "anyone can burn the money they gave you after walking out of the shop".