It is my professional opinion that raising the block size by merely adjusting a constant without any sort of feedback mechanism would be a dangerous and foolhardy thing to do. We are custodians of a multi-billion dollar asset, and it falls upon us to weigh the consequences of our own actions against the combined value of the entire bitcoin ecosystem. Ideally we would take no action for which we are not absolutely certain of the ramifications, with the information that can be made available to us. But of course that is not always possible: there are unknown-unknowns, time pressures, and known-unknowns where information has too high a marginal cost. So where certainty is unobtainable, we must instead hedge against unwanted outcomes.

The proposal to raise the block size now by redefining a constant carries with it risk associated with infrastructure scaling, centralization pressures, and delaying the necessary development of a constraint-based fee economy. It also simply kicks the can down the road in settling these issues because a larger but realistic hard limit must still exist, meaning a future hard fork may still be required.

But whatever new hard limit is chosen, there is also a real possibility that it may be too high. The standard response is that it is a soft-fork change to impose a lower block size limit, which miners could do with a minimal amount of coordination. This is however undermined by the unfortunate reality that so many mining operations are absentee-run businesses, or run by individuals without a strong background in bitcoin protocol policy, or with interests which are not well aligned with other users or holders of bitcoin. We cannot rely on miners being vigilant about issues that develop, as they develop, or able to respond in the appropriate fashion that someone with full domain knowledge and an objective perspective would.

The alternative then is to have some sort of dynamic block size limit controller, and ideally one which applies a cost to raising the block size in some way the preserves the decentralization and/or long-term stability features that we care about. I will now describe one such proposal:

  * For each block, the miner is allowed to select a different difficulty (nBits) within a certain range, e.g. +/- 25% of the expected difficulty, and this miner-selected difficulty is used for the proof of work check. In addition to adjusting the hashcash target, selecting a different difficulty also raises or lowers the maximum block size for that block by a function of the difference in difficulty. So increasing the difficulty of the block by an additional 25% raises the block limit for that block from 100% of the current limit to 125%, and lowering the difficulty by 10% would also lower the maximum block size for that block from 100% to 90% of the current limit. For simplicity I will assume a linear identity transform as the function, but a quadratic or other function with compounding marginal cost may be preferred.

  * The default maximum block size limit is then adjusted at regular intervals. For simplicity I will assume an adjustment at the end of each 2016 block interval, at the same time that difficulty is adjusted, but there is no reason these have to be aligned. The adjustment algorithm itself is either the selection of the median, or perhaps some sort of weighted average that respects the "middle majority." There would of course be limits on how quickly the block size limit can adjusted in any one period, just as there are min/max limits on the difficulty adjustment.

  * To prevent perverse mining incentives, the original difficulty without adjustment is used in the aggregate work calculations for selecting the most-work chain, and the allowable miner-selected adjustment to difficulty would have to be tightly constrained.

These rules create an incentive environment where raising the block size has a real cost associated with it: a more difficult hashcash target for the same subsidy reward. For rational miners that cost must be counter-balanced by additional fees provided in the larger block. This allows block size to increase, but only within the confines of a self-supporting fee economy.

When the subsidy goes away or is reduced to an insignificant fraction of the block reward, this incentive structure goes away. Hopefully at that time we would have sufficient information to soft-fork set a hard block size maximum. But in the mean time, the block size limit controller constrains the maximum allowed block size to be within a range supported by fees on the network, providing an emergency relief valve that we can be assured will only be used at significant cost.

Mark Friedenbach

* There has over time been various discussions on the bitcointalk forums about dynamically adjusting block size limits. The true origin of the idea is unclear at this time (citations would be appreciated!) but a form of it was implemented in Bytecoin / Monero using subsidy burning to increase the block size. That approach has various limitations. These were corrected in Greg Maxwell's suggestion to adjust the difficulty/nBits field directly, which also has the added benefit of providing incentive for bidirectional movement during the subsidy period. The description in this email and any errors are my own.