What is a fee event? As originally defined by core developer Jeff Garzik here, a fee event is an event where Bitcoin's blocks permanently fill up and thus some transactions must be rejected. As of today, there has not been a fee event because blocks are of variable size and over time, even transactions that include zero fee get into the blockchain. A fee event would be a situation where blocks remain completely full for an extended period of time (for instance 7 days in Garzik's definition). In this situation, zero fee transactions would be rejected by the network and even some fees below a particular threshold would not be included into the blockchain, ever.
According to most in the community, this sort of 'fee event' would spell doom to the Bitcoin experiment and must be avoided at all cost. In his recent medium post, Mike Hearn, in concluding bitcoin has failed stated: "Why has Bitcoin failed? It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked 'systemically important institutions' and 'too big to fail' has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse.". He went on to say, "The block chain is full. You may wonder how it is possible for what is essentially a series of files to be 'full'. The answer is that an entirely artificial capacity cap of one megabyte per block, put in place as a temporary kludge a long time ago, has not been removed and as a result the network’s capacity is now almost completely exhausted.". There are many others in the community that share this view point, that if Bitcoin blocks fill up, Bitcoin will be destroyed and not work properly.
In this post, I will attempt to explain my view (which may be considered heretical to some) that a fee event is a good thing because it indicates that Bitcoin has succeeded. Furthermore, I will argue that it something we should encourage to happen sooner, rather than later due to the fact that it is inevitable if Bitcoin is to succeed.
First, lets start with the numbers. In a recent block that was almost (973.8 kB), a total of 2081 transactions confirmed. As an approximation, lets say that each 1mb of block can contain approximately 2000 transactions. If blocks occur every 10 minutes, that implies a limit of around 3.33 transactions per second. This number may not be exact, but it is within an order of magnitude at least. According to recent work by Jonathan Toomim, a block size of 3mb is indicated to be the largest size that is safe. This number is based on his experiments on the testnet. So, that would imply a limit of about 10 transactions per second (3 X 3.33 ~= 10). With upcoming technology (like Xtreme Thinblocks and others), we might be able to increase this number, but even then we're ultimately limited by the fact that all transactions must be broadcast to all participants in the network. This results in an O(n^2) scaling which is generally considered not acceptable. Where does this put us in terms of other payment networks? According to VISA, their peak capacity is 47,000 tps. While their annual average appears to be around 2,000 - 4,000. According to 2011 numbers, 282 million people have VISA cards (or 4% of the world's population). Even for that 4%, they don't exclusively user their VISA cards for purchases. For Bitcoin, we want to do better than that, but as these numbers illustrate, even tens to hundreds of thousands of transactions would not satisfy the world's demand for payments. The block sizes required for these amounts are unfathomable today and, even if we experience 17.7% growth in bandwidth and other technologies (as indicated as the growth rate of bandwidth by Cisco referenced by Peter Wuille in BIP103), there is little hope for Bitcoin as is to scale to the levels required to support all the world's transactions any time soon. This is not even to get into settling stocks/bonds/and other securities on the blockchain.
This means, that without question, unless Bitcoin is a failure (or just a niche success), Bitcoin blocks will eventually fill up. Therefore, a fee event indicates success of the Bitcoin network because it means that demand outstrips supply. The real questions the community should be asking is: when do we want them to fill up? and what do we do when they do fill up?
Regarding the former question "when do we want them to fill up?", it seems that many in the community want the blocks to fill up as far into the future as possible. But, in reality, that is only delaying the inevitable. Blocks will fill up, and it may be hard to accept, but we need a plan for how to handle it. When thinking about this question, one thing to keep in mind is that currently the people involved in the Bitcoin community are generally very bright and generally in a better position to understand the situation and react than the broader population. Also, very few people are dependent on Bitcoin today. Therefore, we have an opportunity to build something that we can demonstrate works before mass adoption and work out the kinks so to speak. In my view, we should take advantage of this time we have and build a sustainable system. This would lead me towards the conclusion, that we should let the fee event happen now and deal with the consequences while we're still young. Once the block size limit is reached, the block size can be increased to lower fees as long as it doesn't bring us beyond the true capacity of the system.
That brings us the question of what do we do when the blocks fill up? Fortunately, even if we do nothing at all (or practically nothing), Bitcoin could most likely be used as a new global reserve currency and serve as a more fair, secure, and verifyable gold standard. See a blog entry from 2011, in which Nick Szabo indicated (in the comment section) that he thought that "Bitcoin may be destined to become a high-powered money rather than a day-to-day payment system for the masses.". While this isn't the most ambitious of goals for the Bitcoin community, it's clearly an improvement over the present day system. In that scenario, intermediaries like Coinbase and other Bitcoin banks would use Bitcoin to settle with each other once a day and allow instant, low cost, micropayments between users without including the transactions on the block chain. The Bitcoin banks would settle with each other periodically or possibly use payment channels to do so instantly. The main benefits over the existing system is that fractional reserve banking would be impossible because consumers would demand to see proof of reserves from their bitcoin banks. Proof of reserves could also serve to reduce the costs of auditing and make it reliable as well. The controlled (and known) supply of Bitcoin is superior to the properties of Gold because we know how much Bitcoin exists at any given time and don't have to worry about a big discovery, or something similar. We'd also have the benefits of being on something much similar to a gold standard.
But more ambitious projects like Lightning Network promise to scale Bitcoin enough to bring it to the masses with more reasonable block sizes which are bigger than today, but within the realm of possibility in the near future. I'm optimistic that Lightning Network and other things (some yet discovered) will allow us to scale as we all hope, but in either case, my hope is the community will accept this reality and start planning for a realistic future for Bitcoin and allow it to reach it's true potential.
4 comments:
1. 17.7% per year is not that bad
According to Jonathan Toomim, 3Mb is pretty safe (note: it doesn't mean that 4 mb blocks would kill Bitcoin; it just means that ~10 transactions per second would be pretty safe now; it is quite possible that current hardware could support much higher throughput, Gavin Andresen experimented with 20Mb blocks over a year ago).
If we start with a conservative rate of 10 transactions per second, 17.7% per year would bring us to ~120 millions transaction a second in 100 years, and the current VISA-level peak transaction rate can be reached in ~52 years (if no other optimizations are being made).
With optimizations Bitcoin will probably be able to handle the current average VISA-level transaction rate in a decade or two.
That's not so bad because adoption takes time too. If the demand grows quicker than throughput then the Lightning Network will get traction. Nobody opposes the Lightning Network, but the block chain capacity should not be arbitrarily constrained.
2. It is better to have a fee event after Bitcoin becomes the mainstream and the block reward becomes negligible.
The block reward is here to subsidise the transaction fees. If the fee event happened in 2009, Bitcoin would never get traction. Higher the fees -> slower the adoption -> higher the risks of holding bitcoins.
Amount of hashing power needed to secure the network doesn't depend on amount of transactions in block. More transactions in block - lower the fees per transaction.
Would you have advised Mark Zuckerberg back when Facebook had only 100,000 users, "Hey Mark -- we'll need to monetize eventually anyway, why not put a bunch of ads on Facebook now?? Ads are a sign of success!"?
It's true that being in a position where you can advertise is a sign that you've been successful. That doesn't imply that advertising whenever you can is a good idea.
Similarly, yes, blocks being full at 1 MB is a sign that Bitcoin is more successful than it might have been in some alternate reality. That fact alone doesn't suggest that not raising the block size is somehow the best path forward.
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