Businesses need certainty of excess capacity

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Steve Sokolowski
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Joined: Wed Aug 27, 2014 3:27 pm
Location: State College, PA

Businesses need certainty of excess capacity

Post by Steve Sokolowski » Fri Dec 04, 2015 6:18 pm

One of the most common arguments on the Internet against the adoption of BIP 101 is that the block sizes proposed in BIP 101 are far larger than most of the other proposals put forward in the blocksize debate. Whereas the most conservative proposals increase blocksize by as little as 17% per year, BIP 101 doubles the maximum size of blocks every other year. In addition, the start point of BIP 101, 8MB, is higher than the 1MB or 2MB that many of the other proposals suggest.

Compared to these other proposals, BIP 101 seems excessive, especially in regards to the initial 8MB blocks. While many are in agreement that the network is constrained right now, few believe that current demand exists for such large blocks. Transactions are probably unlikely to fill up blocks initially after BIP 101 is adopted.

Some are opposed to BIP 101 not because they believe there are technical limitations, but solely because they see current growth levels as not in line with BIP 101's proposed trajectory. These people are wrong because they are confusing cause and effect. Bitcoin is now well-known across the financial industry, so transaction volume is not limited by lack of utility. Bitcoin transaction volume and business investment is limited by the blocksize and the perception of the blocksize in the future.

When presented with the specifications of a system, business owners don't think about limiting their services. They are in highly competitive industries where they cannot succeed by simply creating an equal to a current service, and they have many opportunities to invest their money. They think: "my solution will put 10 transactions per second on the blockchain, but the 2MB patch has only raised capacity to 8." They don't care what capacity is now; since development often takes years before a product is released, they care what it will be when they are ready to use it. Building capacity for the current maximum usage curve causes business owners to see that their solutions will not work when the solutions are ready because the blockchain will be just below the crisis level at that time.

This is why BIP 101 is so important, because it provides capacity that currently seems excessive, but which executives look at with glee thinking "wow, look at all the cool stuff I can do with this!" When their thoughts are "oh no, my business will fail if customers must wait 12 hours to receive their withdrawals in 2 years," they divert their funds towards private blockchains, where they can control the rate of growth without this risk.

But even more critical than capacity is capacity planning. I talked about how 2-4-8 is a failure in one way because it promises unending and continual conflict. BIP 100, in particular, is discouraging to entrepreneurs for a different reason - because it does not allow innovators to count on the network. There is no guarantee under BIP 100 that miners will respond to an increase in transactions with a blocksize increase, since that scenario cannot be tested before deployment. Even if miners do vote for an increase, who owns mining power changes over time and there is no guarantee that miners will behave the same way the next time. But the real harm for businesses is that BIP 100 miners have the ability to reduce capacity. The ability to reduce capacity is perhaps a fatal flaw in BIP 100.

Remember that miners are not incentivized to increase block sizes because they pay less for bandwidth and make more transaction fees on smaller blocks. Reducing capacity allows miners to earn more in transaction fees at the expense of everyone else. It is relatively simple to reduce capacity and very difficult to increase it under Garzik's proposal; only 20% need to agree in order to reduce capacity with BIP 100. Miners and investors do not have aligned incentives, since many miners (like us) simply sell off everything we earn to ensure dependable earnings.

This exposes a profitable business model: buy many ASICs and mine bitcoins, then after they have paid back the initial investment and are starting to become obsolete vote for a blocksize decrease to raise transaction fees, earn as much as possible or a while regardless of what happens (since you are on your way out anyway), and then close the business and use the profit to start a new business in another industry.

When evaluating proposals, it is important to look at the notion of predictability. One of bitcoin's strengths is that there will be exactly 21 million coins; investors buy based upon how much inflation they expect. The rewards will decrease at certain times; miners buy ASICs knowing exactly when they will start earning less. The blocks occur about every ten minutes; buyers know that a new transaction can expect to wait 6.9 minutes to be included into the next block. BIP 101 provides exact dates for blocksize increases; miners and exchanges have lead time to know exactly when to buy more bandwidth. Yet we have numerous proposals that for the first time in bitcoin's history allow humans to control the protocol with voting or through some other indirect means like choosing how many transactions to include in the previous blocks.

It is no accident that the 7 businesses that have committed to BIP 101, such as Coinbase and Bitstamp, use bitcoin for trading and investing, and none of them are mining companies. Miners like ... 1449253663 are holding the network back because mining is the only bitcoin-related business that does not depend on the actual capacity of the network for its operation..

Thus, I'll conclude by restating another three reasons why BIP 101 is the best available plan. First, BIP 101 provides excess capacity, which encourages people who would otherwise be risk-averse to get into the bitcoin industry and try things out. The most interesting applications for bitcoin require a lot of capacity. Second, BIP 101 allows for capacity planning, where everyone knows exactly what to expect at any given time. Exchanges, miners, buyers, and everyone else can begin the process of upgrading any necessary equipment well in advance, and businesses can start development on new services to time them with increases. Third, BIP 101 prevents anyone, including the people who created it, from using the blocksize as a weapon against competitors or people they don't like, which means that everyone suffers equally from the same costs in the required periodic upgrades.

Businesses need to be able to count on bitcoin as a capable system that will have excess capacity at the time their products are ready for it. Solutions to the blocksize problem that leave the network always almost full, or which allow humans to unpredictably change capacity, will result in the same stagnation that we see now.
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