The block(size) party.
There’s a weekly party happening just down your street. After one night of “finding” your neighbours over the fence by a mutual love of Taylor Swift remixes, you agreed to have a party each week in the street instead. Everyone is invited. You decide to set out a budget for the weekly parties. At first you’ll cover most of it, but over time you want it to be supported by everyone (your budget is limited)! Everyone that is coming is expected to chip something in, but it is not required.
Over time if this thing actually takes off (and the authorities don’t mind), you could actually make money from this. The street space is limited though, so you figure, once it takes off, you can actually cover your costs by only allowing those in who chip in the most. This covers your costs, and everyone has a ramming party.
Since the party is (mostly) free in the beginning, it starts to take off. The streets next door gets wind of it, and start joining in on the fun. You still have some funds to cover it, so the party keeps going! As expected, the party keeps growing. It’s a grand time!
After a particularly great party, you wake up the next morning and come to a sudden realisation… We have started something new. The authorities haven’t clamped down on this yet, and other street parties also start happening. It’s cool. The more the merrier! Spread the love. Your party is still the biggest.
However, you also realise your budget is running out. You’ll need to find a way to make this work, so you do some strategic planning.
Option 1: Keep the party in this limited space.
It’s growing, and as it becomes bigger, the party can support itself by eventually only allowing those in who chip in the most. It will be packed and there might be a queue outside. But it will be full & fun and the people that chip in covers the costs, so you don’t need a budget anymore. However, in this scenario, you realise that your janitor from work who you hang out with around the watercooler can’t attend anymore. He can’t chip in the required amount. Since the space is so limited, the new group of friends you met last week aren’t really as connected to this group and decide standing in a queue each time and chipping in, is too much. They decide to leave and join other smaller parties. It’s smaller, but at least they can get in (and apparently they have lots of dogs around. Such fun). Your interest is however focused on keeping this party going first and foremost: to keep it sustainable. It makes sense to rather make the party more awesome each time (eventually hoping to book Taylor Swift!) and bank on the fact that people who want to be there will pay more and more each time. You hope that the other block parties (small and big) don’t distract from your party. You aim to make it awesome each time: that it just can’t be missed!
Option 2: Increase the space of the party.
You get wind of a big warehouse you can host the party in. If you get double the people to come, it will only cost about 1.2x of your budget. So by the power of economies of scale, you hope that by increasing the size of the party, those that chip in will cover the cost of you renting the warehouse. Compared to the limited space, there’s no barrier to entry: people can chip in what they want as usual. Even if you wanted to charge, there’s thousands of block parties happening all over, so you need to keep it like the old model: chip in, and come have some fun! Since the party is so big, you hope it increase the virality of the event (more so than your cozy Taylor Swift jams). Your interest is however focused on keeping this party going first and foremost: to keep it sustainable. Your interest is to make the party more awesome each time and instead of being able to afford Taylor Swift for your old street party you are more content having your janitor & other new friends join. If it keeps up, and the party doesn’t stop (and hopefully the authorities don’t come knocking), you’ll be able to cover the costs. You hope that there will be enough people to join (people new to parties and those who come from other smaller parties) so that even if you don’t have a budget anymore, you can keep growing the party just before it gets cramped. You have to keep the momentum going. As soon as it gets cramped, people might leave. You are pretty sure that with each new venue, the economies of scale should increase (double the size, for an increase of 1.2x of your budget). You need proportionally less people to keep the party going.
What do you do? Amidst other parties flourishing, will a small exclusive party be more sustainable, or will a large party with a larger network effect be able to cover the costs even when you can’t (potentially) pay for it?
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This was an attempt to explain the 2 sides of the blocksize discussion currently happening in Bitcoin. Block space is limited to 1mb per block. Each block is thus technically limited in such a way that Bitcoin can only handle about 7tx/s. Increasing the blocksize results in larger capacity. However, since miners are paid with transaction fees (and increasingly so in the future), one side feels that the block space should remain limited in order to have a competitive market for transaction fees. The other side feels this could potentially increase the transaction fees to the extent that it makes Bitcoin unusable for some, and additionally hit a transaction speed limit (which will mean users switch to other methods of value transfer instead).
However, increasing the block size means that you decrease the incentive to pay transaction fees and thus the miners might not eventually reap enough rewards to want to keep securing the chain (as the subsidy keeps decreasing). It’s like the landlord shutting down the party because you neglect to invite him each time.
I have my own suspicions what the right answer is, and it is neither of the above options, but I still need to figure out for myself the rest of the details.
