What Is the Ideal Block Size and Fee Cost?

Many of the debates around block size in Bitcoin operate under the false premise that the question can even be properly answered by a central authority. But markets are better at deciding these questions and block sizes and fee costs should be worked out by miners and users, not development committees.

Also read: How is Bitcoin Cash Different from Bitcoin Core?

Price-fixing doesn’t work

Dan Held writes in his latest Medium post:

A decentralized economy complements the dispersed nature of information spread throughout society. Each company is an attempt to take the local knowledge that it has and create a good or service that ultimately is the correct capital allocation (aka profit).

This is correct, which makes me think he must not understand the point he’s trying to make, because Held also argues that Bitcoin developers must impose production quotas on block space in order to maintain an ideal block size in Bitcoin and ensure miner profitability and network security.

Price fixing like this breaks Bitcoin for the same reason any form of price-fixing doesn’t work. It distorts the local information economic actors have that would allow them to properly allocate their own capital and energy. This often leads to an overproduction of a particular economic good and an underproduction of another, or, bloat and shortages.

In Bitcoin, the result of this central planning of block space are externalities like the mempool congestion of 2017 that effectively plunged BTC into a two-year dark age of stagnating prices and regressing merchant adoption.

It was the predictable outcome of a tiny developer committee overprioritizing ‘security’ instead of letting the whole market work out exactly how much security is really needed to protect the network while allowing fees to remain low enough for users and merchants to continue using Bitcoin as peer-to-peer electronic cash.

We Don’t Need to Know

A market can work instead to govern block sizes and transaction fees better than a committee of developers. We don’t need to know the ideal block size or the ideal transaction fees in advance, or even worry about it, because the market will tell us. All that is necessary is to remove the arbitrary limits imposed by developers and to allow all the transactors on the network and all the miners to work out the cost of fees and the “ideal” size of the blocks themselves.

This is how Bitcoin was designed, markets, not developer cartels making decisions for everyone on the network. And it is the reason Bitcoin Cash originally forked from BTC. It wasn’t simply block size as such, though they were certainly too small, it was the way block size was being centrally planned by developers instead of being decided by the real economic actors in the market.

As Hayek wrote in “The Use of Knowledge in Society”:

A centrally planned economy could never match the efficiency of the open market because what is known by a single agent is only a small fraction of the sum total of knowledge held by all members of society

It works in Bitcoin like this.

A. Miners want to make the most money off of fees possible while reducing risk and cost of doing business.

B. Users want to get the cheapest and fastest deal on block space possible.

C. Both parties know their own interests better than any developer could sitting outside of their exchange.

If blocks are too big, miners might assume unnecessary cost and risk, or cause security or syncing issues with the broader market of businesses involved in Bitcoin running their own nodes. If blocks are too small, miners limit their profitability and the potential growth of the network. If fees are too low, miners can’t make money. If fees are too high, miners won’t make much money either because users will simply stop transacting.

Somewhere in between the needs of the miner and the user, there is an answer to the ideal transaction fee and the ideal block size. Neither too big nor too small, neither too cheap nor too expensive. There may be some problems here and there, and the planner’s temptation is to try to predict those problems and stop them in advance, but this is the only way these questions can be decided if we want the network to scale globally. They cannot be decided by committees, Telegram chats, Reddit threads, Twitter arguments, or community polls, and attempts to centrally plan answers can lead to unintended consequences because they cannot possibly coordinate all of the local information independent economic actors in Bitcoin have.

In BTC, for example, we can’t know the answer because the limits imposed by Core developers prevent this discovery process from happening. Until they are removed, BTC will continue to struggle growing, because artificial limits on scaling create artificial limits on demand potential.

Leave it to the market. It knows better than us.

Sound Economics

The opportunity for an economically rational Bitcoin free from production quotas on block size, price-fixing on fees, and developer committees has never been better.

Bitcoin Cash was created in 2017 to be that fork, and decision-makers in Bitcoin Cash should remember that an economically sound roadmap is as important as a technically sound one. They should resist the temptation to over-plan the economic activity of the network lest they create the same problems that plague the BTC branch of Bitcoin. They should allow a real market for block space and fees to develop.

The fork of Bitcoin that wins mass adoption will be the one that recognizes that there is no ideal transaction fee and no ideal block size. There is only the market and economic actors in that market making rational, self-interested decisions.

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This article was originally published on Breaking Satoshi.

Op-ed disclaimer: This is an Op-ed article. The opinions expressed in this article are the author’s own. Bitcoin.com is not responsible for or liable for any content, accuracy or quality within the Op-ed article. Readers should do their own due diligence before taking any actions related to the content. Bitcoin.com is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any information in this Op-ed article.

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Why Nick Szabo Probably Isn’t Satoshi

Search online for ‘possible creators of Bitcoin’ and Bit Gold creator Nick Szabo will always appear near the top of the list. His long history in the cypherpunk space, his writings on money, digital cash, and smart contracts, and some facts about his past have often been used to create a compelling picture that he is Satoshi Nakamoto. But many of the facts are misinterpreted and actually point against this theory.

Also Read: “I Designed Bitcoi… Gold” – The Many Facts Pointing to Nick Being Satoshi

Why It Even Matters

Bit Gold creator Nick Szabo is probably not Satoshi. He is not even one of the pretend Satoshis. He has said publicly several times that he is not the creator of Bitcoin. For years though, small-block bitcoiners have successfully used Szabo’s theoretical Satoshiness in the Bitcoin scaling debate to argue against changes to Bitcoin that would allow it to work better as fast, reliable digital cash.

A Useful Talking Point

During the 2017 Segwit2x fork, Litecoin creator and small-blocker Charlie Lee went as far as to use Szabo’s possible Satoshiness as an argument against an increase to BTC’s block size that would have prevented the spike in fees that occurred at the end of 2017, with the growth of forks like BCH and BSV, and helped push BTC into a two-year dark age in which adoption and price have stagnated.

In my opinion, Nick Szabo is the closest we have to Satoshi, if not Satoshi himself. With Nick and all of Bitcoin Core devs against Segwit2x, why are people still pushing for this hardfork that will split the chain?

More recently, small-blocker Dan Held shared what he said were similarities between Satoshi and Szabo to argue that Bitcoin was not intended primarily as a medium of exchange, but as a collectible and store of value.

Satoshi even refers to the earlier use of Bitcoin being a “collectible” before SoV/MoE just like Nick Szabo.

This is incorrect. Satoshi wrote he believed Bitcoin would bootstrap because it had utility and defined its earliest uses in an email on the Cryptography Mailing List as a utility token, not a collectible.

As long as someone can theoretically imagine Szabo being Satoshi though, people will be able to use him to support arguments that might otherwise be discredited with Satoshi’s writing alone. Interestingly, there’s a remarkable amount of evidence against the Szabo-Satoshi theory. Let’s put it to rest by refuting three of the popular arguments.

Why Szabo Probably Isn’t Satoshi

Claim: Satoshi was a cypherpunk like Nick Szabo

Nearly all the popular theories about the origins of Bitcoin place it firmly within the cypherpunk tradition of anarchist digital cash. The idea is that Satoshi was simply the end of a long road pioneered by cypherpunks like b-money creator Wei Dai and Nick Szabo, and that indeed because of this, Satoshi could even be Szabo. It isn’t totally baseless. In 2010, Satoshi wrote that Bitcoin is “an implementation of Wei Dai’s b-money … and Nick Szabo’s Bitgold proposal.” But there’s another explanation for this.

Thanks to statements from cypherpunk Adam Back and emails from Wei Dai, we know that Satoshi was back-crediting and citation stuffing when he said this, and that before creating Bitcoin he was likely not even aware of the prominent earlier cypherpunk attempts to create digital cash like Nick Szabo would have been.

It goes all the way back to around mid-2008, several months before Satoshi announced the whitepaper to the Cryptography Mailing List. Satoshi contacted Adam Back, who according to him suggested he contact b-money creator Wei Dai because the idea for Bitcoin sounded similar to Wei’s earlier proposal. Adam wrote that he believes it was he who got Wei Dai’s b-money reference added to Satoshi’s Bitcoin paper. In other words, Satoshi, unlike Szabo, was ignorant of b-money until Back told him about it and only added the citation to the whitepaper because Back told him about it.

Back hasn’t released any emails, but we can confirm this conversation probably took place because Wei Dai has released the emails Satoshi sent him after communicating with Back.

I’m getting ready to release a paper that expands on your ideas into a complete working system. Adam Back (hashcash.org) noticed the similarities and pointed me to your site. I need to find out the year of publication of your b-money page for the citation in my paper.

Two things are important here. 1) Satoshi didn’t even know the date to the b-money paper, information which Szabo definitely would have had, and 2) his point that Bitcoin “expands on your ideas” clearly does not mean that Satoshi was literally influenced by b-money or aware of it before creating Bitcoin. He was simply giving credit to someone who independently had some similar ideas before him and spreading the word about his new project. Wei tells us as much himself.

My understanding is that the creator of Bitcoin, who goes by the name Satoshi Nakamoto, didn’t even read my article before reinventing the idea himself. He learned about it afterward and credited me in his paper. So my connection with the project is quite limited.

He also has said that “in Satoshi’s early emails to me he was apparently unaware of Nick Szabo’s ideas.” So much for the cypherpunk origin theory of Bitcoin and its relationship to b-money and Bit Gold. It looks like Satoshi just wanted to pad his work for credibility. Szabo might be a cypherpunk, but Satoshi doesn’t appear to have been one.

Claim: Satoshi and Szabo share the same vision for Bitcoin

As we saw earlier, Charlie Lee used the shared vision argument to justify his opposition to the Segwit 2x fork, but a look at the evidence shows Szabo and Satoshi say almost entirely opposite things about important parts of Bitcoin. Compare what Szabo wrote in 2018 about scaling Bitcoin for small payments to what Satoshi wrote 10 years before.

Szabo: “I’ve always thought of Bitcoin as evolving into a settlements-and-large-payments layer that in the long term needed a layer 2 for consumer payments.”

Satoshi: “[Micropayments] can become more practical if I implement client-only mode and the number of network nodes consolidates into a smaller number of professional server farms. Whatever size micropayments you need will eventually be practical. I think in 5 or 10 years, the bandwidth and storage will seem trivial.”

While Satoshi expected Bitcoin to scale onchain according to Moore’s Law using large, professional server farms, Szabo says he has always believed that digital cash would require a base settlement layer and a second payment layer. Even 15 years before Satoshi published the Bitcoin whitepaper, Szabo explained on the Cypherpunk Mailing List a two-layer digital cash that is very different from Bitcoin: “accumulating credits/debits for use of on-line services (including travel services, concert tickets, etc. purchased on-line), eventually paid for by some “real” currency: FRNs, yen, etc. Implemented with Chaum-style protocol to prevent forgery and assure privacy.”

Let’s look at two more quotes to be sure Satoshi and Szabo don’t agree.

Szabo: “…we can have multiple protocol layers instead of separate kinds of physical objects. Bitcoin the settlement & large payments layer is the “gold”; layer 2s or 3s used for retail are the “silver” and “copper”, smaller but pegged to layer 1.”

Satoshi: “Gold mining is a waste, but that waste is far less than the utility of having gold available as a medium of exchange. I think the case will be the same for Bitcoin. The utility of the exchanges made possible by Bitcoin will far exceed the cost of electricity used.”

Satoshi and Szabo both refer to gold, but while Szabo called gold a settlement too, Satoshi specifically calls it a medium of exchange in his comparison to Bitcoin. In other words, Szabo thinks Bitcoin is for settlement while Satoshi thought Bitcoin was for payments. Szabo is a small-blocker, Satoshi was a big-blocker.

Claim: Nick Szabo deliberately altered his blog to hide his tracks

Did Szabo really alter a blog post about Bit Gold? He did. In 2008, Szabo dated a blog post from 2005 to December 2008, nearly two months after the Bitcoin whitepaper was released. Szabo-Satoshi theorists have jumped on this for years as the definitive smoking gun that proves Szabo was trying to mask his involvement in Bitcoin by making it appear he was working on Bit Gold at the same time Satoshi was releasing Bitcoin, but some searching shows this isn’t as scandalous as it appears. Szabo explained this in a post on August 20, 2008 announcing that he would be doing this so that he could bump his better articles to the front of the site as ‘reruns.’

Unenumerated is going into reruns season. For the next few weeks I will be reposting the best articles from this blog. These will mostly be posts from previous years, so unless you have been a reader since the beginning or have read most of the archives many of these will be new to you.

A web archive search of the 2006 article Wet code and dry shows he began changing dates to 2008 only a few days after the announcement, just like he said he would. Redating old posts so they appear at the top in the newsfeed is a well-known practice among bloggers and Nick redated several other posts in 2008 and 2009, including The Kula Ring, which was written in 2005 but now shows September 22nd as the date.

There’s no smoking gun here, just a common blogging practice.

Final Thoughts

What we’re left with after all this is substantially more difficulty making the case Szabo is Satoshi. Satoshi doesn’t match up nearly as well with the cypherpunk origin myths that have been common for so long which are essential for the Szabo theory, his vision for scaling Bitcoin is the opposite of Szabo’s, and the popular smoking gun theory about Szabo’s blog turns out to be much ado about nothing.

If Nick Szabo is Satoshi, he has done a remarkable job of leaving bread crumbs that point the opposite way. From what we know about Satoshi Nakamoto’s abilities, admittedly, that’s not entirely inconceivable.

Who do you think is Satoshi? One person? Many? Let us know in the comments section below.

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