Fee market does not mean free market

In economics, it is accepted that price fixing leads to gluts or shortages in the free market. 

Prices of all goods and services provide a useful indicator of overall supply and demand of that product. Most importantly, they entice or repel providers of that good to make more or less depending on market conditions. History shows a startling sensitivity to prices, and the result of price fixing by authoritative enforcement always results in a glut or a shortage. The most tangible example of this paradigm is in countries with high inflation that engage in max-price limits on consumer goods. Rather than keeping living standards affordable, this policy swiftly empties the shelves leaving them barren. Providers of the consumer goods could sell at a loss, but it would be unsustainable and against their self-interest, and so they simply stop.

In Bitcoin, the artificial block size cap that is currently in place changes the incremental value of one more transaction above 1MB from a consideration between economic incentive and expected cost in electricity, storage, and risk of failed propagation into an unattainable good with an infinite price. The result: a shortage of transactions. 

Conservative protocol changes are laudable, but you can't break Bitcoin even if you try intentionally.

Gavin Andresen once said that he was careful not to break anything during his tenure as benevolent overlord of the Bitcoin protocol. It's a good policy in general, particularly when there is so much money at stake.

But while Gavin may have been right at the individual level, at the macro level, Bitcoin coding mistakes or reckless changes are almost instantly screened and forked to the side. The system is designed to continue plodding along in some form forever, and it likely will continue to do so. A good example of this feature was during the last accidental forking accident. On the individual level there was panic and quick, albeit stressful, action. From 30,000 feet, the network shrugged off the bad fork indifferently.

Centralization is only dangerous when the mining control extends to legal permission to play.

Rightfully, Bitcoin players emphasize the importance of maintaining a decentralized structure to the network. But an important distinction must be made between centralized control, and centralized permission. On the one hand, economic monopolies do emerge in free markets. However, to maintain a strong leadership position, these companies must compete on price and quality to maintain their customer base. As consumers, these monopolies do not threaten our economic freedom, because as soon as the monopolist abuses its influence by raising prices, they create an opportunity and an opening for competitors to encroach. 

This is the case unless the monopolist is legally protected from competition. Take for example the cab industry in the US. The NYC cab monopoly isn't one borne of healthy competition for low prices and high quality, but rather of reliance on legal force to prohibit competitors from operating. With the emergence of Uber, we get a new view into how much that price and quality have suffered under centralized permission.

As long as Bitcoin mining shuns ties to legal licensing, the benefits of decentralization are maintained: Honesty, low prices, and high quality. If a Bitcoin miner must register and apply to engage in operations, something against which the community must remain vigilant - only then will Bitcoin be under threat. 

High cost of capital equipment, the need for cheap electricity, and operational efficiency are not unfair barriers to entry. They are the epiphenomena of fair incentives.

The reason that Bitcoin miners are developing their operations at scale is because the network demands excellence of its maintainers. It may be shocking how quickly that the average miner has moved from the basement laptop CPU into large parallelized warehouses, but it should come as no surprise. 

The best rules are simple rules. In Bitcoin, the miners' rule is that the faster you can count, the more money you will make. Of course we should expect to see expensive counting machines being located in places with cheap power supplies being racked in the most efficient manner possible. Does it make it hard to compete as a miner? Absolutely. But is there a legal barrier to entry? No. The network wants fantastic miners, and so should we all.

With Bitcoin, the only thing you need to trust is that others will act in their own self-interest. 

The miners' profit-maximizing equation is to be as big as possible without threatening the network. In this framework, a miner should compete as hard as possible up until the point that they outpace other miners beyond a reasonable degree. How do we define reasonable? It's not entirely clear, but if we look at the episode when the Ghash mining pool came under fire for growing too large, that number is somewhere between 25%-45% of network hashing power.

Does it matter that a miner might find this unfair that their growth is effectively capped relative to their peers? Not really, because it provides a clear guideline for maximizing benefits. It's just the game they play. Decentralization is baked into the profit equation, and so players can be trusted over the long term to act in a method that is consistent with decentralization. A good example of this happening in the real world is when BitFury publicly announced that they would be both running their new hardware and selling it to their competitors in order to respect the essential functions of the network as a trustworthy ledger with no trusted third parties.

Bitcoin will always be a direct democracy, and a really good one.

Even though it's not always evident nor clear, the process in place is that developers "suggest," miners "choose," and bitcoin owners "vote." Developers have influence but no control, miners have control but no power, and users have power but no control.

In this, a virtuous cycle of decisions, however slow and contentious, leads to a stronger and more valuable Bitcoin. It's a direct democracy in which everybody is a one-issue voter, and it's an issue that they all want resolved to the same ends.

2MB is not sufficient, but it's a good first step. Unlimited block size is the end game with the best outcomes.

At least, that is the author's opinion. In reality we're going through the tiered process of suggestion, choice, and voting that will likely lead to this outcome. Already, users are beginning to vote with their feet, selling their bitcoin holdings and moving a step closer to alt-coin alternatives. They are just dipping a toe at the moment, but it's a clear warning shot to the developers to suggest something different. Specifically, the market wants larger blocks - rather, it wants the availability of larger blocks. Miners will always have the choice to cap their blocks where they see fit, balancing the availability of transaction capacity with their own economic constraints, not an artificial constraint such as the hard block size cap.

And if the market wants more transactions, then it will demand operational efficacy from its miners in turn.

A free market in Bitcoin is essential to its success. All currency attributes should be unbounded except for the supply limit.

Even if Bitcoin enters a phase of centrally planned price fixing, it cannot escape the free market of blockchain-based competitors known as alt-coins. As such, it must compete and strive to be the best, lest it should be overtaken.

But isn't the hard cap on block size in the same category as the hard cap on currency supply? On the surface it may seem this way, but they are very different. The block size cap is a functional limitation on Bitcoin designed to avoid certain types of DDOS attacks as a temporary measure. The currency cap is a featured limitation that makes bitcoin a better currency.

Paradoxically, a great currency is an endless list of superlatives: most divisible, easiest to recognize, most challenging to counterfeit, easiest to send, cheapest to store, hardest to steal, etc.; with one drop of discipline: a stable supply.

We need to maintain (or aim for establishing) "cheapest to send," "most reliable to settle," and "greatest transaction volume capability" among that list of superlatives. The market demands it, and the market always wins in the end.