Does the dynamic blocksize limit and penalty function lead to a tragedy of the commons?

Question

My understanding is that:

• The penalty applies to the block subsidy and not the transaction fees.
• Under constant demand blocks can increase continuously by pushing up the median block size.
• There doesn't seem to be a push back mechanism to confine block size except for reduction of the median by block space exceeding demand.

This means that as long as there are enough transactions waiting, blocks could always get full which would not incur a penalty. However, whenever there are enough transaction fees waiting to add e.g. 0.25% of the block subsidy with 5% additional block space, it would be economically viable to exceed the median block size by 5%.

In a scenario of constant demand excess such as Bitcoin is currently entering, blocks could continuously grow e.g. by the aforementioned 5% per day. Even a consistent growth of 5% per day would amount to 40% per week. As the block space supply could then grow exponentially and essentially unboundedly, all kinds of use cases that require cheap block space would be attracted, in turn creating a practically unbounded demand.

Meanwhile, assuming approximately homogeneous fee levels over the body of waiting transactions, e.g. transactions filling 5% of the block space should not exceed 0.0025 of the block subsidy, otherwise a bigger block would be more profitable to the miner. Hence, short term optimizing miners could have fees trending toward a small fraction of the block subsidy (for the assumed 5% growth it would be 5,25%).

This growth would be further exacerbated by the decreasing block subsidy reducing the cost of block size increases.

With sufficient demand, one would end up with a boundless block size, and a minuscule block reward, a tragedy of the commons. What am I missing?

Answer 1

With sufficient demand, one would end up with a boundless block size, and a minuscule block reward, a tragedy of the commons. What am I missing?

I would argue you are missing physics. At some point, the physical limits of the network bound the blocksize. I.e., if a miner decides to keep pushing the blocksize higher, eventually a blocksize will be reached that takes considerably longer to propagate through the network than a smaller block.

Indeed, there are two prerogatives for blockchain mining:

1. Crafting a block with the highest reward possible
2. Propagating that block to the entire network before a competing block propagates through the network

The evidence for #2 can be seen in the bitcoin network - mining pools opt to mine empty blocks even though they could receive more bitcoin if they mined blocks with transactions. (although this behavior seems to have stopped recently with the advent of centralized block relay networks)

So, as is often the case, the phrase "tragedy of the commons" is missing a key qualifier that the coiner of the term realized he should have added - "Tragedy of the unregulated commons". In our case, the regulation is physics, so the Monero network will always adapt at the rate of the technology that runs the software.

Edited to add: The dynamic fee algorithm also provides an incentive to keep the blocks small. As the block size increases, the minimum relay fee decreases. Thus, even though you are filling the blocks with more transactions, it not necessarily the case that the transaction fees are worth more.