The competition for blockspace will always be a source of tension between users of the Bitcoin protocol. There are two main restrictions to how blockspace can be used. The first is the consensus and technical layer, which determines what the protocol allows or does not allow, and secondly, the economic layer, which dictates what users are willing to spend to use it for different purposes.
The network is fundamentally and irrevocably based on this reality. Bitcoin uses a market-driven distributed system. Markets are the final deciders of whether anything is actually done. Markets are also responsible for enabling things which were not previously possible.
Market participants should have a good understanding of how blockspace can be used in various scenarios to assess the potential interactions between different applications.
The Common Resource of Blockspace
It is not a tragedy of the commons as such, because no one is allowed to use it. The dynamics of blockspace use are similar, even though it isn’t a true tragedy of the Commons. It is not a tragedy of the commons, but it does have some similarities in terms of its use. At some level, the consumption of blockspace is a game that has a negative sum. A space-consuming entity pushes another space-consuming entity out of the way.
People would resolve such conflicts in any normal social setting. People will try to find a way to improve the efficiency of a use that occupies disproportionate space. The worst-case scenario would see destructive or harmful uses restricted. Bitcoin is a system that is completely anarchic, and there are no authorities or points of control to manage the system.
We have only the market.
Most often, the relationship between blockspace usage and market dynamics is conceptualized very simplistically. They can use it however they wish within the rules of consensus. This is the most fundamental aspect, but it’s not the only thing. What is consensus? How does consensus come about? The dynamic is important.
The consensus rules that are enforced on a daily basis by the economic players governs what is allowed and not permitted to be done in blockspace. It is an important layer in the dynamics of market that governs its use, beyond just the economic aspect of why people buy blockspace.
It is important to understand how the system works and what users must do in order to maintain the viability and sustainability of their blockspace usage. Everyone in the system must realize that their actions can affect market decisions, regardless of what they decide to charge for blockspace.
What is Blockspace?
When examining different uses of blockspace and their impact on the availability of space, it is important to take into account many different factors. The amount of space used, the frequency, and how inflexible demand is due to price fluctuations are all factors that need to be considered. Each system that is built using Bitcoin must consider the way other systems use blockspace.
It is important that each system considers its internal interaction with the blockchain as well as the balance it will have with other systems. In a vacuum one system could work very well, but in an ecosystem with systems that are different it might be overworked or end up in failure mode.
The core properties of these dynamics are:
The Space Available
What is the most important factor? In terms of bytes, how much space will a certain use take up within a block? It is the introduction of the concept of scarcity to the blockspace resource. The ideal system that is built upon Bitcoin would minimize the space needed to make it function as efficiently and securely as possible, without having to sacrifice utility.
Consider it a ratio: you’re trying to maximize the security and utility of the system while using the minimum amount of space. This can sometimes be achieved in a deterministic way, that is. The amount of space required is predictable and constant. It depends on both the design of the system and its state when the blockspace is needed. The blockspace needs of some systems cannot be predetermined. When space requirements are indeterminable, an upper and lower bound can be set depending on how the system is designed and the current state.
There are some systems with a size requirement which is constant and does not change as the system changes state, or whose requirements are proportional to their level of usage. Some systems may have variable space requirements that are not proportional to the level of usage. It is critical to determine whether the protocol’s needs for space are variable or fixed when developing a new system.
Frequency
How often do you need to use blockspace? What is the cost per transaction?
Certain systems require the constant use of blockspace whenever they change state or take an action. Some systems only need to use blockspace infrequently. Others may require almost no blockspace at all, except for entering or leaving the system.
In the same way that minimizing overall space required for a one-time use of the blockspace can be a design goal, minimizing frequency is also a good idea. In an ideal world, a well-constructed system would not have to use blockspace unless it was in the case of a failure or for entering and exiting.
In terms of the frequency at which blockspace is used, there are two options: constant or variable. Blockspace is required to advance the system in a constant-frequency system every time it performs a task or advances in any way. In a system with variable frequencies, state may progress or an action taken without the need to use blockspace.
The blockspace market and these two systems work in different ways.
The use of blockspace by constant frequency systems is predictable, and can be easily analyzed based on volume. This system’s engineering goal is to minimize the chain footprint. The frequency of blockspace usage is deterministic and predictable based on its level of use. The system is not changeable in any fundamental way.
The blockspace usage of variable frequency systems is difficult to predict and analyze. System focus is not just on minimising its footprint on the chain, but on also finding a balance between the system’s incentives. The need for more block space is a common reason why variable frequency systems have varying frequencies. Unpredictability is a result of this, which is why engineers focus on incentive balance to encourage cooperation.
The Time Sensitivity
Is the requirement for a system to use blockspace time-sensitive? Do you need to perform a certain system action, update, or upgrade immediately? Or can it be delayed for a while? It is a reaction to another action or merely an update with no deadline.
Constant frequency systems will not have a real time-sensitivity, other than when a state shift is required from an unconfirmed system to confirming. State progression may have a time-sensitive component in some instances, but the overall system progresses state either way.
A cache of state progressions off-chain are being disputed by variable frequency systems. The use of blockspace has a high time-sensitivity, because it’s not about maintaining the current state and progressing it. It’s a challenge in which an incorrect state can resolve on the chain.
There are very distinct dynamics when it comes to time and price, as well as the need for blockspace. Prices can vary widely between systems that are more time-sensitive and those who are not. This is because the latter can delay confirming an operation until later. In contrast, systems that are time-sensitive and require rapid confirmation of state progress will be more sensitive to price, as they have to pay the market rate to do so.
Interacting Systems
The constant systems and the variable ones need to be able to communicate with one another, or, rather, with the externalities they create for all parties, in order for them interact with the Blockchain. Each is an entirely different beast. They are not adaptable nor dynamic. The system must progress using blockspace. The operation of variable frequency systems is more dynamic and flexible. In terms of incentives or design, they can come up with creative ways to reduce the need for blockspace.
The adaptability of systems that share the same resource, blockspace, with other systems is greatly affected by whether these systems have constant or variable space requirements. The cost of operating each system is affected by the global saturation in blockspace usage and the resulting price increase. How much and how frequently do they need to use blockspace?
The aggregate number of Bitcoin-based systems determines the level of general saturation, and thus the fees. It is basically a feedback system, where the type of systems that are operating will determine how saturated the blockspace is and the fees. The viability of different systems and their operating costs are affected by this.
After a saturation point, fees will continue to rise. The only way constant systems can adapt is to reduce their footprint on the chain, pay more or wait longer for system updates.
Many systems with variable frequencies will experience a less predictable and consistent demand for blockspacing. Instead of being the result from a consistent progression in system states, blockspace will be driven by protocols that are triggered by user entry or exit, as well as severe disruptive events.
The constant-variable systems are fundamentally different when it comes to adapting themselves to a high-fee environment that causes the price of systems that use Bitcoin to rise.
Constant Systems is able to compress data to use in transactions on the chain that are used to move the system forward. If they don’t want to pay or wait more, then their only option is to do so.
Variable Systems allow for the scaling of coordination to larger groups, while still maintaining incentive compatibility. The architecture can be adjusted to eliminate or minimize incentive misalignment or attack vectors which could disrupt the system and force it to consume blockspace in order to settle a dispute.
Lightning is the perfect example of an variable system. This applies to both frequency and size of data. Rollups will be the perfect example for a system with a constant data and frequency. Understanding how these two things interact will be important in watching the fee market mature for Bitcoin.
What is gained?
When comparing system architectures, the most important thing to consider is how much you gain from each one. By choosing one system over another, what type of security can a user expect? How much does it cost to implement that model of security in a particular architecture? Costs are borne either by one user or a group of users.
It is important to weigh the costs and benefits associated with constant and variable system. Users will realize more value if the security model is stronger and fewer assumptions or parties are trusted.
Over time, there will be many trade-offs. Different architectures come at different prices, with different frequency of blockspace usage, and will have different benefits. All of these systems have an impact on the cost and benefit of each other.
A centralizing of pressures should also be considered. They allow for a variety of participants within a single system and give users the flexibility to adjust to their presence. The constant systems are likely to have a more centralizing dynamic due to their rigid space consumption and upper limits for the other systems.
Market Choices
It is ultimately up to the users to decide which systems they want to have and how these will interact. Users should understand both the benefits and costs of using different systems, as well as the effects that these systems will have on the network.
Many people raise ridiculous concerns whenever new Bitcoin features come out, including government blacklists and arbitrary data. They also make other absurd rationalizations about what the public should or should not be allowed to do when they buy blockspace. I think these are all red herrings.
When discussing new features for Bitcoin, the real issue is how they interact with constant or variable system architectures. Which one adds more utility? It is important to consider this when looking at new Bitcoin functionality.
This will affect the Bitcoin fee market in the future, as well as the viability or lack of it of various types of system.
Due to their constant need for space, Constant Systems have a limit on how much they can scale. This means that they are likely to be the main driver behind heavy and consistent fee pressure, if they operate simultaneously.
Variable systems could drive fee pressure when mass on-boarding/off-boarding occurs, or disruptions occur to the functioning of the system, but they won’t likely drive predictable and consistent fee pressure until they have reached a saturation point much deeper than constant systems. The saturation point could never be reached if the designs were as close to perfect as possible.
Markets ultimately make the final decision, but those markets should be informed.
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Source: bitcoinmagazine.com
