[cryptography] bitcoin scalability to high transaction rates

[Sampo Syreeni]

Since I've been forced to take yet another look into BitCoin and  
algorithmic (high frequency) trading within a short timespan, I began to  
wonder how they would work together. What precisely would happen to  
BitCoin if we had tens to tens of thousands of high frequency traders  
(thousands of transactions per second per trader) within the network?

I haven't been able to come up with any substantive claim about what that 
would lead to, but it at least seems possible that we could hit some limits 
within the distributed log algorithm which could lead to significant 
economies of scale in producing new blocks. Even if we actively sparsify 
the history -- simply knowing about what to start the process with could be 
bandwidth heavy, and keeping up with all of the eventually false block 
chains given that bandwidth could necessitate very high end hardware with 
an unusual, mainframe-kind I/O-cycles balance. If that were to happen, it 
could centralize the verification activity to a degree that is amenable to 
takeover, for simple economic reasons. Alternatively, the distributed 
algorithm could simply become choked to a degree via bandwidth constraints 
(not processing cycles) that would lead to enough time inconsistency within 
the cloud to make it almost impossible for it "to prune the bush into a 
stalk".

Do you think something like this could happen? Is it a viable failure  
scenario? I fear this especially because the incentive payment for block  
creation isn't in any way divisible between those who tried, which means  
that winner takes all, and so that with very high rates of transactions,  
only highly centralized and massive scale processing plants can expect to 
reap a benefit from block processing which is statistically within usual 
financial timescales.

(That is, the reward from contributing processing power to the system  
isn't divisible, unlike BTC's themselves. I can't for example run a low  
power mining operation and expect to get .000001 BTC in a reasonable time, 
whereas somebody with more power statistically will have it in a shorter 
time. That's a clear benefit to scale, because people do not have infinite 
liquidity, and aren't risk neutral.)

(And yeah, this is mostly about economics still. But since BitCoin is a  
cryptographic protocol, this stuff speaks to the threat model and the  
incentive design which is integral to why the protocol is designed the way 
it is. Thus, also to now the protocol should be developed to reincentivize 
better.)
-- 
Sampo Syreeni, aka decoy - decoy at iki.fi, http://decoy.iki.fi/front
+358-50-5756111, 025E D175 ABE5 027C 9494 EEB0 E090 8BA9 0509 85C2
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