It will be interesting to see how this will work out in the long-term. Currently the cost of Bitcoin transaction is already at around $50 which makes Bitcoin transactions quite expensive. The only reason why this cost doesn't matter yet is because the inflationary factors (new coins, etc.) are smaller than the deflationary factors (more adoption, etc.).
I see Bitcoin as something like the 2nd-gen P2P file sharing systems (Gnutella, etc.) where a radical decentralization approach was taken to counter weaknesses of the earlier generation (P2P: Napster, Currency: E-Gold). In the P2P world we figured out that a small amount of centralization provides benefits and is acceptable (e.g., Bittorrent). I suspect that in the e-currency world we'll be going a similar route, where successors to Bitcoin will use Ripple-like concensus systems instead of proof-of-work [2]. This should not only allow to significantly reduce the cost per transaction, but might also allow to make the network more secure in practice (as the number of validators in a concensus approach will be much larger than the number of mining pools with signficant hashing power in the Bitcoin world).
[2] Proof-of-stake is a nice theoretical approach but due to the complexity involved it will probably take some time until a solution is found that also works well in practice. Proof-of-stake as implemented in Peercoin is basically outdated, something like Slasher (http://blog.ethereum.org/2014/01/15/slasher-a-punitive-proof...) looks more like a viable solution.
EDIT: As there has been some confusion about the $50 transactions costs: I'm not talking about direct costs for the person who initiated the transaction, but about externalized costs that are paid by the whole network. See my responses below.
The cost of a bitcoin transaction is not $50, it's about $0.06. Often times, such as for large transactions or moving old coins, you don't need to include a fee at all.
The direct cost per transaction (= the mining fees paid by the person who initiated the transaction) is $0.06. The externalized cost per transaction (= the block reward divided by the number of transactions) is $50.
(1) That's not made apparent in the sentence (why leave it for a footnote?), and (2) you haven't explained why that number is actually meaningful.
Edit: I don't know much about this stuff so please correct me if I'm wrong but wouldn't the cost of the "externalized price per transaction" be (price_to_mine-block_reward)/number_of_txs. price_to_mine and block_reward would approach each other over time.
The block reward will continue to half in regular intervals during the next decades, while the price of a Bitcoin can't continue to double in regular intervals during the next decades (see: limits of exponential growth, etc.).
This leaves us with two options:
1) Instead of being financed by the block reward miners will require higher mining fees in order to include transactions. With a decreasing block reward those mining fees will eventually approach the actual cost of a transaction (currently: $50).
2) There will be less miners so mining a single block will be cheaper. This will lead to a decreased security of the network and make the network more vulnerable to attacks.
Why don't you factor in the possibility of more transactions per block? The idea is that as the Bitcoin transaction volume climbs, the need for a block reward decreases.
Secondly, you're assuming that the mining pool is currently constrained by what is profitable. From what I have read about large mining operations, they are significantly into the green on profit margin right now, so there seems to be room for a decrease in profitability without losing significant portions of the mining network. Every time the mining difficulty changes this is tested already so we know that there is at least some wiggle room in the mining profit margins.
You mean that the number of transactions grows faster than the mining capacity? I've covered a similar case in https://news.ycombinator.com/item?id=7846564 (it's #2). In general, if you want more transactions you also need a better security, which leads to increased mining costs.
That does not seem like a similar case to me. You specifically say "less miners" in #2. Plus what do you mean by mining capacity? If you mean actual GH/s then that's not a meaningful measurement because better hardware in the future will give higher mining efficiency at the same mining cost.
It just seems like you're oversimplifying a really complex equation with lost of potential outcomes. Perhaps this short comment style just isn't allowing you to explain everything. Have you written a blog or anything that details your thoughts on this?
This externalized costs basically result in inflationary factors, as it increases the number of Bitcoins in circulation. So everyone who is holding Bitcoin is paying for them. Currently those inflationary factors are offset by the deflationary factors (more users, more adoption).
This is not a "cost" because no one pays it. The 25BTC are created out of thin air as a reward to the miner. I don't see the relevance of this metric to your argument, but I hope that you will edify me.
You can't create money out of thin air. It's the same as with dollars (and any other currency). The more money you print the more you will devalue each individual unit (due to inflation). In Bitcoin this currently doesn't matter as deflation is much higher than inflation.
Currently the cost of Bitcoin transaction is already at around $50
That's a meaningless soundbite.
The figure you cite is a function of the current network difficulty/hash-rate, tx-rate and USD/BTC exchange rate. It's devoid of any meaning when looked at in isolation because it is by definition already factored into the exchange rate.
50$ of transaction fee? At current price that means 0.075 btc per tx. I can assure you that you can mv btc from one address to another for a lot less. Even without paying any fee at all. It all depends on how "old" are the btc you're moving, the amount of btc , the number of addresses involved in the tx and if you're in a hurry or not.
I see Bitcoin as something like the 2nd-gen P2P file sharing systems (Gnutella, etc.) where a radical decentralization approach was taken to counter weaknesses of the earlier generation (P2P: Napster, Currency: E-Gold). In the P2P world we figured out that a small amount of centralization provides benefits and is acceptable (e.g., Bittorrent). I suspect that in the e-currency world we'll be going a similar route, where successors to Bitcoin will use Ripple-like concensus systems instead of proof-of-work [2]. This should not only allow to significantly reduce the cost per transaction, but might also allow to make the network more secure in practice (as the number of validators in a concensus approach will be much larger than the number of mining pools with signficant hashing power in the Bitcoin world).
[1] that's basically the cost of finding a new block divided by the number of transactions per block - see https://blockchain.info/en/charts/cost-per-transaction.
[2] Proof-of-stake is a nice theoretical approach but due to the complexity involved it will probably take some time until a solution is found that also works well in practice. Proof-of-stake as implemented in Peercoin is basically outdated, something like Slasher (http://blog.ethereum.org/2014/01/15/slasher-a-punitive-proof...) looks more like a viable solution.
EDIT: As there has been some confusion about the $50 transactions costs: I'm not talking about direct costs for the person who initiated the transaction, but about externalized costs that are paid by the whole network. See my responses below.