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I might have misunderstood what is happening, but looking at the block sizes it seems that most mining pools are sticking to the 250 kb soft cap, with BTC Guild being the notable exception. There are many blocks that are just under 250 kb, so I assume that pools are excluding certain fee-paying transactions to stay below the limit.

My question is, why are they doing so? Is the marginal cost of including those extra transactions indeed greater than the fee being paid? If not, what is their reasoning for acting in a non-profit maximizing manner?

The whole idea of Bitcoin is based on the assumption that participants behave rationally - i.e. profit maximizing. So what is going on here?

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Some pools may still use the 250 KB cap for faster block propagation and reduced chance of orphaned blocks. If one block is orphaned you probably have to mine for 10 years to recover that loss with the extra transaction fees from mining larger blocks.

However I think many pools use a max size above 250 KB. The reason most of the blocks are smaller, even when there are more transactions available, is that they set a max size for how many KB of free or minimum-fee transactions they will include. There aren't enough above-minimum-fee transactions to fill up the blocks.

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  • Thanks. I didn't know pools were excluding min-fee transactions. So the pools judge that the orphan cost of including a transaction is greater than the current min fee of 0.0001. Just trying to understand the fee situation better.
    – user1874365
    Commented Nov 15, 2013 at 8:40
  • Currently, most pools consider transactions "free" if they have fees below a certain amount per KB or no fee at all. Pools limit how many free transactions are included in each block. If using max block size 500 KB and max space for free txes 50 KB, then you will see blocks down to 50 KB in size even when lots of unconfirmed free transactions are available.
    – Dr.Haribo
    Commented Nov 15, 2013 at 16:42

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