One of Bitcoin's central value propositions is that no matter what happens, if you pay a high enough fee, some miner in the world will confirm your transaction. In other words, Bitcoin is censorship-resistant. There's a very good reason why “censorship-resistant” is the wording you hear whenever this topic comes up, rather than “proof of censorship.” Any individual miner can censor whatever they want, meaning they can refuse to include something in any block they mine themselves. However, they cannot prevent other miners from including that transaction in their own blocks when they find it.
Bitcoin is resistant to censorship, but it is not immune to it. Any miner can censor whatever they want, and it's free, ignoring of course the potential opportunity cost of losing revenue if there aren't enough transactions available for a fee similar to the transaction(s) they choose to censor. But that doesn't stop the global system from processing that transaction anyway, unless those miners 1) make up the majority of the entire network's hash rate, and 2) choose to take advantage of that fact to isolate the block of any miner who chooses to process the transaction(s) they wish to enforce. Censorship.
Doing so will cause the majority of miners involved in the attack to lose orphan funds as long as the minority group of miners persist in the mining blocks that included the “blocked” transaction. Every time such a block is found, it will essentially increase the time until the next block that has hit the chain is found, reducing the majority of regulated miners' income on average. This will remain the case until the minority gives up and surrenders or stops working (because it will give up revenue on any block including the controlled transaction as well).
For now, let's assume that this scenario is unlikely. If so, then Bitcoin is either a failure, or has to exist in this state so that unsupervised miners can quietly collect enough hashes in order to overcome the current majority's intention to quarantine blocks containing transactions they don't want. Confirm it in the blockchain.
So, what happens when a group of miners, a minority, decides that they will censor a certain subset of transactions from their block? The amount of block space available for those transactions shrinks. There is less space available for them than for any other class of transactions. What is the end result of this? Fee pressure for this class of transactions will reach saturation faster than for any other class of transactions.
Just for the sake of simplicity in the example, imagine that it only takes 10 transactions to fill any given block. We will simply call normal transactions “normal transactions,” and controlled transactions “blocked transactions.” Every day an average of five blocks are found, and there are five miners. Red blocks represent miners who will not mine blocked transactions, and green blocks represent miners who will. In order for regular transactions to saturate the available block space and start raising fees, there must be more than 50 transactions pending for the bidding frenzy to start raising fees and increasing miner revenues. At this point, the fees generated revenue for everyone Miners will start to increase.
For blocked transactions, there only have to be more than 20 pending transactions for a bidding frenzy between them to begin, resulting in increased fee revenue. But fee income from prohibited transactions It will only be collected by green miners.
In the case where blocked transactions do not saturate memory modules beyond their available block capacity, all miners will receive approximately the same level of income. These blocked transactions have to compete with regular transactions in order to have some guarantee for timely confirmation, so if regular transactions saturate memory but blocked transactions are not, the overall fee pressure will be relatively evenly distributed among all miners and no one will have any Disproportionate Fees Fee income is not available to others.
However, if blocked transactions saturate the memory pool beyond the available block space, this fee compression will result in increased fees paid by blocked transactions. Only for green miners. Having chosen to censor these transactions, red miners will not realize any increase in fee revenue from the blocked transactions. Regular transactions in this scenario would not have to compete with blocked transactions in fees unless they needed to be confirmed in the next block, so higher indirect fees in regular transactions due to the pressure of blocked transaction fees would not result in an equivalent increase in revenue for red miners.
This imbalance results in green miners receiving more revenue per block/hash than red miners. This stimulus is clearly unsustainable. One of two things will happen over time: 1) either the green miners will reinvest the additional revenue they earn and expand their hashrate, or 2) the miners will defect to the red side and the green group of miners will grow their hashrate that way.
The dynamic of high fees for green miners will cause the hash rate of green miners to grow, regardless of whether through reinvestment or defection from red miners, until it reaches an equilibrium where the levels of demand for block space for forbidden transactions decrease with normal transactions, and both The two groups of miners earn approximately the same income. This equilibrium will continue until forbidden transactions' demand for block space exceeds what is available to them, after which green miners earn more until they grow the network's hashrate share to an equilibrium point of equal fee revenue again.
This dynamic is why Bitcoin is so resistant to censorship. Not because all miners are unable to censor something, but because miners are incentivized to include something that other miners are censoring through market dynamics. If some miners censor a class of transactions, they reduce the amount of block space available to them and increase the fees they are willing to pay. Simple and pure. Unless the miners are completely irrational, in which case the entire Bitcoin security model is called into question, some will include these transactions and earn additional revenue.
