An optimal block size would be one that dynamically adjusts to fluctuating demand for on-chain volume. This dynamic nature suggests that a fixed block size limit cannot accommodate the varying levels of demand seen within a blockchain network.

Small block sizes create a competitive environment where users are willing to pay higher fees for transaction inclusion, due to the limited space available in each block. This competition may not necessarily exclude smaller players, as it could encourage the use of Layer 2 (L2) solutions, which offer alternatives for transaction processing outside the main blockchain (Layer 1 or L1). Through this mechanism, the cost of securing the network is primarily borne by those who conduct transactions on-chain.

Conversely, large block sizes reduce competition over time, potentially leading to lower transaction fees. In the absence of sufficient competition, there may not be enough incentive for users to pay higher fees, which could necessitate the introduction of tail emission. Tail emission involves creating new coins to reward miners once the regular block rewards diminish, ensuring the ongoing security of the network. This means that instead of just transaction initiators covering security costs, all holders share this burden, regardless of their transaction activity.

This analysis underscores the complexity of determining an optimal block size that balances network security costs with user incentives. It challenges the notion that smaller blocks inherently maximize fee revenue and invites further exploration into how dynamic block sizes could offer a more balanced solution.