I was in my shed for the first time in months yesterday. I used to move some of my miners out there during the summer back in my mining days. Bunch of UPS and a network switch still out there. This got me thinking about my wallet full of small mining payouts. Many of those payouts are smaller then the fees to spend them. They are still sitting in my old full node that I don't even run anymore. I let it sync every few months that's about it. It's useless coin at this point.
So how does this lead to centralization of mining? Well very few people can afford the mining equipment to mine solo that means pooled mining. On top of the people that mine as a hobby usually can't afford the hash to get big payouts. When I was mining 0.001 BTC was the normal payout. Lucky to get that once every day or 2. Pools don't like to be wallets and hold coin or at least they shouldn't for security reasons. That means lots of small payouts. Setting higher ones means not getting payouts for long periods but you still get many if you keep at it. Let's just say you set to .01BTC. That's about $80 at current price. Now if your lucky the mining pool will mine their own payout and not charge you a fee. If you aren't then you are looking at $3-$4 in fees to get your money. Now once you have it you are looking at another fee to spend it on anything. So you have already lost up to 10% of your mining revenue on fees. Even more if you are using cold storage. Moving to and from there is up to another 10% depending on how the coins are consolidated in the move. This isn't even counting electric costs and ROI on the equipment. This makes earnings very thin to nonexistent for small miners.
Now that is the current scenario. What happens when fees rise even further? You need larger and larger mining farms to make anything mining without loosing any revenue to fees. You are left with big mining farms being the only ones able to mine.
So what's the possible attack vector? Well these big mining farms locate to places with cheap electric. Imagine 20% of the hash power being located in country X where power costs are very low. What happens when the government of country X decides bitcoin should be illegal and sizes all mining farms. With full blocks you have a sudden hash drop meaning longer block times until the next difficulty adjustments. Probably longer than that. It could take 2 or even 3 difficulty adjustments to get block times back to 10 minutes. (Note Bitcoin Cash doesn't have this issue due to it's difficulty adjusting more frequently.) This forces fees to rise even higher as the mempool backlogs. Peoples transactions start to fail. More and more coins become undependable due to the high fees. People are forced to sell for other coins or fiat to pay their bills. If they can even move their coins to an exchange. Coins on exchanges become too expensive to move off of them. This could go on for months. Price would surely tank. More mining becomes unprofitable and miners are forced to turn off their equipment. The whole thing cascades out of control. The higher fees don't really help the miners in this scenario either since the price would be lower by the time it takes for the 100 blocks to make the rewards spendable. Only miners with enough revenue to hold out for a possible future price increase could continue.
Fees lead to centralization. BTC will be centralized. It's already centralized in development. Mining will centralize. It will become too expensive to not keep coins on exchanges so they become centralized banks. People won't be able to afford to own bitcoin only big businesses will. People will be forced into centralized custodial services. This is the future of high fee bitcoin.