Towards a Functional Fee Market for Cryptocurrencies

Abstract

Blockchain-based cryptocurrencies prioritize transactions based on their fees, creating a unique kind of fee market. Empirically, this market has failed to yield stable equilibria with predictable prices for desired levels of service. We argue that this is due to the absence of a dominant strategy equilibrium in the current fee mechanism. We propose an alternative fee setting mechanism that is inspired by generalized second price auctions. The design of such a mechanism is challenging because miners can use any criteria for including transactions and can manipulate the results of the auction after seeing the proposed fees. Nonetheless, we show that our proposed protocol is free from manipulation as the number of users increases. We further show that, for a large number of users and miners, the gain from manipulation is small for all parties. This results in users proposing fees that represent their true utility and lower variance of revenue for miners. Historical analysis shows that Bitcoin users could have saved $272,528,000 USD in transaction fees while miners could have reduced the variance of fee income by an average factor of 7.4 times.

Selfish & opaque transaction ordering in the Bitcoin blockchain

“…Only a few recent work touched upon the issue of how miners select and order transactions, and how this is interlaced with how the fees are set. Lavi et al [40] and Basu et al [6] highlighted the inefficiencies in the existing transaction fee-setting mechanisms and proposed alternatives. They showed that miners might not be trustworthy, but without providing empirical evidence.…”

The Economics of Cryptocurrencies

“…Step 3: In each transaction, we treat all the addresses on the input side of a transaction as being controlled by the same person. 6 In the first step, we filter out all the users who only use addresses once for any transaction and may care more about transaction privacy than returns, along with the users who do not trade frequently. In this study, we use monthly returns, half-monthly returns, and weekly returns to measure investors' performance on a short-term horizon.…”

“…Dimitri [18] models "the transaction fee as a Nash equilibrium outcome of an auction game with complete information," and the conclusion is that the optimal block size for miners depends on the distribution of users' willingness to pay. Basu et al [6] argue that the transaction fee mechanism in the bitcoin system acts as a generalized first-price auction on multiple and identical items. Noda et al [41] point out a potential vulnerability in the bitcoin payment system: the difficulty adjustment algorithm in the bitcoin network may fail to adjust the block arrival rate timely when a large group of miners suddenly leave the network.…”

“…In this subsample, each transaction record may no longer preserve all the involved addresses. However, our goal is calculate address level return, so transaction level incompleteness will not affect our final results 6. As we mentioned at the beginning of this subsection, CoinJoin transactions can be exceptions.…”

Studying Transaction Fees in the Bitcoin Blockchain with Probabilistic Logic Programming

“…To avoid price fluctuation, the authors in [34] proposed a new method to compute fees based on generalized second price auctions that will reduce the gain obtained by manipulating the system, even if the number of users increases. A game theory approach to study fees can be found in [35] in which the authors show that the current state of the system incentivizes the formations of large miner coalitions.…”