Towards a Functional Fee Market for Cryptocurrencies
This addresses the issue of unpredictable transaction fees in cryptocurrencies, which affects users and miners, and is incremental as it builds on existing auction theory.
The paper tackled the problem of unstable fee markets in cryptocurrencies by proposing a new fee-setting mechanism based on generalized second price auctions, which reduces manipulation and leads to users paying true utility fees and miners having lower revenue variance, with historical analysis showing potential savings of $272,528,000 for users and a 7.4 times reduction in variance for miners.
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.