A Model and Estimation of the Bitcoin Transaction Fee
This work provides a rigorous economic framework for understanding Bitcoin fee formation, which is crucial for users and miners as block subsidies decline.
The authors develop and estimate a structural model of Bitcoin transaction fees, treating the mempool as a market for scarce blockspace. Using a novel high-frequency mempool panel, they find that congestion is the main determinant of delay and that the marginal value of priority is priced in fees, with RBF, CPFP, and block conditions having economically important effects.
Bitcoin transaction fees will become more important as the block subsidy declines, but fee formation is hard to study with blockchain data alone because the relevant queueing environment is unobserved. We develop and estimate a structural model of Bitcoin fee choice that treats the mempool as a market for scarce blockspace. We assemble a novel, high-frequency mempool panel, from a self-run Bitcoin node that records transaction arrivals, exits, block inclusion, fee-bumping events, and congestion snapshots. We characterize the fee market as a Vickery-Clarke-Groves mechanism and derive an equation to estimate fees. In the first-stage we estimate a monotone delay technology linking fee-rate priority and network state to expected confirmation delay. We then estimate how fees respond to that delay technology and to transaction characteristics. We find that congestion is the main determinant of delay; that the marginal value of priority is priced in fees, which is increasing in the gradient of confirmation time reduction per movement up in the fee queue; and that transactor choice of RBF, CPFP, and block conditions have economically important effects on fees.