Redesigning Bitcoin's fee market

The security of the Bitcoin system is based on having a large amount of computational power in the hands of honest miners. Such miners are incentivized to join the system and validate transactions by the payments issued by the protocol to anyone who creates blocks. As new bitcoins creation rate decreases (halving every 4 years), the revenue derived from transaction fees start to have an increasingly important role. We argue that Bitcoin's current fee market does not extract revenue well when blocks are not congested. This effect has implications for the scalability debate: revenue from transaction fees may decrease if block size is increased. The current mechanism is a "pay your bid" auction in which included transactions pay the amount they suggested. We propose two alternative auction mechanisms: The Monopolistic Price Mechanism, and the Random Sampling Optimal Price Mechanism (due to Goldberg et al.). In the monopolistic price mechanism, the miner chooses the number of accepted transactions in the block, and all transactions pay exactly the smallest bid included in the block. The mechanism thus sets the block size dynamically (up to a bound required for fast block propagation and other security concerns). We show, using analysis and simulations, that this mechanism extracts revenue better from users, and that it is nearly incentive compatible: the profit due to strategic bidding relative to honest biding decreases as the number of bidders grows. Users can then simply set their bids truthfully to exactly the amount they are willing to pay to transact, and do not need to utilize fee estimate mechanisms, do not resort to bid shading and do not need to adjust transaction fees (via replace-by-fee mechanisms) if the mempool grows. We discuss these and other properties of our mechanisms, and explore various desired properties of fee market mechanisms for crypto-currencies

Performance-Based Analysis of Blockchain Scalability Metric

Cryptocurrencies like Bitcoin and Ethereum, are widely known applications of blockchain technology, have drawn much attention and are largely recognized in recent years. Initially Bitcoin and Ethereum processed 7 and 15 Transactions Per Second (TPS) respectively, whereas VISA and Paypal process 1700 and 193 TPS respectively. The biggest challenge to blockchain adoption is scalability, defined as the capacity to change the block size to handle the growing amount of load. This paper attempts to present the existing scalability solutions which are broadly classified into three layers: Layer 0 solutions focus on optimization of propagation protocol for transactions and blocks, Layer 1 solutions are based on the consensus algorithms and data structure, and Layer 2 solutions aims to decrease the load of the primary chain by implementing solutions outside the chain. We present a classification and comparison of existing blockchain scalability solutions based on performance along with their pros and cons

Scalability Analysis of Blockchains Through Blockchain Simulation

The past decade has witnessed a surge of cryptocurrencies such as bitcoins, litecoin, dogecoin, peercoin, bitcoin being the most popular amongst them. Enthusiasts and skeptics have debated and come up with disparate opinions to contest both the success and failures of such currencies. However, the veracity of such opinions can only be derived after true analysis of the technological breakthroughs that have occurred in this domain. Blockchains being the backbone of such currencies is a broad subject that encompasses economics, law, cryptography and software engineering. Most of these technologies are decentralized and are open source algorithms. Blockchains popularity is largely based on its tremendous potential of carrying huge amount of data securely over a peer to peer network. This feature of blockchains has leveraged its value in the market for many companies who want to use blockchains for enterprise goals and profit making. For a more comprehensive understanding of blockchains and how the block generation algorithm works , how transactions are included in a block we must understand the genesis of the blockchain technology, what exactly it represents and its relevance to the real world. Despite its advantages, blockchains still remain a novel technology and their remains areas of concerns that can be bettered for attaining ideal efficiency. This research delves into the scalability issue of blockchains and provides a comparative analysis of several blockchain parameters with real time data . It delves into the factors that make block chains largely non-scalable. This is done by the simulation of blockchain. It then addresses the various mechanisms that can be employed to resolve this limitation through measuring the differences between the simulator and real time scenarios

A Miniscule Survey on Blockchain Scalability

With the rise of cryptocurrency and NFTs in the past decade, blockchain technology has been an area of increasing interest to both industry and academic experts. In this paper, we discuss the feasibility of such systems through the lens of scalability. We also briefly dive into the security issues of such systems, as well as some applications, including healthcare, supply chain, and government applications

Low on Trust and High on Risks: Is Sidechain a Good Solution to Bitcoin Problems?

Over the past few years, cryptocurrencies (especially Bitcoin) have attracted a particular attention. As the number of transactions increase, these systems tend to become slower, expensive, and unsustainable for a use-case such as payment. In this way, the Bitcoin sidechain seeks to provide prompt and confidential transactions between major trading platforms. Although poor performance and high volatility can push potential users away from Bitcoin, this study reveals that the introduction of sidechain solves some of the problems Bitcoin is facing. Using relatively new techniques, we find that the implementation of sidechain reduces Bitcoin price volatility, rises its efficiency, and enhances its usefulness as a transaction tool and a diversifier. We explain these changes in Bitcoin characteristics by the sidechain"s capacity to speed up the circulation of money by shortening block validation times and to an improvement in the scalability of Proof of Work and Bitcoin payment services. Our results also indicate that the sidechain liquid network lead to a less energy-consuming and in turn to less polluting Bitcoin system. But a weakly vanishing causality between Bitcoin mining and Bitcoin energy consumption implies that the concentration of miners is still follow available electrical supply

Bitcoin Governance as a Decentralized Financial Market Infrastructure

Bitcoin is the oldest and most widely established cryptocurrency network with the highest market capitalization among all cryptocurrencies. Although bitcoin (with lowercase b) is increasingly viewed as a digital asset belonging to a new asset class, the Bitcoin network (with uppercase B) is a decentralized financial market infrastructure (dFMI) that clears and settles transactions in its native asset without relying on the conventional financial market infrastructures (FMIs). To be a reliable asset class as well as a dFMI, however, Bitcoin needs to have robust governance arrangements; whether such arrangements are built into the protocol (i.e., on-chain governance mechanisms) or relegated to the participants in the Bitcoin network (i.e., off-chain governance mechanisms), or are composed of a combination of both mechanisms (i.e., a hybrid form of governance). This paper studies Bitcoin governance with a focus on its alleged shortcomings. In so doing, after defining Bitcoin governance and its objectives, the paper puts forward an idiosyncratic governance model whose main objective is to preserve and maximize the main value proposition of Bitcoin, i.e., its censorship-resistant property, which allows participants to transact in an environment with minimum social trust. Therefore, Bitcoin governance, including the processes through which Bitcoin governance crises have been resolved and the standards against which the Bitcoin Improvement Proposals (BIPs) are examined, should be analyzed in light of the prevailing narrative of Bitcoin as a censorship-resistant store of value and payment infrastructure. Within such a special governance model, this paper seeks to identify the potential shortcomings in Bitcoin governance by reference to the major governance crises that posed serious threats to Bitcoin in the last decade. It concludes that the existing governance arrangements in the Bitcoin network have been largely successful in dealing with Bitcoin’s major crises that would have otherwise become existential threats to the Bitcoin network