3 research outputs found
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
Redesigning Bitcoin's Fee Market
The Bitcoin payment system involves two agent types: users that transact with the currency and pay fees and miners in charge of authorizing transactions and securing the system in return for these fees. Two of Bitcoin's challenges are (i) securing sufficient miner revenues as block rewards decrease, and (ii) alleviating the throughput limitation due to a small maximal block size cap. These issues are strongly related as increasing the maximal block size may decrease revenue due to Bitcoin's pay-your-bid approach. To decouple them, we analyze the "monopolistic auction"[16], showing (i) its revenue does not decrease as the maximal block size increases, (ii) it is resilient to an untrusted auctioneer (the miner), and (iii) simplicity for transaction issuers (bidders), as the average gain from strategic bid shading (relative to bidding one's value) diminishes as the number of bids increases.</p