Transaction Fees, Block Size Limit, and Auctions in Bitcoin

Authors

  • Nicola Dimitri University of Siena-Italy

DOI:

https://doi.org/10.5195/ledger.2019.145

Abstract

Confirmation of Bitcoin transactions is executed in blocks, which are then stored in the Blockchain. As compared to the number of transactions in the mempool, the set of transactions which are verified but not yet confirmed, available space for inclusion in a block is typically limited. For this reason, successful miners can only process a subset of such transactions, and users compete with each other to enter the next block by offering confirmation fees. Assuming that successful miners pursue revenue maximization, they will include in the block those mempool transactions that maximize earnings from related fees. In the paper we model transaction fees as a Nash Equilibrium outcome of an auction game with complete information. In the game the successful miner acts as an auctioneer selling block space, and users bid for shares of such space to confirm their transactions. Moreover, based on expected fees we also discuss what the optimal, revenue maximizing, block size limit should be for the successful miner. Consistently with the intuition, the optimal block size limit resolves the trade-off between including additional transactions (which possibly lower the unit fees collected) and keeping the block capacity limited (with, however, higher unit fees).

References

Bonneau, J. “Bitcoin Mining Is NP-Hard.” Freedom to Tinker (27 October 2014) https://freedom-to-tinker.com/2014/10/27/bitcoin-mining-is-np-hard/.

Chepurnoy, A., Kharin, V., Meshkov, D. “A Systematic Approach To Cryptocurrency Fees,” in A. Zohar, I. Eyal, V. Teague, J. Clark, A. Bracciali, F. Pintore, M. Sala (Eds.) Financial Cryptography and Data Security FC 2018 International Workshops, BITCOIN, VOTING, and WTSC, Nieuwpoort, Curaçao, March 2, 2018, Revised Selected Papers Berlin: Springer 19-30 (2019) https://doi.org/10.1007/978-3-662-58820-8_2.

Dimitri, N. “Bitcoin Mining as a Contest.” Ledger 2 31-37 (2017) https://doi.org/10.5195/ledger.2017.96.

Easley, D., O’Hara, M., Basu, S. “From Mining to Markets: The Evolution of Bitcoin Transaction Fees.” Journal of Financial Economics (available online) (2019) https://doi.org/10.1016/j.jfineco.2019.03.004.

Houy, N. “The Bitcoin Mining Game.” Ledger 1 53-68 (2016) https://doi.org/10.5195/ledger.2016.13.

Houy, N. “The Economics of Bitcoin Transaction Fees.” GATE Working Paper 1407, 2014 (2014) https://dx.doi.org/10.2139/ssrn.2400519.

Huberman, G., Leshno, J., Moallemi, C. “An Economic Analysis of the Bitcoin Payment System.” Columbia Business School Research Paper 17-92 (2019) https://dx.doi.org/10.2139/ssrn.3025604.

Kaşkaloğlu, K. “Near Zero Bitcoin Transaction Fees Cannot Last Forever,” in SDIWC, The International Conference on Digital Security and Forensics (DigitalSec2014) 91-99 (2014) http://sdiwc.net/digital-library/near-zero-bitcoin-transaction-fees-cannot-last-forever.html.

Lavi, R., Sattath, O., Zohar, A. “Redesigning Bitcoin’s Fee Market.” arXiv (2017) (accessed 27 May 2019) https://arxiv.org/abs/1709.08881.

Moser, M., Bohme, R. “Trends, Tips, Tolls: A Longitudinal Study of Bitcoin Transaction Fees,” in M. Brenner, N. Christin, B. Johnson, K. Rohloff (eds) Financial Cryptography and Data Security FC 2015 International Workshops, BITCOIN, WAHC, and Wearable, San Juan, Puerto Rico, January 30, 2015, Revised Selected Papers Berlin: Springer 19-33 (2015) https://doi.org/10.1007/978-3-662-48051-9_2.

Rizun, P. “A Transaction Fee Market Exists Without a Block Size Limit.” Bitcoin Unlimited Block Size Debate Working Paper (2015) https://www.bitcoinunlimited.info/resources/feemarket.pdf.

Wilson, R. “Auctions of Shares.” Quarterly Journal of Economics 93.4 675-689 (1979) https://doi.org/10.2307/1884475.

Cover image for Volume 4 of Ledger.

Downloads

Published

2019-06-07

How to Cite

Dimitri, N. (2019). Transaction Fees, Block Size Limit, and Auctions in Bitcoin. Ledger, 4. https://doi.org/10.5195/ledger.2019.145

Issue

Vol. 4 (2019)

Section

Research Articles

License

Authors who publish with this journal agree to the following terms:

  1. The Author retains copyright in the Work, where the term “Work” shall include all digital objects that may result in subsequent electronic publication or distribution.
  2. Upon acceptance of the Work, the author shall grant to the Publisher the right of first publication of the Work.
  3. The Author shall grant to the Publisher and its agents the nonexclusive perpetual right and license to publish, archive, and make accessible the Work in whole or in part in all forms of media now or hereafter known under a Creative Commons Attribution 4.0 International License or its equivalent, which, for the avoidance of doubt, allows others to copy, distribute, and transmit the Work under the following conditions:
    1. Attribution—other users must attribute the Work in the manner specified by the author as indicated on the journal Web site;
    with the understanding that the above condition can be waived with permission from the Author and that where the Work or any of its elements is in the public domain under applicable law, that status is in no way affected by the license.
  4. The Author is able to enter into separate, additional contractual arrangements for the nonexclusive distribution of the journal's published version of the Work (e.g., post it to an institutional repository or publish it in a book), as long as there is provided in the document an acknowledgement of its initial publication in this journal.
  5. Authors are permitted and encouraged to post online a prepublication manuscript (but not the Publisher’s final formatted PDF version of the Work) in institutional repositories or on their Websites prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work. Any such posting made before acceptance and publication of the Work shall be updated upon publication to include a reference to the Publisher-assigned DOI (Digital Object Identifier) and a link to the online abstract for the final published Work in the Journal.
  6. Upon Publisher’s request, the Author agrees to furnish promptly to Publisher, at the Author’s own expense, written evidence of the permissions, licenses, and consents for use of third-party material included within the Work, except as determined by Publisher to be covered by the principles of Fair Use.
  7. The Author represents and warrants that:
    1. the Work is the Author’s original work;
    2. the Author has not transferred, and will not transfer, exclusive rights in the Work to any third party;
    3. the Work is not pending review or under consideration by another publisher;
    4. the Work has not previously been published;
    5. the Work contains no misrepresentation or infringement of the Work or property of other authors or third parties; and
    6. the Work contains no libel, invasion of privacy, or other unlawful matter.
  8. The Author agrees to indemnify and hold Publisher harmless from Author’s breach of the representations and warranties contained in Paragraph 6 above, as well as any claim or proceeding relating to Publisher’s use and publication of any content contained in the Work, including third-party content.
  9. The Author agrees to digitally sign the Publisher’s final formatted PDF version of the Work.

Revised 7/16/2018. Revision Description: Removed outdated link. 

Most read articles by the same author(s)