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Determination of equilibrium transaction fees in the Bitcoin network: A rank-order contest

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  • Kim, Daehan
  • Ryu, Doojin
  • Webb, Robert I.

Abstract

Bitcoin users compete with one another over the timing of the settlement of their on-[block]chain transactions. Earlier settlement is valuable. Bitcoin users can accelerate the confirmation of the settlement of their transactions in the cryptocurrency by voluntarily bidding transaction fees with a user's optimal fee level dependent upon his or her impatience. We characterize this transaction competition as a contest with a rank-order allocation of prizes. Under this characterization, we derive the fee-bidding strategy at the symmetric equilibrium. Based on this equilibrium, we discuss the Bitcoin network and highlight the impacts of changes in different factors related to the mining industry. We find that fee–security feedback can amplify the impacts of these events.

Suggested Citation

  • Kim, Daehan & Ryu, Doojin & Webb, Robert I., 2023. "Determination of equilibrium transaction fees in the Bitcoin network: A rank-order contest," International Review of Financial Analysis, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000030
    DOI: 10.1016/j.irfa.2023.102487
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    References listed on IDEAS

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    Cited by:

    1. Podhorsky, Andrea, 2023. "Taxing bitcoin: Incentivizing the difficulty adjustment mechanism to reduce electricity usage," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Son, Jaemin & Ryu, Doojin & Webb, Robert I., 2023. "Central bank digital currency: Payment choices and commercial bank profitability," International Review of Financial Analysis, Elsevier, vol. 90(C).
    3. Chi-Wei Su & Yuru Song & Hsu-Ling Chang & Weike Zhang & Meng Qin, 2023. "Could Cryptocurrency Policy Uncertainty Facilitate U.S. Carbon Neutrality?," Sustainability, MDPI, vol. 15(9), pages 1-15, May.

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    More about this item

    Keywords

    Bitcoin; Blockchain security; Contest theory; Rank-order allocation; Transaction fee;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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