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Transaction Fee Mechanism Design

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  • Tim Roughgarden

Abstract

Demand for blockchains such as Bitcoin and Ethereum is far larger than supply, necessitating a mechanism that selects a subset of transactions to include "on-chain" from the pool of all pending transactions. This paper investigates the problem of designing a blockchain transaction fee mechanism through the lens of mechanism design. We introduce two new forms of incentive-compatibility that capture some of the idiosyncrasies of the blockchain setting, one (MMIC) that protects against deviations by profit-maximizing miners and one (OCA-proofness) that protects against off-chain collusion between miners and users. This study is immediately applicable to a recent (August 5, 2021) and major change to Ethereum's transaction fee mechanism, based on a proposal called "EIP-1559." Historically, Ethereum's transaction fee mechanism was a first-price (pay-as-bid) auction. EIP-1559 suggested making several tightly coupled changes, including the introduction of variable-size blocks, a history-dependent reserve price, and the burning of a significant portion of the transaction fees. We prove that this new mechanism earns an impressive report card: it satisfies the MMIC and OCA-proofness conditions, and is also dominant-strategy incentive compatible (DSIC) except when there is a sudden demand spike. We also introduce an alternative design, the "tipless mechanism," which offers an incomparable slate of incentive-compatibility guarantees -- it is MMIC and DSIC, and OCA-proof unless in the midst of a demand spike.

Suggested Citation

  • Tim Roughgarden, 2021. "Transaction Fee Mechanism Design," Papers 2106.01340, arXiv.org, revised Dec 2023.
    • Handle: RePEc:arx:papers:2106.01340
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    References listed on IDEAS

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    1. Raphael Auer, 2019. "Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies," Globalization Institute Working Papers 355, Federal Reserve Bank of Dallas.
    2. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    3. Mohammad Akbarpour & Shengwu Li, 2020. "Credible Auctions: A Trilemma," Econometrica, Econometric Society, vol. 88(2), pages 425-467, March.
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    Citations

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    Cited by:

    1. Matheus V. X. Ferreira & Ye Lin Sally Hahn & S. Matthew Weinberg & Catherine Yu, 2022. "Optimal Strategic Mining Against Cryptographic Self-Selection in Proof-of-Stake," Papers 2207.07996, arXiv.org.
    2. Andrew Komo & Scott Duke Kominers & Tim Roughgarden, 2024. "Shill-Proof Auctions," Papers 2404.00475, arXiv.org, revised Nov 2024.
    3. Matheus V. X. Ferreira & David C. Parkes, 2022. "Credible Decentralized Exchange Design via Verifiable Sequencing Rules," Papers 2209.15569, arXiv.org, revised Apr 2023.
    4. Conall Butler & Martin Crane, 2023. "Blockchain Transaction Fee Forecasting: A Comparison of Machine Learning Methods," Mathematics, MDPI, vol. 11(9), pages 1-26, May.
    5. Maryam Bahrani & Pranav Garimidi & Tim Roughgarden, 2023. "Transaction Fee Mechanism Design with Active Block Producers," Papers 2307.01686, arXiv.org, revised Oct 2023.
    6. Yuxuan Lu & Qian Qi & Xi Chen, 2023. "A Framework of Transaction Packaging in High-throughput Blockchains," Papers 2301.10944, arXiv.org.
    7. Abdoulaye Ndiaye, 2024. "Blockchain Price vs. Quantity Controls," Papers 2405.00235, arXiv.org.
    8. Luyao Zhang & Fan Zhang, 2023. "Understand Waiting Time in Transaction Fee Mechanism: An Interdisciplinary Perspective," Papers 2305.02552, arXiv.org.
    9. Michele Fabi, 2024. "Latency Tradeoffs in Blockchain Capacity Management," Working Papers 2024-10, Center for Research in Economics and Statistics.
    10. Oguzhan Akcin & Robert P. Streit & Benjamin Oommen & Sriram Vishwanath & Sandeep Chinchali, 2022. "A Control Theoretic Approach to Infrastructure-Centric Blockchain Tokenomics," Papers 2210.12881, arXiv.org.
    11. Agostino Capponi & Ruizhe Jia & Ye Wang, 2022. "The Evolution of Blockchain: from Lit to Dark," Papers 2202.05779, arXiv.org.
    12. Joshua S. Gans & Richard T. Holden, 2022. "Mechanism Design Approaches to Blockchain Consensus," NBER Working Papers 30189, National Bureau of Economic Research, Inc.
    13. Yoav Kolumbus & Joe Halpern & 'Eva Tardos, 2024. "Paying to Do Better: Games with Payments between Learning Agents," Papers 2405.20880, arXiv.org.
    14. Yotam Gafni & Aviv Yaish, 2022. "Discrete & Bayesian Transaction Fee Mechanisms," Papers 2210.07793, arXiv.org, revised May 2024.
    15. Eduard Hartwich & Alexander Rieger & Johannes Sedlmeir & Dominik Jurek & Gilbert Fridgen, 2023. "Machine economies," Electronic Markets, Springer;IIM University of St. Gallen, vol. 33(1), pages 1-13, December.
    16. Meryem Essaidi & Matheus V. X. Ferreira & S. Matthew Weinberg, 2022. "Credible, Strategyproof, Optimal, and Bounded Expected-Round Single-Item Auctions for all Distributions," Papers 2205.14758, arXiv.org.

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