Towards a Functional Fee Market for Cryptocurrencies

32 Pages Posted: 30 Jan 2019

See all articles by Soumya Basu

Soumya Basu

Cornell University - Department of Computer Science

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Emin Sirer

Cornell University

Date Written: January 18, 2019

Abstract

Blockchain-based cryptocurrencies prioritize transactions based on their fees, creating a unique kind of fee market. Empirically, this market has failed to yield stable equilibria with predictable prices for desired levels of service. We argue that this is due to the absence of a dominant strategy equilibrium in the current fee mechanism. We propose an alternative fee setting mechanism that is inspired by generalized second price auctions. The design of such a mechanism is challenging because miners can use any criteria for including transactions and can manipulate the results of the auction after seeing the proposed fees. Nonetheless, we show that our proposed protocol is free from manipulation as the number of users increases. We further show that, for a large number of users and miners, the gain from manipulation is small for all parties. This results in users proposing fees that represent their true utility and lower variance of revenue for miners. Historical analysis shows that Bitcoin users could have saved $272,528,000 USD in transaction fees while miners could have reduced the variance of fee income by an average factor of 7.4 times.

Keywords: bitcoin, auction, cryptocurrencies, transaction fees

JEL Classification: D44, G10

Suggested Citation

Basu, Soumya and Easley, David and O'Hara, Maureen and Sirer, Emin, Towards a Functional Fee Market for Cryptocurrencies (January 18, 2019). Available at SSRN: https://ssrn.com/abstract=3318327 or http://dx.doi.org/10.2139/ssrn.3318327

Soumya Basu

Cornell University - Department of Computer Science ( email )

4130 Upson Hall
Ithaca, NY 14853
United States

David Easley (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Emin Sirer

Cornell University

Ithaca, NY 14853
United States

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