StableFees: A Predictable Fee Market for Cryptocurrencie

Abstract

Blockchain-based cryptocurrencies must solve the problem of assigning priorities
to competing transactions. The most widely used mechanism involves
each transaction offering a fee to be paid once the transaction is processed,
but this discriminatory price mechanism fails to yield stable equilibria with
predictable prices. We propose an alternate fee setting mechanism, Stable-
Fees, that is based on uniform price auctions. We prove that our proposed
protocol is free from manipulation by users and miners as the number of users
and miners increases and show empirically that gains from manipulation are
small in practice. We show that StableFees reduces the fees paid by users and
reduces the variance of fee income to miners. Data from December 2017 shows
that, if implemented, StableFees could have saved Bitcoin users $272,528,000
USD in transaction fees while reducing the variance of miner's fee income, on
average, by a factor of 7:4. We argue that our fee protocol also has important
social welfare and environmental benefits.

Keywords: bitcoin, auction, cryptocurrencies, transaction fees

JEL Classification: D44, G10