StableFees: A Predictable Fee Market for Cryptocurrencie

30 Pages Posted: 30 Jan 2019 Last revised: 24 Jul 2021

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 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 first-price mechanism fails to yield stable equilibria with predictable prices. We propose an alternate fee setting mechanism, StableFees, that is based on second-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

Suggested Citation

Basu, Soumya and Easley, David and O'Hara, Maureen and Sirer, Emin, StableFees: A Predictable Fee Market for Cryptocurrencie (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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