Miner Collusion and the BitCoin Protocol

Abstract

Bitcoin users can offer fees to the miners who record transactions on the Blockchain. We document high variation of Bitcoin fees, not only over time, but also within blocks. Further, the blockchain rarely runs at capacity, even though there appears to be excess demand. We argue that this is inconsistent with competitive mining, but is consistent with strategic capacity management. If agents believe that only high fee transactions are executed in a timely fashion then strategic capacity management can be used to increase fee revenue. We note that mining pools facilitate collusion, and estimate that they have extracted least 200 million USD a year in excess fees by making processing artificially capacity scarce

Keywords: Bitcoin, Transaction Costs, Block-chain, Decentralized Finance