Miner Competition and Transaction Fees

36 Pages Posted: 23 Jun 2021 Last revised: 21 Mar 2022

See all articles by Enchuan Shao

Enchuan Shao

University of Saskatchewan - Economics

Danusha Rajapaksa

University of Saskatchewan - Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 19, 2022

Abstract

In order to maintain the function of a decentralized financial system like Bitcoin, transaction fees are offered to engage miners in the transaction confirmation process. This paper investigates the effect of miner competition on the equilibrium transaction fees. We develop a game-theoretic model with costly entry into mining activities. We find that miners may strategically assemble fewer transactions into a block to reduce total fees, and as a result, to deter entry. Equilibrium transaction fees also depend on block rewards as a rise in total fees is accompanied by a drop in rewards. Our empirical analysis supports the model's predictions. We provide evidence on the existence of excess capacity in a block, taking into account the random confirmation process. The empirical findings demonstrate that heightened competition tends to increase the block size and total fees. Furthermore, the halving of rewards correlates to a fee hike.

Keywords: Bitcoin Mining, Transaction Fees, Entry Deterrence

JEL Classification: G10, E42, L13

Suggested Citation

Shao, Enchuan and Rajapaksa, Danusha, Miner Competition and Transaction Fees (March 19, 2022). Available at SSRN: https://ssrn.com/abstract=3867552 or http://dx.doi.org/10.2139/ssrn.3867552

Enchuan Shao (Contact Author)

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

Danusha Rajapaksa

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
47
Abstract Views
323
PlumX Metrics