Blockchain Price vs. Quantity Controls

11 Pages Posted: 25 Aug 2023 Last revised: 1 May 2024

See all articles by Abdoulaye Ndiaye

Abdoulaye Ndiaye

New York University (NYU) - New York University

Date Written: April 30, 2024

Abstract

This paper studies the optimal transaction fee mechanisms for blockchains, focusing on the distinction between price-based (P) and quantity-based (Q) controls. By analyzing factors such as demand uncertainty, validator costs, cryptocurrency price fluctuations, price elasticity of demand, and levels of decentralization, we establish criteria that determine the selection of transaction fee mechanisms. We present a model framed around a Nash bargaining game, exploring how blockchain designers and validators negotiate fee structures to balance network welfare with profitability. Our findings suggest that the choice between P and Q mechanisms depends critically on the blockchain’s specific technical and economic features. The study concludes that no single mechanism suits all contexts and highlights the potential for hybrid approaches that adaptively combine features of both P and Q to meet varying demands and market conditions.

Keywords: blockchain, transaction fees, EIP-1559, EIP-4844, price elasticity, decentralization, validator costs, demand uncertainty, cryptocurrency volatility

JEL Classification: D40, G23, L86, 031

Suggested Citation

Ndiaye, Abdoulaye, Blockchain Price vs. Quantity Controls (April 30, 2024). Available at SSRN: https://ssrn.com/abstract=4538155

Abdoulaye Ndiaye (Contact Author)

New York University (NYU) - New York University ( email )

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