Transaction Fee Mechanism for Proof-of-Stake Protocol

18 Pages Posted: 28 Aug 2023 Last revised: 30 Aug 2023

See all articles by Wenpin Tang

Wenpin Tang

Columbia University - Department of Industrial Engineering and Operations Research

David Yao

Columbia University

Date Written: August 26, 2023

Abstract

We study a mechanism design problem in the blockchain proof-of-stake (PoS) protocol. Our main objective is to extend the transaction fee mechanism (TFM) recently proposed in Chung and Shi (SODA, p.3856-3899, 2023), so as to incorporate a long-run utility model for the miner into the burning second-price auction mechanism 𝙱𝚂𝙿(γ) proposed in Chung and Shi (where γ is a key parameter in the strict γ-utility model that is applied to both miners and users). First, we derive an explicit functional form for the long-run utility of the miner using a martingale approach, and reveal a critical discontinuity of the utility function, namely a small deviation from being truthful will yield a discrete jump (up or down) in the miner's utility. We show that because of this discontinuity the 𝙱𝚂𝙿(γ) mechanism will fail a key desired property in TFM, c-side contract proofness (c-SCP). As a remedy, we introduce another parameter θ, and propose a new 𝙱𝚂𝙿(θ) mechanism, and prove that it satisfies all three desired properties of TFM: user- and miner-incentive compatibility (UIC and MIC) as well as c-SCP, provided the parameter θ falls into a specific range, along with a proper tick size imposed on user bids.

Keywords: Blockchain, proof of stake, transaction fee mechanism, cryptocurrency, incentive compatibility, utility, martingale

Suggested Citation

Tang, Wenpin and Yao, David, Transaction Fee Mechanism for Proof-of-Stake Protocol (August 26, 2023). Available at SSRN: https://ssrn.com/abstract=4552795 or http://dx.doi.org/10.2139/ssrn.4552795

Wenpin Tang (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research ( email )

500 W. 120th Street #315
New York, NY 10027
United States

David Yao

Columbia University ( email )

New York, NY
United States

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