Dynamic Posted-Price Mechanisms for the Blockchain Transaction Fee Market (2103.14144v2)

Abstract: In recent years, prominent blockchain systems such as Bitcoin and Ethereum have experienced explosive growth in transaction volume, leading to frequent surges in demand for limited block space and causing transaction fees to fluctuate by orders of magnitude. Existing systems sell space using first-price auctions; however, users find it difficult to estimate how much they need to bid in order to get their transactions accepted onto the chain. If they bid too low, their transactions can have long confirmation times. If they bid too high, they pay larger fees than necessary. In light of these issues, new transaction fee mechanisms have been proposed, most notably EIP-1559, aiming to provide better usability. EIP-1559 is a history-dependent mechanism that relies on block utilization to adjust a base fee. We propose an alternative design -- a {\em dynamic posted-price mechanism} -- which uses not only block utilization but also observable bids from past blocks to compute a posted price for subsequent blocks. We show its potential to reduce price volatility by providing examples for which the prices of EIP-1559 are unstable while the prices of the proposed mechanism are stable. More generally, whenever the demand for the blockchain stabilizes, we ask if our mechanism is able to converge to a stable state. Our main result provides sufficient conditions in a probabilistic setting for which the proposed mechanism is approximately welfare optimal and the prices are stable. Our main technical contribution towards establishing stability is an iterative algorithm that, given oracle access to a Lipschitz continuous and strictly concave function $f$, converges to a fixed point of $f$.

• The paper introduces a novel dynamic posted-price mechanism that leverages historical utilization data and previous bid information to set transaction fees.
• It employs an iterative algorithm based on a Lipschitz continuous, strictly concave function to achieve convergence and price stability.
• Experimental results demonstrate reduced fee volatility relative to EIP-1559, potentially enhancing user satisfaction and economic welfare in blockchain networks.

Dynamic Posted-Price Mechanisms for Blockchain Transaction Fee Markets

Blockchain transaction fee markets have been challenged by the growing demands for block space, leading to erratic fluctuations in transaction fees, particularly in systems such as Bitcoin and Ethereum. Traditional first-price auctions employed by these systems create difficulties for users in estimating bid amounts necessary for transaction approval. This paper investigates a novel approach for addressing these concerns through dynamic posted-price mechanisms, proposing an alternative to the Ethereum Improvement Proposal 1559 (EIP-1559).

Unlike EIP-1559, which adjusts base fees based on historical block utilization, the dynamic posted-price mechanism utilizes both historical block utilization data and observable bids from previous blocks to determine a posted price for subsequent transactions. The paper presents evidence of the dynamic posted-price mechanism's capacity to stabilize transaction fees, particularly in scenarios where EIP-1559 prices demonstrate volatility. The dynamic mechanism sheds light on whether, under stable blockchain demand conditions, it can achieve approximately welfare-optimal prices.

The primary technical development underpinning the proposed mechanism is an iterative algorithm designed to achieve convergence to a fixed point of a Lipschitz continuous and strictly concave function. This convergence is facilitated utilizing oracle access to the specified function, ensuring price stability under probabilistic settings.

Experimental results affirms the dynamic posted-price mechanism's ability to mitigate price volatility compared to EIP-1559, emphasizing its practical implications for blockchain transaction fee markets. By offering a more stable pricing model, the approach can enhance user experience by reducing the uncertainty inherent in transaction fee estimation.

From a theoretical standpoint, the proposed mechanism enriches the blockchain fee market landscape with new insights into pricing stability and welfare optimization. While practical deployment and further empirical validation remain crucial, the implications of this research extend to improving allocation efficiency and user satisfaction in blockchain networks.

Future research directions may involve expanding on the dynamic mechanism by integrating additional predictive variables or exploring its adaptability across diverse blockchain implementations. Furthermore, ongoing evaluations of user behavior and market dynamics could provide deeper insights into transactional demand management, thus informing enhancements to posted-price models.

The convergence of the dynamic posted-price mechanism suggests promising evolutions in blockchain transaction fee architectures, potentially catalyzing advancements in algorithmic game theory and distributed ledger economics.