Babel Fees via Limited Liabilities (2106.01161v2)

Abstract: Custom currencies (ERC-20) on Ethereum are wildly popular, but they are second class to the primary currency Ether. Custom currencies are more complex and more expensive to handle than the primary currency as their accounting is not natively performed by the underlying ledger, but instead in user-defined contract code. Furthermore, and quite importantly, transaction fees can only be paid in Ether. In this paper, we focus on being able to pay transaction fees in custom currencies. We achieve this by way of a mechanism permitting short term liabilities to pay transaction fees in conjunction with offers of custom currencies to compensate for those liabilities. This enables block producers to accept custom currencies in exchange for settling liabilities of transactions that they process. We present formal ledger rules to handle liabilities together with the concept of babel fees to pay transaction fees in custom currencies. We also discuss how clients can determine what fees they have to pay, and we present a solution to the knapsack problem variant that block producers have to solve in the presence of babel fees to optimise their profits.

• The paper introduces a limited liabilities mechanism that temporarily permits negative token balances to offset custom fee payments and maintain ledger integrity.
• It develops the concept of babel fees, enabling transactions to use alternative currencies by leveraging a market mechanism to balance token values.
• The study offers both exact and approximate algorithms for block selection, highlighting practical applications for optimizing DeFi operations and future research directions.

Overview of "Babel Fees via Limited Liabilities"

The paper "Babel Fees via Limited Liabilities" addresses the limitations of custom currencies on blockchain platforms, specifically in the context of transaction fees, which traditionally can only be settled using a blockchain's primary currency. The authors propose a novel framework allowing transaction fees to be paid using custom currencies, resolving challenges related to the second-class status of custom tokens, typically ERC-20 tokens on Ethereum. Their method introduces a concept called babel fees, integrating the notion of short-term liabilities to facilitate this alternative fee payment mechanism.

Key Contributions

1. Limited Liabilities Mechanism: The paper introduces the concept of limited liabilities within a ledger, a mechanism to temporarily allow negative token amounts — defined as liabilities. This approach allows transactions containing liabilities, which typically are prohibited from persisting on a blockchain, to be bundled into batches where liabilities are offset, ensuring the ledger remains balanced upon finalization.
2. Babel Fees: The babel fees concept enables transactions to specify alternative currencies for fee payment, contingent upon a market mechanism where different actors value the custom tokens and offset the liabilities. The method uses a unique ledger mechanism where transaction creators form babel fee outputs with token bundles indicating a shortfall in the primary currency and excesses in custom tokens as compensation.
3. Practical Implementation: The authors present formal ledger rules to support this framework and discuss a knapsack problem for block producers, aimed at optimizing transactions included in blocks as per token value assessments. Block issuers are incentivized to select transactions that maximize their profits by accepting custom tokens corresponding to their value assessments.
4. Algorithmic Solutions: The paper provides both exact and approximate algorithms for block selection in the presence of babel fees, with proofs ensuring that the latter offers solutions close to optimal with polynomial time complexity.

Implications

The approach detailed in the paper has both immediate practical and broad theoretical implications. By allowing transaction fees to be paid in a more flexible manner, the framework encourages broader use of custom tokens and enhances the economic interactions possible on a blockchain, potentially catalyzing further developments in decentralized finance (DeFi). Furthermore, the mechanisms of liabilities and atomic swaps offer alternative perspectives on managing on-chain resources, enhancing liquidity, and providing greater autonomy to users in fee payments.

Future Directions

The paper opens several pathways for further research. One could explore the implementation of babel fees across different blockchain architectures, particularly examining the translation from UTXO-based to account-based systems. Investigations into dynamic exchange rates, market adaptations for pricing babel offers, and productivity impacts would refine the model and enhance its capability. Moreover, its utility in specific applications like token-based services, oracles (deploying swaps for data), and more efficient cross-chain interoperability could be explored. Examining resilience to various adversarial scenarios would also be crucial for broader adoption.

In conclusion, the paper presents a structurally innovative solution to a pressing problem in blockchain ecosystems, contributing a formal framework that extends the utility and efficiency of custom tokens while maintaining ledger integrity. The concept of babel fees via limited liabilities is a compelling addition to blockchain transaction mechanisms, with promising directions for future exploration and deployment.