Dynamic Transaction Fee Mechanism Design

Mallesh Pai PFP
Mallesh Pai
Max Resnick PFP
Max Resnick


Transaction fee mechanism design for blockchains is an active field of research; however, much of the current literature focuses on a static model in which users only care about inclusion in the next block. In contrast, this paper studies the design of transaction fee mechanisms in a more realistic dynamic setting where both transactions and blocks arrive over time and users face a dynamic tradeoff between paying more for immediate inclusion or paying less for delayed inclusion.

In this context we show two main results. First we show that Proof-of-Stake chains, where blocks arrive at deterministic intervals, have lower equilibrium congestion and bids than Proof-of-Work chains with the same demand and throughput.
Second, we investigate EIP-1559, a dynamic reserve price mechanism introduced to Ethereum in 2021. We show that, unlike in the static model, EIP-1559 is not Dominant Strategy Incentive Compatible (DSIC) in the dynamic model. Furthermore we show that rapid updates to the reserve price can lead to substantial congestion for low willingness-to-pay users. We use these findings to study how to improve on EIP-1559. In particular, we argue that slower updating rules for EIP-1559 may alleviate the delays for low types.

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