Transaction Fee Mining and Mechanism Design

TL;DR

This paper analyzes incentive issues in blockchain transaction fee mechanisms, surveying attacks, exploring incentive compatibility concepts, and evaluating classical and recent mechanisms like EIP-1559, highlighting fundamental incompatibilities and open problems.

Contribution

It provides a comprehensive analysis of incentive compatibility in blockchain fee mechanisms, introduces new perspectives, and compares classical and modern approaches including EIP-1559.

Findings

Incentive compatibility notions are provably incompatible in full form.

Classical and recent mechanisms exhibit different strengths and weaknesses.

Open problems remain in designing fully incentive-compatible fee mechanisms.

Abstract

Transaction fees represent a major incentive in many blockchain systems as a way to incentivize processing transactions. Unfortunately, they also introduce an enormous amount of incentive asymmetry compared to alternatives like fixed block rewards. We analyze some of the incentive compatibility issues that arise from transaction fees, which relate to the bids that users submit, the allocation rules that miners use to choose which transactions to include, and where they choose to mine in the context of longest-chain consensus. We start by surveying a variety of mining attacks including undercutting, fee sniping, and fee-optimized selfish mining. Then, we move to analyzing mechanistic notions of user incentive compatibility, myopic miner incentive compatibility, and off-chain-agreement-proofness, as well as why they are provably incompatible in their full form. Then, we discuss weaker notions of nearly and $\gamma$-weak incentive compatibility, and how all of these forms of incentive compatibility hold or fail in the trustless auctioneer setup of blockchains, examining classical mechanisms as well as more recent ones such as Ethereum's EIP-1559 mechanism and \cite{chung}'s burning second-price auction. Throughout, we generalize and interrelate existing notions, provide new unifying perspectives and intuitions on analysis, and discuss both specific and overarching open problems for future work.