Tiered Mechanisms for Blockchain Transaction Fees

TL;DR

This paper proposes a tiered transaction fee mechanism for blockchains that promotes inclusivity by accommodating diverse transaction urgencies, contrasting with current mechanisms like Ethereum's EIP-1559 which favor high-value, immediate transactions.

Contribution

It introduces a formal model and a tiered pricing mechanism that ensures more inclusive, stable, and potentially revenue-neutral transaction fee policies in blockchain systems.

Findings

EIP-1559 is not inclusive and causes price surges during congestion.

Our mechanism achieves stable, low prices for low-urgency transactions.

The proposed mechanism maintains revenue through price discrimination.

Abstract

Blockchain systems come with the promise of being inclusive for a variety of decentralized applications (DApps) that can serve different purposes and have different urgency requirements. Despite this, the transaction fee mechanisms currently deployed in popular platforms as well as previous modeling attempts for the associated mechanism design problem focus on an approach that favors increasing prices in favor of those clients who value immediate service during periods of congestion. To address this issue, we introduce a model that captures the traffic diversity of blockchain systems and a tiered pricing mechanism that is capable of implementing more inclusive transaction policies. In this model, we demonstrate formally that EIP-1559, the transaction fee mechanism currently used in Ethereum, is not inclusive and demonstrate experimentally that its prices surge horizontally during periods of congestion. On the other hand, we prove formally that our mechanism achieves stable prices in expectation and we provide experimental results that establish that prices for transactions can be kept low for low urgency transactions, resulting in a diverse set of transaction types entering the blockchain. At the same time, perhaps surprisingly, our mechanism does not necessarily sacrifice revenue since the lowering of the prices for low urgency transactions can be covered from high urgency ones due to the price discrimination ability of the mechanism.