Blockchain Price vs. Quantity Controls

TL;DR

This paper analyzes optimal transaction fee mechanisms for blockchains, comparing price-based and quantity-based controls, and provides criteria for selecting suitable mechanisms based on economic and technical factors.

Contribution

It introduces a model using Nash bargaining to determine when to use price or quantity controls, considering demand uncertainty, costs, and decentralization.

Findings

Choice of fee mechanism depends on blockchain's features.

Hybrid fee mechanisms can adapt to different market conditions.

No single mechanism is optimal for all blockchain contexts.

Abstract

This paper studies the optimal transaction fee mechanisms for blockchains, focusing on the distinction between price-based ($\mathcal{P}$) and quantity-based ($\mathcal{Q}$) controls. By analyzing factors such as demand uncertainty, validator costs, cryptocurrency price fluctuations, price elasticity of demand, and levels of decentralization, we establish criteria that determine the selection of transaction fee mechanisms. We present a model framed around a Nash bargaining game, exploring how blockchain designers and validators negotiate fee structures to balance network welfare with profitability. Our findings suggest that the choice between $\mathcal{P}$ and $\mathcal{Q}$ mechanisms depends critically on the blockchain's specific technical and economic features. The study concludes that no single mechanism suits all contexts and highlights the potential for hybrid approaches that adaptively combine features of both $\mathcal{P}$ and $\mathcal{Q}$ to meet varying demands and market conditions.