"A Transaction Fee Market Exists Without a Block Size Limit"--new research paper suggests

Summary:

In a recent research paper titled “A Transaction Fee Market Exists Without a Block Size Limit,” Peter R explains how a rational Bitcoin miner should select transactions from his node’s mempool to maximize profit without a block size limit. The paper introduces the block space supply curve and the mempool demand curve, which describe the cost for a miner to supply block space by accounting for orphaning risk and the fees offered by the transactions in mempool, respectively. These curves are related to the derivatives of the classical economic supply and demand curves. The paper also shows that an unhealthy fee market—where miners are incentivized to produce arbitrarily large blocks—cannot exist since it requires communicating information at an arbitrarily fast rate. A healthy market is defined as one where a rational miner would be incentivized to produce a finite block. An unhealthy market is one where a miner would be incentivized to produce an arbitrarily large block. A non-existant market is one where a miner is better off publishing an empty block. The paper concludes by considering the conditions under which a rational miner would produce big, small or empty blocks, and by estimating the cost of a spam attack. The miner's profit is a maximum at the point where the derivatives of the mempool demand curve and the block space supply curve intersect. This is when "demand and supply are matched." The definitions presented in the paper for these curves represent the empirical demand measurable from a miner’s mempool, while the block space supply curve represents the additional cost to create a block of size Q by accounting for orphaning risk. Furthermore, not only is there a minimum fee density below which no rational miner should include any transactions but the required fee density for inclusion also naturally increases if demand for space within a block is elevated. If the cost to produce block space decreases (e.g., due to improvements in network interconnectivity), then a miner will be able to profitably include a greater number of transactions in his block. In such a scenario, there would be no scalability concerns, as scale would be almost perfectly elastic.

Updated on: 2023-06-10T18:11:51.319274+00:00