Subject: Re: [bitcoin-dev] BIP Idea: Marginal Pricing

From: Chenxi Cai <[email-masked]>
Date: Thu, 30 Nov 2017 05:52:24 +0000

Hi All,

Auction theory is a well-studied problem in the economics literature. Currently what bitcoin has is Generalized first-price auction, where winning bidders pay their full bids. Alternatively, two approaches are potentially viable, which are Generalized second-price auction and Vickrey–Clarke–Groves auction. Generalized second-price auction, where winning bidders pay their next highest bids, reduces (but not eliminate) the need for bidders to strategize by allowing them to bid closer to their reservation price. Vickrey–Clarke–Groves auction, a more sophisticated system that considers all bids in relation to one another, elicit truthful bids from bidders, but may not maximize miners' fees as the other two systems will.

Due to one result called Revenue Equivalence, the choice of fee design will not impact miners' fees unless the outcomes of the auction changes (i.e, the highest bidders do not always win). In addition, the sole benefit of second-price auction over first-price auction is to spare people's mental troubles from strategizing, rather than actually saving mining fees, because in equilibrium the fees bidders pay remain the same. Therefore, in balance, I do not see substantial material benefits arising from switching to a different fee schedule.

Best,

Chenxi Cai

________________________________
From: [email-masked] <[email-masked]> on behalf of William Morriss via bitcoin-dev <[email-masked]>
Sent: Wednesday, November 29, 2017 5:47 PM
To: [email-masked]
Subject: [bitcoin-dev] BIP Idea: Marginal Pricing

Comrades,

Long term, tx fees must support hash power by themselves. The following is an economic approach to maximize total fee collection, and therefore hashpower.

Goals
Maximize total transaction fees
Reduce pending transaction time
Reduce individual transaction fees

Challenges
Validators must agree on the maximum block size, else miners can cheat and include extra transactions.
Allowing too many transactions per block will increase the cost of the mining without collecting much income for the network.

Problem
In the transaction market, users are the demand curve, because they will transact less when fees are higher, and prefer altcoins. The block size is the supply curve, because it represents miners' willingness to accept transactions.
Currently, the supply curve is inelastic:
Increasing the block size will not affect the inelasticity for any fixed block size. The downsides of a fixed block size limit are well-known:
- Unpredictable transaction settlement time
- Variable transaction fees depending on network congestion
- Frequent overpay

Proposal
1. Miners implicitly choose the market sat/byte rate with the cheapest-fee transaction included in their block. Excess transaction fees are refunded to the inputs.
2. Remove the block size limit, which is no longer necessary.

Benefits
- Dynamic block size limit regulated by profit motive
- Transaction fees maximized for every block
- No overpay; all fees are fair
Miners individually will make decisions to maximize their block-reward profit.
Miners are incentivized to ignore low-fee transactions because they would shave the profits of their other transactions and increase their hash time.
Users and services are free to bid higher transaction fees in order to reach the next block, since their excess bid will be refunded.

The block size limit was added as a spam-prevention measure, but in order for an attacker to spam the network with low-fee transactions, they would have to offset the marginal cost of reducing the price with their own transaction fees. Anti-spam is thus built into the marginal system without the need for an explicit limit.

Rarely, sections of the backlog would become large enough to be profitable. This means every so many blocks, lower-fee transactions would be included en masse after having been ignored long enough. Low-fee transactions thus gain a liveness property not previously enjoyed: low-fee transactions will eventually confirm. Miners targeting these transactions would be at a noteworthy disadvantage because they would be hashing a larger block. I predict that this scheme would result in two markets: a backlog market and a real-time market. Users targeting the backlog market would match the price of the largest backlog section in order to be included in the next backlog block.

Examples

Scenario 1
Sat/byte        Bytes   Reward
400     500000  200000000
300     700000  210000000
200     1000000 200000000
100     1500000 150000000
50      5000000 250000000
20      10000000        200000000
A miner would create a 5MB block and receive 0.25 BTC

Scenario 2
Sat/byte        Bytes   Reward
400     600000  240000000
300     700000  210000000
200     1000000 200000000
100     1800000 180000000
50      4000000 200000000
20      10000000        200000000
A miner would create a 600KB block and receive 0.24 BTC

Thanks,
William Morriss