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

From: Chenxi Cai <[email-masked]>
Date: Thu, 30 Nov 2017 16:15:01 +0000

It is clear that charging min fee won't maximize total miner's fees because it ignores heterogeneity in willingness to pay among bidders within the same block. Also, spamming can still occur by setting a large number of transactions to the min fee. Competition between spammers might drive up the min fee, which is really where the positive effect comes from in this model.

A two-part pricing scheme involving a fixed fee per transaction plus variable fee per byte is likely to work much better. The fixed fee component raises the cost of micro-transactions substantially and deters spamming of the mempool.  Also, revenue is not lost from people with higher willingness to pay.

Chenxi

________________________________
From: William Morriss <[email-masked]>
Sent: Wednesday, November 29, 2017 11:05 PM
To: Chenxi Cai
Cc: Bitcoin Protocol Discussion
Subject: Re: [bitcoin-dev] BIP Idea: Marginal Pricing

On Wed, Nov 29, 2017 at 9:52 PM, Chenxi Cai <[email-masked]<mailto:[email-masked]>> wrote:

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

Changing the bidding system to the marginal price allows us to supersede the block size limit, which changes the outcome of the auction, as different transactions are included.