Dynamic Posted-Price Mechanisms for the Blockchain Transaction-Fee Market
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In recent years, prominent blockchain systems such as Bitcoin and Ethereum have experienced explosive growth in transaction volume, leading to frequent surges in demand for limited block space, causing transaction fees to fluctuate by orders of magnitude. Under the standard first-price auction approach, users find it difficult to estimate how much they need to bid to get their transactions accepted (balancing the risk of delay with a preference to avoid paying more than is necessary). In light of these issues, new transaction fee mechanisms have been proposed, most notably EIP-1559. A problem with EIP-1559 is that under market instability, it again reduces to a first-price auction. Here, we propose dynamic posted-price mechanisms, which are ex post Nash incentive compatible for myopic bidders and dominant strategy incentive compatible for myopic miners. We give sufficient conditions for which our mechanisms are stable and approximately welfare optimal in the probabilistic setting where each time step, bidders are drawn i.i.d. from a static (but unknown) distribution. Under this setting, we show instances where our dynamic mechanisms are stable, but EIP-1559 is unstable. Our main technical contribution is an iterative algorithm that, given oracle access to a Lipschitz continuous and concave function f, converges to a fixed point of f.
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