# Transaction Fee Mechanisms ## Auctions in DLTs ### First-price auctions (FPAs) * Bitcoin Drawbacks: * Fee instability * Extremely inefficient *for the user, who tends to underpay or overpay* (difficult to choose the right fee) * Big UX barrier ### Ethereum EIP-1559 EIP-1559: https://github.com/ethereum/EIPs/blob/master/EIPS/eip-1559.md Variation of EIP-1559 in Filecoin: https://filfox.info/en/stats/gas Variation of EIP-1559 in NEAR: * https://near.org/papers/the-official-near-white-paper/ * https://docs.near.org/concepts/basics/transactions/gas Ideas behind EIP-1559 * *Variable, objectively calculated*, history-dependent Base fee *which is burned* * Tips *(which are paid to the block producer)* are bids in FPA (sort of emergency mechanism in case of congestion) * Variable-sized blocks *with a target and a maximum size* EIP-1559 * satisfies MMIC and OCA-proofness conditions * is DSIC (except when there is a sudden demand spike) Truthful bidding is usually optimal (https://dl.acm.org/doi/pdf/10.1145/3485447.3512051) ### Polkadot Transaction Fees https://wiki.polkadot.network/docs/learn-transaction-fees Weight-based model: once the fee is paid, nodes will execute the transaction Fees are calculated based on: * Weight fee * Length fee * Tip (optional) ### StableFees S. Basu et al., "StableFees: A Predictable Fee Market for Cryptocurrencies" in Tokenomics 2019: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3318327 * Monopolistic approach (second price auction) * Users are incentived to bid their true value * Maximizes social welfare **Algorithm**: * Charge the minimum fee in the block * The miner will be receiving the average of the large n blocks mined **Drawback**: not OCA-proof ## Definitions **DSIC: Dominant Strategy Incentive Compatibility** Robustness to deviations from straightforward bidding by transaction creators. **MMIC: Incentive Compatibility for Myopic Miners** A transaction fee mechanism should be robust to deviations by profit-maximizing miners from the intended allocation rule and also the injection of fake transactions **OCA-proof: Off-chain Agreement** The mechanism should be robust to cartels of transaction creators and miners colluding off-chain; more precisely, no off-chain arrangement among members of such a cartel should be capable of Pareto improving over a canonical on-chain outcome. Proof that no transaction fee mechanism is always DSIC, MMIC and OCA-proof: https://arxiv.org/abs/2111.03151 ## Additional reading material Y. Liu et al., "Empirical Analysis of EIP-1559: Transaction Fees, Waiting Times, and Consensus Security" in ACM SIGSAC 2022: https://arxiv.org/pdf/2201.05574.pdf (check references in it) Z. Shi et al., "Integration of Blockchain and Auction Models: A Survey, Some Applications, and Challenges" in ArXiv: https://arxiv.org/abs/2110.12534 G. Yan et al., "Dynamic Game Model for Ranking Bitcoin Transactions Under GSP Mechanism" in IEEE Access: https://ieeexplore.ieee.org/document/9112199 Roughgarden T., "Transaction Fee Mechanism Design": https://arxiv.org/pdf/2106.01340.pdf [Roughgarden speech at UZH](https://uzh.mediaspace.cast.switch.ch/channel/UZH%2BBlockchain%2BCenter%2B-%2BLecture%2BSeries/13110) ## Slides and Recording - [Slides](https://docs.google.com/presentation/d/1RvlZPbepxJNxudZmHWUCF71KGAw-1Ins/edit?usp=share_link&ouid=115542597871066403253&rtpof=true&sd=true) - [Recording](https://drive.google.com/file/d/1ixYFvhSaSXTXXK82G2vhyoOIJePMZFW-/view?usp=share_link)