Transaction Fee Mechanism Design

Demand for blockchains such as Bitcoin and Ethereum is far larger than supply, necessitating a mechanism that selects a subset of transactions to include "on-chain" from the pool of all pending transactions. EIP-1559 is a proposal to make several tightly coupled changes to the Ethereum blockchain's transaction fee mechanism, including the introduction of variable-size blocks and a burned base fee that rises and falls with demand. These changes are slated for deployment in Ethereum's "London fork," scheduled for late summer~2021, at which point it will be the biggest economic change made to a major blockchain to date. The first goal of this paper is to formalize the problem of designing a transaction fee mechanism, taking into account the many idiosyncrasies of the blockchain setting (ranging from off-chain collusion between miners and users to the ease of money-burning). The second goal is to situate the specific mechanism proposed in EIP-1559 in this framework and rigorously interrogate its game-theoretic properties. The third goal is to suggest competing designs that offer alternative sets of trade-offs. The final goal is to highlight research opportunities for the EC community that could help shape the future of blockchain transaction fee mechanisms.