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The economics of Bitcoin transaction fees

Author

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  • Nicolas Houy

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study the economics of Bitcoin transaction fees in a simple static partial equilibrium model with the specificity that the system security is directly linked to the total computational power of miners. We show that any situation with a fixed fee is equivalent to another situation with a limited block size. In both cases, we give the optimal value of the transaction fee or of the block size. We also show that making the block size a non binding constraint and, in the same time, letting the fee be fixed as the outcome of a decentralized competitive market cannot guarantee the very existence of Bitcoin in the long-term.

Suggested Citation

  • Nicolas Houy, 2014. "The economics of Bitcoin transaction fees," Working Papers halshs-00951358, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00951358
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00951358
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    References listed on IDEAS

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    1. Nicolas Houy, 2014. "It will cost you nothing to "kill" a proof-of-stake crypto-currency," Economics Bulletin, AccessEcon, vol. 34(2), pages 1038-1044.
    2. Fumiko Hayashi & William R. Keeton, 2012. "Measuring the costs of retail payment methods," Economic Review, Federal Reserve Bank of Kansas City, vol. 97(Q II).
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    Cited by:

    1. Yulin Liu & Yuxuan Lu & Kartik Nayak & Fan Zhang & Luyao Zhang & Yinhong Zhao, 2022. "Empirical Analysis of EIP-1559: Transaction Fees, Waiting Time, and Consensus Security," Papers 2201.05574, arXiv.org, revised Apr 2023.
    2. Bonaparte, Yosef, 2022. "Time horizon and cryptocurrency ownership: Is crypto not speculative?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    3. Parthajit Kayal & Purnima Rohilla, 2021. "Bitcoin in the economics and finance literature: a survey," SN Business & Economics, Springer, vol. 1(7), pages 1-21, July.
    4. Korniotis, George & Bhambhwani, Siddharth & Delikouras, Stefanos, 2019. "Blockchain Characteristics and the Cross-Section of Cryptocurrency Returns," CEPR Discussion Papers 13724, C.E.P.R. Discussion Papers.
    5. Luca Marchiori, 2018. "Monetary theory reversed: Virtual currency issuance and miners’ remuneration," BCL working papers 115, Central Bank of Luxembourg.
    6. Silvia Bartolucci & Fabio Caccioli & Pierpaolo Vivo, 2019. "A percolation model for the emergence of the Bitcoin Lightning Network," Papers 1912.03556, arXiv.org.
    7. Pavel Ciaian & Miroslava Rajcaniova & d’Artis Kancs, 2016. "The digital agenda of virtual currencies: Can BitCoin become a global currency?," Information Systems and e-Business Management, Springer, vol. 14(4), pages 883-919, November.
    8. Andreas Hanl, 2018. "Some Insights into the Development of Cryptocurrencies," MAGKS Papers on Economics 201804, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    9. Rainer Böhme & Nicolas Christin & Benjamin Edelman & Tyler Moore, 2015. "Bitcoin: Economics, Technology, and Governance," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 213-238, Spring.
    10. Juanjuan Li & Yong Yuan & Fei-Yue Wang, 2022. "Analyzing Bitcoin transaction fees using a queueing game model," Electronic Commerce Research, Springer, vol. 22(1), pages 135-155, March.
    11. Tim Roughgarden, 2020. "Transaction Fee Mechanism Design for the Ethereum Blockchain: An Economic Analysis of EIP-1559," Papers 2012.00854, arXiv.org.
    12. Lambrecht, Maxime & Larue, Louis, 2018. "After the (virtual) gold rush: is Bitcoin more than a speculative bubble?," Internet Policy Review: Journal on Internet Regulation, Alexander von Humboldt Institute for Internet and Society (HIIG), Berlin, vol. 7(4), pages 1-22.
    13. Bonaparte, Yosef & Bernile, Gennaro, 2023. "A new “Wall Street Darling?” effects of regulation sentiment in cryptocurrency markets," Finance Research Letters, Elsevier, vol. 52(C).
    14. Silvia Bartolucci & Andrei Kirilenko, 2019. "A Model of the Optimal Selection of Crypto Assets," Papers 1906.09632, arXiv.org.
    15. Natkamon Tovanich & Nicolas Soulié & Nicolas Heulot & Petra Isenberg, 2022. "MiningVis: visual analytics of the Bitcoin mining economy," Post-Print hal-03348145, HAL.
    16. Dulani Jayasuriya Daluwathumullagamage & Alexandra Sims, 2020. "Blockchain-Enabled Corporate Governance and Regulation," IJFS, MDPI, vol. 8(2), pages 1-41, June.
    17. Yan, Guanghui & Wang, Shan & Li, Shikui & Lu, Binwei, 2022. "Multi-player dynamic game model for Bitcoin transaction bidding prediction," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Bitcoin; transaction fee; mining; crypto-currency;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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