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Miner competition and transaction fees

Author

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  • Shao, Enchuan
  • Rajapaksa, Danusha

Abstract

In order to maintain the function of a decentralized financial system like Bitcoin, transaction fees are offered to engage miners in the transaction confirmation process. This paper investigates the effect of miner competition on the equilibrium transaction fees. We develop a game-theoretic model with costly entry into mining activities. We find that miners may strategically assemble fewer transactions into a block to reduce total fees, and as a result, to deter entry. Equilibrium transaction fees also depend on block rewards as a rise in total fees is accompanied by a drop in rewards. Our empirical analysis supports the model’s predictions. We provide evidence on the existence of excess capacity in a block, taking into account the random confirmation process. The empirical findings demonstrate that heightened competition tends to increase the block size and total fees. Furthermore, the halving of rewards correlates to a fee hike.

Suggested Citation

  • Shao, Enchuan & Rajapaksa, Danusha, 2024. "Miner competition and transaction fees," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    • Handle: RePEc:eee:jeborg:v:227:y:2024:i:c:s0167268124003500
    DOI: 10.1016/j.jebo.2024.106736
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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