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Farsighted Miners under Transaction Fee Mechanism EIP1559

Author

Listed:
  • Jens Leth Hougaard

    (Department of Food and Resource Economics, University of Copenhagen)

  • Mohsen Pourpouneh

    (Department of Food and Resource Economics, University of Copenhagen)

Abstract

We investigate the recent fee mechanism EIP1559 of the Ethereum network. Whereas previous studies have focused on myopic miners, we here focus on strategic miners in the sense of miners being able to reason k-blocks ahead. We derive expressions for optimal miner behavior (in terms of setting block sizes) in the case of 2-block foresight and varying degrees of hashing power. Results indicate that a sufficiently large mining pool will have enough hashing power to gain by strategic foresight. We further use a simulation study to examine the impact of both 2-block and 3-block foresight. In particular, the simulation study indicates that for realistic levels of hashing power, mining pools do not gain from the being able to reason more than 2 blocks ahead. Moreover, even though the presence of strategic miners increase the variation in block sizes and potentially empty blocks, overall system throughput tend to increase slightly compared to myopic mining.

Suggested Citation

  • Jens Leth Hougaard & Mohsen Pourpouneh, 2022. "Farsighted Miners under Transaction Fee Mechanism EIP1559," IFRO Working Paper 2022/04, University of Copenhagen, Department of Food and Resource Economics, revised Dec 2022.
    • Handle: RePEc:foi:wpaper:2022_04
    as

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    File URL: http://okonomi.foi.dk/workingpapers/WPpdf/WP2022/IFRO_WP_2022_04_update.pdf
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    References listed on IDEAS

    as
    1. Eric Maskin, 2001. "Auctions and Efficiency," Economics Working Papers 0002, Institute for Advanced Study, School of Social Science.
    2. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Blockchain; Ethereum; Transaction fee mechanism;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets

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