Blockchain Fee Policies: Quantity- vs Price-Control Design across Protocols

Abdoulaye Ndiaye

No 18890, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops an economic theory to explain the optimal choice of blockchain transaction fee policies, contrasting quantity controls (as in Bitcoin) and price controls (as in Ethereum). I model the blockchain as a decentralized platform where validators, possessing temporary monopoly power and facing uncertain operational costs, choose transactions under varying user demand. Price controls outperform quantity controls when demand volatility is significant, the correlation between marginal costs and demand is low, and validators hold substantial bargaining power—conditions aligning closely with Ethereum’s current structure following its proof-of-stake transition. Conversely, quantity controls are optimal when marginal costs positively correlate with demand and validators’ bargaining power is limited, conditions characteristic of Bitcoin’s proof-of-work model. To a first-order approximation, I characterize the dynamics of Ethereum’s fee policies: deviations from the block-size target decay with persistence such that adjustment faster than the inverse elasticity buys not faster convergence but oscillations and excess fee volatility. Using recent transaction data, I illustrate that Ethereum’s base fee adjusts more rapidly than optimal. Additionally, I derive bounds for block size targets to mitigate maximal extractable value (MEV) exploitation. These insights offer guidance for improving blockchain governance and optimizing fee policy design.

Keywords: Blockchain; Transaction costs; Fee policies; Bitcoin; Ethereum; Demand fluctuations; Price elasticity (search for similar items in EconPapers)
JEL-codes: C70 G00 (search for similar items in EconPapers)
Date: 2024-03
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