Determination of equilibrium transaction fees in the Bitcoin network: A rank-order contest

Daehan Kim, Doojin Ryu and Robert I. Webb

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: Bitcoin users compete with one another over the timing of the settlement of their on-[block]chain transactions. Earlier settlement is valuable. Bitcoin users can accelerate the confirmation of the settlement of their transactions in the cryptocurrency by voluntarily bidding transaction fees with a user's optimal fee level dependent upon his or her impatience. We characterize this transaction competition as a contest with a rank-order allocation of prizes. Under this characterization, we derive the fee-bidding strategy at the symmetric equilibrium. Based on this equilibrium, we discuss the Bitcoin network and highlight the impacts of changes in different factors related to the mining industry. We find that fee–security feedback can amplify the impacts of these events.

Keywords: Bitcoin; Blockchain security; Contest theory; Rank-order allocation; Transaction fee (search for similar items in EconPapers)
JEL-codes: D44 D82 G10 G20 L86 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000030

DOI: 10.1016/j.irfa.2023.102487

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