Cryptocurrency in Blockchain: A Model of Blockspace and Transaction Fee
COM2 Level 2
MR3, COM2-02-26
Examiners: A/P Hahn Jungpil and Assistant Professor Jin Chen
Abstract:
An important purpose of having cryptocurrency is to serve as the payment mode for virtual transactions. To this end, a significant problem is the right amount of transaction fee, which is expected to substitute block rewards in the future, that can sustain user demand while keeping the transaction processing viable from the miner's perspective. This research, as contextualized in the application of Bitcoin and builds on the Lagos and Wright (2005) framework, examines the issues of transaction fee pricing and the production of miners in terms of blockspace. We propose a generalized model that allows users and miners to have variable bargaining power. We derive a Nash solution for this scenario. Our analysis reveals that transaction fee and blockspace are optimized when users have all the bargaining power. Conversely, when miners have the dominating bargaining power, miners prefer to earn block rewards without processing any transaction (i.e., zero blockspace) by publishing empty blocks. Our model is further extended beyond Proof-of-Work to other consensus protocols such as Raft and Proof-of-Stake.