Participation in permissionless blockchains results in competition over system resources, which needs to be controlled with fees. Ethereum's current fee mechanism is implemented via a first-price auction that results in unpredictable fees as well as other inefficiencies. EIP-1559 is a recent, improved proposal that introduces a number of innovative features such as a dynamically adaptive base fee that is burned, instead of being paid to the miners. Despite intense interest in understanding its properties, several basic questions such as whether and under what conditions does this protocol self-stabilize have remained elusive thus far.
We perform a thorough analysis of the resulting fee market dynamic mechanism via a combination of tools from game theory and dynamical systems. We start by providing bounds on the step-size of the base fee update rule that suffice for global convergence to equilibrium via Lyapunov arguments. In the negative direction, we show that for larger step-sizes instability and even formally chaotic behavior are possible under a wide range of settings. We complement these qualitative results with quantitative bounds on the resulting range of base fees. We conclude our analysis with a thorough experimental case study that corroborates our theoretical findings.
EIP-1559 is a proposal to make several tightly coupled additions to Ethereum's transaction fee mechanism, including variable-size blocks and a burned base fee that rises and falls with demand. This report assesses the game-theoretic strengths and weaknesses of the proposal and explores some alternative designs.
Ethereum Improvement Proposal (EIP) 1559 was recently implemented to transform Ethereum's transaction fee market. EIP-1559 utilizes an algorithmic update rule with a constant learning rate to estimate a base fee. The base fee reflects prevailing network conditions and hence provides a more reliable oracle for current gas prices. Using on-chain data from the period after its launch, we evaluate the impact of EIP-1559 on the user experience and market performance. Our empirical findings suggest that although EIP-1559 achieves its goals on average, short-term behavior is marked by intense, chaoti…
Transaction fee markets are essential components of blockchain economies, as they resolve the inherent scarcity in the number of transactions that can be added to each block. In early blockchain protocols, this scarcity was resolved through a first-price auction in which users were forced to guess appropriate bids from recent blockchain data. Ethereum's EIP-1559 fee market reform streamlines this process through the use of a base fee that is increased (or decreased) whenever a block exceeds (or fails to meet) a specified target block size. Previous work has found that the EIP-1559 mechanism ma…
Public blockchains implement a fee mechanism to allocate scarce computational resources across competing transactions. Most existing fee market designs utilize a joint, fungible unit of account (e.g., gas in Ethereum) to price otherwise non-fungible resources such as bandwidth, computation, and storage, by hardcoding their relative prices. Fixing the relative price of each resource in this way inhibits granular price discovery, limiting scalability and opening up the possibility of denial-of-service attacks. As a result, many prominent networks such as Ethereum and Solana have proposed multi-d…
Transaction fees represent a major incentive in many blockchain systems as a way to incentivize processing transactions. Unfortunately, they also introduce an enormous amount of incentive asymmetry compared to alternatives like fixed block rewards. We analyze some of the incentive compatibility issues that arise from transaction fees, which relate to the bids that users submit, the allocation rules that miners use to choose which transactions to include, and where they choose to mine in the context of longest-chain consensus. We start by surveying a variety of mining attacks including undercut…
In blockchains such as Bitcoin and Ethereum, users compete in a transaction fee auction to get their transactions confirmed in the next block. A line of recent works set forth the desiderata for a "dream" transaction fee mechanism (TFM), and explored whether such a mechanism existed. A dream TFM should satisfy 1) user incentive compatibility (UIC), i.e., truthful bidding should be a user's dominant strategy; 2) miner incentive compatibility (MIC), i.e., the miner's dominant strategy is to faithfully implement the prescribed mechanism; and 3) miner-user side contract proofness (SCP), i.e., no c…
