An Incentive Analysis of some Bitcoin Fee Designs

Abstract: In the Bitcoin system, miners are incentivized to join the system and validate transactions through fees paid by the users. A simple "pay your bid" auction has been employed to determine the transaction fees. Recently, Lavi, Sattath and Zohar [LSZ17] proposed an alternative fee design, called the monopolistic price (MP) mechanism, aimed at improving the revenue for the miners. Although MP is not strictly incentive compatible (IC), they studied how close to IC the mechanism is for iid distributions, and conjectured that it is nearly IC asymptotically based on extensive simulations and some analysis. In this paper, we prove that the MP mechanism is nearly incentive compatible for any iid distribution as the number of users grows large. This holds true with respect to other attacks such as splitting bids. We also prove a conjecture in [LSZ17] that MP dominates the RSOP auction in revenue (originally defined in Goldberg et al. [GHKSW06] for digital goods). These results lend support to MP as a Bitcoin fee design candidate. Additionally, we explore some possible intrinsic correlations between incentive compatibility and revenue in general.