StableFees: A Predictable Fee Market for Cryptocurrencies proposes a mechanism based on second price auctions that enables more stable fees for decentralized cryptocurrencies. In the current mechanism, users of proof-of-work cryptocurrencies attach a fee to each transaction. Then, miners prioritize transactions by choosing from the highest paying fees to include in the blocks. Similar to first price auctions, users act as bidders while miners act as auctioneers in the fee market. The problem is that the current mechanism is very unstable: in June 2018, Bitcoin’s average daily fee ranged from $0.58 to $6.85. This volatility creates a poor experience for users, as low-bidders may be subject to long waiting times and high-bidders may overbid to get confirmed. Volatility also makes it difficult for miners to make a long term profitability plan. Another unique challenge is that miners are not trusted auctioneers, and have incentives to submit fake bids or not fill the block to manipulate the process.
The goal of this paper is to suggest an alternative mechanism that maximizes social welfare, minimizes the incentives to bid strategically and manipulate, and lowers fees for users while reducing income variability for miners. The StableFees mechanism moves away from first price auctions to second price auctions, whereby users are charged the lowest fee of the block and miners are paid the average fee of the most recent blocks. Miners must also pay a penalty if they underfill blocks. As a result, the authors find that in a large enough market, users’ gains from strategic bidding and miners’ gains from manipulation become irrelevant as the number of participants grows. The optimal strategy is for agents to play truthfully. The paper makes an important contribution towards improving proof-of-work cryptomining’s transparency and welfare.