Transaction fee mechanism design

Abstract

Demand for blockchains such as Bitcoin and Ethereum is far larger than supply, necessitating a mechanism that selects a subset of transactions to include "on-chain" from the pool of all pending transactions. EIP-1559 is a proposal to make several tightly coupled changes to the Ethereum blockchain's transaction fee mechanism, including the introduction of variable-size blocks and a burned base fee that rises and falls with demand. These changes are slated for deployment in Ethereum's "London fork," scheduled for late summer 2021, at which point it will be the biggest economic change made to a major blockchain to date. This short note provides an overview of recent work by the author that formally investigates and compares the incentive guarantees offered by Ethereum's current transaction fee mechanism and the new mechanism proposed in EIP-1559.