Foundations of Transaction Fee Mechanism Design

Elaine Shi

Cryptocurrencies today use auctions to decide which transactions get confirmed in the block, yet classical auctions fail in such a decentralized environment because even the auctioneer can be a strategic player. Even the second-price auction – a golden standard in classical mechanism design – fails in the blockchain environment. In this talk, Elaine Shi (Carnegie Mellon University) introduces a new foundation for mechanism design in a decentralized environment. She proves an impossibility result that rules out the existence of an idealized transaction fee mechanism that incentivizes honest behavior for the user, the miner, and a miner-user coalition at the same time. Elaine then argues why earlier modeling choices are too draconian, and how we can overcome this lower bound by capturing the hidden costs certain deviations.

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