# Transaction Fee Mechanism Design

arXiv: https://arxiv.org/abs/2106.01340 · HTML: https://mlsanity.com/paper/2106.01340/

## Key facts

- Cited by 5 papers in the map (data through 14 Oct 2026).
- First posted on arXiv 2 Jun 2021.

## Built on by (most cited first, 5 of 5)

- [Games with Payments between Learning Agents](https://mlsanity.com/paper/2405.20880/) (2024)
- [Nik Defense: An Artificial Intelligence Based Defense Mechanism against Selfish Mining in Bitcoin](https://mlsanity.com/paper/2301.11463/) (2023)
- [Blockchain Transaction Fee Forecasting: A Comparison of Machine Learning Methods](https://mlsanity.com/paper/2305.08105/) (2023)
- [Designing Redistribution Mechanisms for Reducing Transaction Fees in Blockchains](https://mlsanity.com/paper/2401.13262/) (2024)
- [An Adaptive Multichain Blockchain: A Multiobjective Optimization Approach](https://mlsanity.com/paper/2602.22230/) (2026)

## Abstract (arXiv)

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. This paper investigates the problem of designing a blockchain transaction fee mechanism through the lens of mechanism design. We introduce two new forms of incentive-compatibility that capture some of the idiosyncrasies of the blockchain setting, one (MMIC) that protects against deviations by profit-maximizing miners and one (OCA-proofness) that protects against off-chain collusion between miners and users. This study is immediately applicable to a recent (August 5, 2021) and major change to Ethereum's transaction fee mechanism, based on a proposal called "EIP-1559." Historically, Ethereum's transaction fee mechanism was a first-price (pay-as-bid) auction. EIP-1559 suggested making several tightly coupled changes, including the introduction of variable-size blocks, a history-dependent reserve price, and the burning of a significant portion of the transaction fees. We prove that this new mechanism earns an impressive report card: it satisfies the MMIC and OCA-proofness conditions, and is also dominant-strategy incentive compatible (DSIC) except when there is a sudden demand spike. We also introduce an alternative design, the "tipless mechanism," which offers an incomparable slate of incentive-compatibility guarantees -- it is MMIC and DSIC, and OCA-proof unless in the midst of a demand spike.