*Transaction Fee Mechanisms exist to filter low-value transactions to optimally use block space that has excess demand. These mechanisms rely upon the relationship between base fees, blockspace demand, and mempool congestion*  > Roughgarden: Demand for blockspace causes "persisently high transaction fees" and scalability issues. This demand may increase revenue for processing transactions, but transaction fees do not cause this. Thus, only a change in excess demand for blockspace will reduce transaction fees. ___ From the [[Transaction Fee Mechanism Design for the Ethereum Blockchain- An Economic Analysis of EIP-1559 1.pdf|research of Tim Roughgarden]]: Transaction fee bid auctions allow the prioritization of transactions in a block, since block space is a scarce resource. ## Problems - Fake transactions - Off-chain collusion via smart contracts - Untruthful bidding ## Terms Incentive Compatible for Users (UIC) Incentive Compatibility of Myopic Miners (MMIC) - no fakes Off Chain Agreement (OCA-proofness) >[!quote] ...the mechanism should be robust to cartels of transaction creators and miners colluding off-chain; more precisely, no off-chain arrangement among members of such a cartel should be capable of Pareto improving over a canonical on-chain outcome. [Source](https://www.arxiv-vanity.com/papers/2106.01340/#S3.Thmtheorem6) Dominant-strategy incentive compatible (DSIC) - see Roughgarden work on knapsack auctions for algorithm game theoretical design [[Algorithmic Game Theory Lecture Algorithmic Mechanism Design.pdf|here]] _____ From the research of [[Foundations of Transaction Fee Mechanism Design.pdf|Hao Chung and Elaine Shi]]: >[!quote] >In blockchains such as Bitcoin and Ethereum, users compete in a transaction fee auction to get their transactions confirmed in the next block. A line of recent works set forth the desiderata for a "dream" transaction fee mechanism (TFM), and explored whether such a mechanism existed. A dream TFM should satisfy 1) user incentive compatibility (UIC), i.e., truthful bidding should be a user's dominant strategy; 2) miner incentive compatibility (MIC), i.e., the miner's dominant strategy is to faithfully implement the prescribed mechanism; and 3) miner-user side contract proofness (SCP), i.e., no coalition of the miner and one or more user(s) can increase their joint utility by deviating from the honest behavior. The weakest form of SCP is called 1-SCP, where we only aim to provide resilience against the collusion of the miner and a single user. Sadly, despite the various attempts, to the best of knowledge, no existing mechanism can satisfy all three properties in all situations. Since the TFM departs from classical mechanism design in modeling and assumptions, to date, our understanding of the design space is relatively little. In this paper, we further unravel the mathematical structure of transaction fee mechanism design by proving the following results: - Can we have a dream TFM? - Rethinking the incentive compatibility notions. - Do the new design elements make a difference? ____ From the research of [[Econometrica - 2020 - Akbarpour - Credible Auctions A Trilemma.pdf|Mohammad Akbarpour and Shengwu Li on credible auctions]] and the work of [[Towards a Functional Fee Market for Cryptocurrencies.pdf|Basu/Easley on second price auctions]]: ### TFM types - Second price auctions using a Vickery-Clark-Groves (VCG) model - See Basu/Easley - Greedy - TU model - unknown source