Transaction Fees, Block Size Limit, and Auctions in Bitcoin

Nicola Dimitri


Confirmation of Bitcoin transactions is executed in blocks, which are then stored in the Blockchain. As compared to the number of transactions in the mempool, the set of transactions which are verified but not yet confirmed, available space for inclusion in a block is typically limited. For this reason, successful miners can only process a subset of such transactions, and users compete with each other to enter the next block by offering confirmation fees. Assuming that successful miners pursue revenue maximization, they will include in the block those mempool transactions that maximize earnings from related fees. In the paper we model transaction fees as a Nash Equilibrium outcome of an auction game with complete information. In the game the successful miner acts as an auctioneer selling block space, and users bid for shares of such space to confirm their transactions. Moreover, based on expected fees we also discuss what the optimal, revenue maximizing, block size limit should be for the successful miner. Consistently with the intuition, the optimal block size limit resolves the trade-off between including additional transactions (which possibly lower the unit fees collected) and keeping the block capacity limited (with, however, higher unit fees).

Full Text:



Bonneau, J. “Bitcoin Mining Is NP-Hard.” Freedom to Tinker (27 October 2014)

Chepurnoy, A., Kharin, V., Meshkov, D. “A Systematic Approach To Cryptocurrency Fees,” in A. Zohar, I. Eyal, V. Teague, J. Clark, A. Bracciali, F. Pintore, M. Sala (Eds.) Financial Cryptography and Data Security FC 2018 International Workshops, BITCOIN, VOTING, and WTSC, Nieuwpoort, Curaçao, March 2, 2018, Revised Selected Papers Berlin: Springer 19-30 (2019)

Dimitri, N. “Bitcoin Mining as a Contest.” Ledger 2 31-37 (2017)

Easley, D., O’Hara, M., Basu, S. “From Mining to Markets: The Evolution of Bitcoin Transaction Fees.” Journal of Financial Economics (available online) (2019)

Houy, N. “The Bitcoin Mining Game.” Ledger 1 53-68 (2016)

Houy, N. “The Economics of Bitcoin Transaction Fees.” GATE Working Paper 1407, 2014 (2014)

Huberman, G., Leshno, J., Moallemi, C. “An Economic Analysis of the Bitcoin Payment System.” Columbia Business School Research Paper 17-92 (2019)

Kaşkaloğlu, K. “Near Zero Bitcoin Transaction Fees Cannot Last Forever,” in SDIWC, The International Conference on Digital Security and Forensics (DigitalSec2014) 91-99 (2014)

Lavi, R., Sattath, O., Zohar, A. “Redesigning Bitcoin’s Fee Market.” arXiv (2017) (accessed 27 May 2019)

Moser, M., Bohme, R. “Trends, Tips, Tolls: A Longitudinal Study of Bitcoin Transaction Fees,” in M. Brenner, N. Christin, B. Johnson, K. Rohloff (eds) Financial Cryptography and Data Security FC 2015 International Workshops, BITCOIN, WAHC, and Wearable, San Juan, Puerto Rico, January 30, 2015, Revised Selected Papers Berlin: Springer 19-33 (2015)

Rizun, P. “A Transaction Fee Market Exists Without a Block Size Limit.” Bitcoin Unlimited Block Size Debate Working Paper (2015)

Wilson, R. “Auctions of Shares.” Quarterly Journal of Economics 93.4 675-689 (1979)



  • There are currently no refbacks.

Copyright (c) 2019 Nicola Dimitri

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.