Determination of Transaction Fees in the Bitcoin Network

Confirmation of the settlement on-[block]chain transactions is both costly and takes time as it requires the actions of others (i.e., “bitcoin miners”) who compete to mine a block into which they can compile transactions. In the on-chain settlement competition for bitcoin transactions, users who want their transactions to be confirmed voluntarily bid transaction fees. To accelerate the confirmations of their transactions, these users can raise the levels of their fees (denominated in bitcoin). Bitcoin’s fee-pricing mechanism can price discriminate for the confirmation service according to the impatience of the users. We characterize this bitcoin transaction competition as a contest with a rank-order allocation of prizes. Under this characterization, we derive the fee-bidding strategy at the symmetric equilibrium. This strategy depends on the user’s impatience level. Based on this equilibrium, we discuss the bitcoin blockchain system and highlight the impacts of changes in different factors related to the mining industry including periodic “halving.”. Furthermore, we find that fee–security feedback can amplify the impacts of these events