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Latency Tradeoffs in Blockchain Capacity Management

Author

Listed:
  • Michele Fabi

    (Telecom Paris, CREST, IP Paris)

Abstract
We analyze the effect of block propagation latency on the performance and design of Nakamoto-style blockchains. Miners strategically choose block capacity, balancing the risk of invalidation from forking with transaction fee income. The model identifies a unique and symmetric Nash equilibrium block capacity, which increases with the ratio of block production time to transmission delay and decreases with the ratio of coinbase reward to transaction fee rate. We endogenize blockchain growth and derive the Fokker-Planck equation for pending mempool data. The results reveal a tradeoff between efficiency (low transaction load) and security (high miner participation). Reducing the coinbase reward while raising transaction fees improves efficiency but may weaken security. We also discuss testable implications and extend the model to include uncle block rewards and discrete latency.

Suggested Citation

  • Michele Fabi, 2024. "Latency Tradeoffs in Blockchain Capacity Management," Working Papers 2024-10, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2024-10
    as

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    File URL: http://crest.science/RePEc/wpstorage/2024-10.pdf
    File Function: CREST working paper version
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    References listed on IDEAS

    as
    1. Tim Roughgarden, 2020. "Transaction Fee Mechanism Design for the Ethereum Blockchain: An Economic Analysis of EIP-1559," Papers 2012.00854, arXiv.org.
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    5. Álvaro Cartea & Leandro Sánchez-Betancourt, 2023. "Optimal execution with stochastic delay," Finance and Stochastics, Springer, vol. 27(1), pages 1-47, January.
    6. Eric Budish & Peter Cramton & John Shim, 2015. "Editor's Choice The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1547-1621.
    7. Echenique, Federico & Edlin, Aaron, 2004. "Mixed equilibria are unstable in games of strategic complements," Journal of Economic Theory, Elsevier, vol. 118(1), pages 61-79, September.
    8. Easley, David & O'Hara, Maureen & Basu, Soumya, 2019. "From mining to markets: The evolution of bitcoin transaction fees," Journal of Financial Economics, Elsevier, vol. 134(1), pages 91-109.
    9. Xuefeng Gao & Yunhan Wang, 2020. "Optimal market making in the presence of latency," Quantitative Finance, Taylor & Francis Journals, vol. 20(9), pages 1495-1512, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Blockchain design; Nakamoto consensus; forks; coinbase; stochastic storage;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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