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From: Chenxi Cai <Chenxi_Cai@live.com>
To: "bitcoin-dev@lists.linuxfoundation.org"
	<bitcoin-dev@lists.linuxfoundation.org>
Thread-Topic: [bitcoin-dev] BIP Idea: Marginal Pricing
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Subject: Re: [bitcoin-dev] BIP Idea: Marginal Pricing
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It is clear that charging min fee won't maximize total miner's fees because=
 it ignores heterogeneity in willingness to pay among bidders within the sa=
me block. Also, spamming can still occur by setting a large number of trans=
actions to the min fee. Competition between spammers might drive up the min=
 fee, which is really where the positive effect comes from in this model.


A two-part pricing scheme involving a fixed fee per transaction plus variab=
le fee per byte is likely to work much better. The fixed fee component rais=
es the cost of micro-transactions substantially and deters spamming of the =
mempool.  Also, revenue is not lost from people with higher willingness to =
pay.


Chenxi

________________________________
From: William Morriss <wjmelements@gmail.com>
Sent: Wednesday, November 29, 2017 11:05 PM
To: Chenxi Cai
Cc: Bitcoin Protocol Discussion
Subject: Re: [bitcoin-dev] BIP Idea: Marginal Pricing

On Wed, Nov 29, 2017 at 9:52 PM, Chenxi Cai <Chenxi_Cai@live.com<mailto:Che=
nxi_Cai@live.com>> wrote:

Hi All,


Auction theory is a well-studied problem in the economics literature. Curre=
ntly what bitcoin has is Generalized first-price auction, where winning bid=
ders pay their full bids. Alternatively, two approaches are potentially via=
ble, which are Generalized second-price auction and Vickrey=96Clarke=96Grov=
es auction. Generalized second-price auction, where winning bidders pay the=
ir next highest bids, reduces (but not eliminate) the need for bidders to s=
trategize by allowing them to bid closer to their reservation price. Vickre=
y=96Clarke=96Groves auction, a more sophisticated system that considers all=
 bids in relation to one another, elicit truthful bids from bidders, but ma=
y not maximize miners' fees as the other two systems will.


Due to one result called Revenue Equivalence, the choice of fee design will=
 not impact miners' fees unless the outcomes of the auction changes (i.e, t=
he highest bidders do not always win). In addition, the sole benefit of sec=
ond-price auction over first-price auction is to spare people's mental trou=
bles from strategizing, rather than actually saving mining fees, because in=
 equilibrium the fees bidders pay remain the same. Therefore, in balance, I=
 do not see substantial material benefits arising from switching to a diffe=
rent fee schedule.


Best,

Chenxi Cai


Changing the bidding system to the marginal price allows us to supersede th=
e block size limit, which changes the outcome of the auction, as different =
transactions are included.

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<html>
<head>
<meta http-equiv=3D"Content-Type" content=3D"text/html; charset=3DWindows-1=
252">
<style type=3D"text/css" style=3D"display:none;"><!-- P {margin-top:0;margi=
n-bottom:0;} --></style>
</head>
<body dir=3D"ltr">
<div id=3D"divtagdefaultwrapper" style=3D"font-size:12pt;color:#000000;font=
-family:Calibri,Helvetica,sans-serif;" dir=3D"ltr">
<p style=3D"margin-top:0;margin-bottom:0"><br>
</p>
<div style=3D"color: rgb(0, 0, 0);">
<div id=3D"divRplyFwdMsg" dir=3D"ltr">
<div>&nbsp;</div>
</div>
<div dir=3D"ltr">
<div id=3D"x_divtagdefaultwrapper" dir=3D"ltr" style=3D"font-size:12pt; col=
or:#000000; font-family:Calibri,Helvetica,sans-serif">
<p style=3D"margin-top:0; margin-bottom:0">It is clear that charging&nbsp;m=
in fee won't maximize total&nbsp;miner's fees because it ignores heterogene=
ity in willingness to pay among bidders within the same block. Also,&nbsp;s=
pamming can still occur by setting a large number
 of transactions to the min fee. Competition between spammers might drive u=
p the min fee, which is really where the positive effect comes from in this=
 model.&nbsp;</p>
<p style=3D"margin-top:0; margin-bottom:0"><br>
</p>
<p style=3D"margin-top:0; margin-bottom:0">A two-part pricing scheme involv=
ing a fixed fee per transaction plus variable fee per byte is likely to wor=
k much better. The fixed fee component raises the cost of micro-transaction=
s substantially and deters spamming
 of the mempool.&nbsp; Also, revenue is not lost from&nbsp;people with high=
er willingness to pay.&nbsp;</p>
<p style=3D"margin-top:0; margin-bottom:0"><br>
</p>
<p style=3D"margin-top:0; margin-bottom:0">Chenxi</p>
<div style=3D"color:rgb(0,0,0)">
<hr tabindex=3D"-1" style=3D"display:inline-block; width:98%">
<div id=3D"x_divRplyFwdMsg" dir=3D"ltr"><font face=3D"Calibri, sans-serif" =
color=3D"#000000" style=3D"font-size:11pt"><b>From:</b> William Morriss &lt=
;wjmelements@gmail.com&gt;<br>
<b>Sent:</b> Wednesday, November 29, 2017 11:05 PM<br>
<b>To:</b> Chenxi Cai<br>
<b>Cc:</b> Bitcoin Protocol Discussion<br>
<b>Subject:</b> Re: [bitcoin-dev] BIP Idea: Marginal Pricing</font>
<div>&nbsp;</div>
</div>
<div>
<div dir=3D"ltr">
<div class=3D"x_x_gmail_extra">
<div class=3D"x_x_gmail_quote">On Wed, Nov 29, 2017 at 9:52 PM, Chenxi Cai =
<span dir=3D"ltr">
&lt;<a href=3D"mailto:Chenxi_Cai@live.com" target=3D"_blank">Chenxi_Cai@liv=
e.com</a>&gt;</span> wrote:<br>
<blockquote class=3D"x_x_gmail_quote" style=3D"margin:0px 0px 0px 0.8ex; bo=
rder-left:1px solid rgb(204,204,204); padding-left:1ex">
<div dir=3D"ltr">
<div id=3D"x_x_gmail-m_8403313716500134774divtagdefaultwrapper" dir=3D"ltr"=
 style=3D"font-size:12pt; color:rgb(0,0,0); font-family:Calibri,Helvetica,s=
ans-serif">
<p style=3D"margin-top:0px; margin-bottom:0px">Hi All,</p>
<p style=3D"margin-top:0px; margin-bottom:0px"><br>
</p>
<p style=3D"margin-top:0px; margin-bottom:0px">Auction theory is a well-stu=
died problem in the&nbsp;economics&nbsp;literature. Currently what bitcoin =
has is Generalized first-price auction,&nbsp;where winning bidders pay thei=
r full bids. Alternatively, two approaches are potentially
 viable, which are Generalized second-price auction and&nbsp;<span>Vickrey=
=96Clarke=96Groves auction.&nbsp;Generalized second-price auction, where wi=
nning bidders pay their next highest bids,&nbsp;reduces (but not eliminate)=
 the need&nbsp;for bidders to strategize by allowing them
 to bid closer to their reservation price.&nbsp;Vickrey=96Clarke=96Groves a=
uction, a more sophisticated&nbsp;system that considers all bids in relatio=
n to one another, elicit truthful bids from bidders, but may not maximize m=
iners' fees as the other two systems will.&nbsp;</span></p>
<p style=3D"margin-top:0px; margin-bottom:0px"><br>
</p>
<p style=3D"margin-top:0px; margin-bottom:0px">Due to&nbsp;one result calle=
d&nbsp;<span>Revenue Equivalence, the choice of fee&nbsp;design will not im=
pact miners' fees&nbsp;unless the outcomes of the auction changes (i.e, the=
 highest bidders do not always win). In addition, the
 sole benefit of second-price auction over first-price auction is to spare =
people's mental troubles from strategizing,&nbsp;rather than actually savin=
g mining fees, because in equilibrium the fees bidders pay remain the same.=
 Therefore, in balance, I do not see
 substantial&nbsp;material&nbsp;benefits arising from switching to a differ=
ent fee schedule.&nbsp;</span></p>
<p style=3D"margin-top:0px; margin-bottom:0px"><span><br>
</span></p>
<p style=3D"margin-top:0px; margin-bottom:0px">Best,</p>
<p style=3D"margin-top:0px; margin-bottom:0px">Chenxi Cai</p>
<br>
</div>
</div>
</blockquote>
<div><br>
</div>
<div>Changing the bidding system to the marginal price allows us to superse=
de the block size limit, which changes the outcome of the auction, as diffe=
rent transactions are included.
<br>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</body>
</html>

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