Description:

This paper shows how a rational Bitcoin miner should select transactions from his node’s mempool, when creating a new block, in order to maximize his profit in the absence of a block size limit. To show this, the paper introduces the block space supply curve and the mempool demand curve. The former describes the cost for a miner to supply block space by accounting for orphaning risk. The latter represents the fees offered by the transactions in mempool, and is expressed versus the minimum block size required to claim a given portion of the fees. The paper explains how the supply and demand curves from classical economics are related to the derivatives of these two curves, and proves that producing the quantity of block space indicated by their intersection point maximizes the miner’s profit. The paper then shows that an unhealthy fee market—where miners are incentivized to produce arbitrarily large blocks—cannot exist since it requires communicating information at an arbitrarily fast rate. The paper concludes by considering the conditions under which a rational miner would produce big, small or empty blocks, and by estimating the cost of a spam attack.