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On the Nature of Miner Advantages in Uncapped Block Size Fee Markets


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This paper shows how a rational Bitcoin miner should select an optimal block size to mine based
on basic properties of mempool transactions. The paper explains this by expanding on the notions
of block space supply and mempool demand curves recently described in the literature. The paper
quantifies the conditions under which a healthy fee market can be expected to exist based on very
simple properties of the mempool. Finally, the paper concludes by quantifying a miners revenue
advantage as a function of the operating hashrate. We consider the conditions for this advantage to
be minimized and show how this is deeply related to the value of block reward subsidies.



The Bitcoin community is currently up at arms over whether the current 1MB maximum[6] block size limit should
be raised or not in an effort to scale the networks transaction capacity. At the time of writing, three BIPs (Bitcoin
Improvement Proposal) - BIP100, 101, 102 are being passionately debated by the community and a hard fork of the
bitcoin protocol was released on August 1st, 2015 heavily sponsoring BIP101. The debate over the block size limit sits
at the crossroads of computer science, economics and community philosophy as it challenges the understanding of both
the protocols underlying economical incentives as well as the ideologies underlying the Bitcoin projects governance.
This paper will focus on the former, seeking to address some of the concerns regarding whether the network can
economically support larger block sizes without sacrificing its decentralized nature.
In this regard, related efforts have been made to quantify a miners marginal cost of adding transactions to a block.
As discussed by Houy [1], if this marginal cost is zero, miners are incentivized to create arbitrarily large blocks leading
to the necessity of either a limited block size or a minimum transaction fee. Andresen [2] criticized this point by
noting that larger blocks risk an exponentially larger chance of being orphaned thus making the marginal cost finite.
Recently Peter R [3] extended Houys work by accounting for Andresens block size-dependent orphaning factor to
show that an optimal block size exists such that the marginal cost of adding extra transactions is larger than the fees
potentially accrued in the process. It is concluded that rational miner behavior must necessarily lead to the formation
of a healthy fee market independently of the protocols maximum block size limit and that irrational spamming of
the network carries costs which grow exponentially with the block size.
This work seeks to expand on Peter Rs work and, in the process, answer a series of critiques and objections put
forward by the Bitcoin community. In Section III, we summarize Peter Rs miner proft model and compute a
miners optimal block size by reconstructing both the block space supply and mempool demand curves. In doing so
we correct Peter Rs definition of neutral profit to account for the fact that miners are not always incentivized to
mine empty blocks in the absence of an inviting mempool transaction fee structure. In doing so we will define lowand high- efficiency miners as being distinguished by well-defined properties. Most importantly, though, we account
for instantaneous miner self-propagation in our calculations and conclude that, up to trivial corrections in the block
propagation times, Peter Rs proof on the impossibility of unhealthy fee markets is qualitatively unaltered.
In Section IV we establish the mempool conditions under which a healthy fee market can always be expected
to exist such that miners are not incentivized to create empty blocks. Furthermore, since a miners profit model is
analytically tractable in the large block size limit (which we rigorously define), we establish the conditions under
which both low- and high- efficiency miners can be expected to create large blocks justifying the application of our
analytical results.
Finally, in Section V we employ our analytical results to quantify the profit advantage that a large miner may
have over a smaller miner in both the low- and high- efficiency groups. We argue that in the limit of vanishing block
rewards and growing mempool sizes: a) all miners are likely to belong to the same efficiency group leading to identical
profit dynamics for all, and b) a large miners marginal profit advantage decreases with hashrate beyond a minimum
percentage ( 0.01%) of the network hashrate.



For the remainder of this manuscript, the following symbols have the specified meanings.
The symbol $ refers to US dollars; price conversions between bitcoin and US dollars assume that 1-B= $230.

Fitting parameters for a miners cost structure subject to economies of scale
Miners efficiency factor
H, h
Network and miner hashrate
Miners expected profit

Mining hardware amortized cost per unit hash

Block size
, k
Weibull distribution scale and shape constants
Total size of mempool
Money (bitcoins)
the block size that maximizes the miners expected profit
Mdem Partial sum of the transaction fees in mempool in order of descending fee density
Block reward subsidy
Miners cost due to orphaning to produce a certain block size
Typical mining block time
Total fees submitted by high-priority transactions
Block propagation time
Total fees submitted by bulk mempool transactions
Block header propagation latency
Total fees submitted by all mempool transactions.

Miner network constant

Miner network propagation impedance



When a miner attempts to mine a block, the profit he expects to generate will be the difference between his expected
revenues and costs:

hi = (R + M )

h (Q)


where R is the block subsidy, M the fees corresponding to the transactions gathered in the block, h/H the minerto-network hashrate ratio, h (Q) the time required to propagate a block of size Q to the majority of the network,
the miners hardwares amortized cost per unit hash and T the typical block time ( 600 s). An exponential cost is
associated with larger blocks due to the chance of producing an orphan as a result of the propagation time growing
with the block size. While for very small block sizes Q, the propagation time h (Q) will be limited by the miners
block header propagation latency h (0) (1 h/H)0 towards the rest of the network (himself not included), for
large block sizes, the propagation time will scale linearly in block size and proportionally to the miners impedance
h (Q) = h (0) + Z(1 h/H)Q,


where we assume that block propagation of a miner to himself (self-propagation) happens instantaneously.
Depending on the transaction fees and sizes submitted to the mempool, the miner is presented with the cost-benefit
problem of choosing which transactions to include in his mined block in order to balance the fees gained versus the
risk of orphaning the generated block. The optimal strategy, first analyzed in [3], consists in gathering transactions
in order of decreasing fee density up to some optimal block size which maximizes the difference between potential the
fee gains and the resource costs the miner is subject to.


Fee Demand Curve

Consider a hypothetical scenario where the Bitcoin protocol allows for uncapped maximum block sizes and the
network supports a healthy transaction fee market consisting of a very many transactions in the mempool. The
distribution of transaction fee densities (see Fig. 1.a) will be highly peaked around some bulk value, corresponding to
the minimal fee density required for a transaction to be reliably included in an upcoming block, plus a smaller peak
of high fee density outliers corresponding to high priority transactions which aim to be included in the next block
to be mined. Since bulk transactions will all pay roughly the same fee density, once high priority transactions have
been included in a miners block, the total fees included in a block can be expected to scale linearly with the size of

the block itself. Denoting by Qmem the total mempool size, Mbulk the total bulk mempool fees, and M0 the total
high priority mempool fees (where the total mempool fees are Mmem = M0 + Mbulk ), the fee demand curve can be
approximated asymptotically as:

Mdem (Q) ' M0 +


which forms an upper bound to the true fee demand curve (see Fig. 1.b).

FIG. 1: a) Transaction fee density distribution and b) example fee demand curve Mdem (Q) constructed by randomly
gathering transactions submitted to the Bitcoin network between blocks 368932 and 371231 with fee densities greater
than the average of the fee density distribution (a).

If in the large block size limit, the fee demand curve is dominated asymptotically by the common bulk fee densities,
in the small block size limit, it will be determined by the few high priority transactions submitted to the mempool.
We model these as Weibull-distributed extreme value events. The fee demand curve will then behave as a Weibull
cumulative distribution in the small block size limit (see Figure 1.b):

Mdem (Q) '

M0 +


if Q/Qmem 1

1 exp (Q/)

, if Q/Qmem  1,


where and k are respectively the scale and shape parameters of the Weibull distribution to be determined empirically
from mempool data as it updates on the network.

Fee Supply Curve

In evaluating the cost of gathering fees, a rational miner will compare his expected profit to that which he would make
were he not to include them. Recent work [3] has denoted this as the neutral profit hi0 , defined as the expected profit
of mining an empty block. However, depending on the block reward and the miners hardwares amortized cost per hash
, the expected profit of mining an empty block may be negative (whenever > (R/HT )eh (0)/T 1011 [sat/hash]).
In such a scenario, a miners alternative to mining for fees is simply to not mine at all thus making the neutral profit
Let us then define high- (low-) efficiency miners as those such that is less (greater) than (R/HT )eh (0)/T with
= 0. The fee supply curve Msupp (Q), representing the
neutral profits hihigh
= R(h/H) exp[h (0)/T ] and hilow
miners net resource cost of mining a block of size Q, is defined as the sequence of points in the M Q-plane where the
miners profit is identical to his neutral profit. With a little algebra, this works out to:

(Q) = R eh (Q)/T 1 ,


(Q) = HT eh (0)/T eh (Q)/T R,


where h (Q) = Z(1 h/H)Q. The high-efficiency fee supply curve was already constructed in [3], where the author
failed to recognize its low-efficiency counterpart. To simplify notations movign forward, we assume that the network
latency is much smaller than the block interval h (0)  T and, as such, will approximate e (0)/T 1. This in no
way qualitatively alters the results of this paper and can always be straightforwardly reincluded if necessary.

Optimal Miner block size

We are now in a position to compute

 what a rational miners optimal block size is. Maximizing the difference
between fee demand and supply max Mdem Msupply
(the miners surplus), one obtains that the optimal block
size must satisfy Q Mdem = Q Msupply
which, in the large blocksize limit Q Qmem ,leads to:




= exp





where we have defined the network constant (T /Z)(Mbulk /Qmem ) and the efficiency factors: high = R and
low = HT e (0)/T . Solving (7) for the optimal block size, one obtains:

Q = min Qmem ,
Z(1 h/H)
(1 h/H)


which is a finite upper bound to the true optimal block size.



PeterR has recently proven that unhealthy fee markets where a miners surplus continuously grows with block space
are impossible. This is guarateed by the fact that while the fee demand curve Mdem is asymptotically linear for large
block sizes (see (3)), the cost of producing larger blocks grows exponentially (see (5)) for both high- and low-efficiency
miners. Previous work has however not quantified under what circumstances miners have no incentive to mine, leading
to the appearance non-existent fee markets.
As discussed in the previous section, a rational miners optimal block size Q is one which maximizes his surplus. Under the assumption that such an optimum happens for large block sizes (Q /Qmem 1), we employed our
asymptotic expansion of Mdem to derive an analytical expression for Q . In turn, equation (8) implies that as long as

high,low ,


Q will be positive, and miners will be incentivized to participate in the fee market. If the inequality is not satisfied,
miners might be incentivized to ignore mempool transactions altogether. Particularly, high-efficiency miners would
limit themselves to mining empty blocks whereas low-efficiency miners would cease to mine altogether. This in turn
would lead to the undesireable appearance of a non-existent fee market.
However, since (8) was derived in the large block size limit of Mdem it is formally incorrect to read much into it in
the limit of small block sizes. We must instead switch to our low block size approximation:
Mdem (Q) ' 1 exp (Q/) .
Maximization of the miners expected surplus then leads to the following trascendental equation for the optimal block
 k #
(Q )
= exp (1 h/H) Q +
k Z(1 h/H)high,low

which must be solved numerically. We can however conclude that as long as the shape parameter k of Mdem is less
than unity (k < 1), a solution Q > 0 will always exist thus ensuring the sufficiency of healthy and existent fee
Even though the existence of the fee market depends on the precise nature of the true fee demand curve, condition (9)
allows us to estimate when the asymptotic linear approximation (3) to Mdem is valid. Let us then put some numbers to
our equations to have an idea of the magnitude of the various parameters involved. The network constant depends
on the average mempool fee density and the network impedance seen by the participating miner. Taking for
definiteness the current mempool fee density (in Satoshis) for reference Mbulk /Qmem ' Mmem /Qmem ' 20k [sat/kB],
one has that for the slow Decker and Watterhofer networks [4] DW ' 1.5 108 [sat][7], while for the much faster relay
networks RN ' 60 108 [sat][8].
Results obtained via large block size approximation of Mdem will be valid for high-efficiency miners as long as their
hash rate h > H(1 /R). At the current block reward of R = 25 108 [sat], any high efficency miner with a network
impedance smaller than Zmax 4.8 [sec/MB] will be incentivized to mine in the large block limit (where this condition
relaxes as R decreases). The situation is slightly different for low efficiency miners where the linear approximation
holds as long as their hashrate satisfies h > H(1/(HT )). At the current network hashrate H = 4108 [Gh/s], only
a barely low-efficiency miner with amortized cost per hash ' 1011 [sat/H], connected through a relay network, will
be incentivized to mine in the large block limit. Over time, as the block reward decreases, all miners will progressively
become low-efficiency miners leading to a reduction of miner advantages as we now proceed to show.



One heavily referenced argument of the block size debates has been the risk of centralization due to the advantage
that large miners may have in mining progressively larger blocks. In this section, we quantify such advantages and
discuss the dominant factors which influence them. We will continue working in the large block size asymptotic
approximation of Mdem as it allows us to construct analytical results as well as emphasizing the miner behavior in
large block size scenarios.
Having derived the optimal block size that a rational miner would attempt to mine, we can now construct the
optimal expected profit per block per unit hash that the miner may expect to earn. Plugging (8) into (3) and (1),
one has:

R+Mmem exp (1 h/H) Mmem T,
= n R+M

(1 h/H) ln (1 h/H) T,

if Q > Qmem
if Q < Qmem ,


where we have dropped the descriptors from the efficiency factor to simplify notation and kept track of the finiteness

of the mempool (as was done in the derivation of (8)). Ideally one would like the profit per unit of hash hi
to be
constant or decreasing as a function of hashrate such that a miners profit incentives do not grow with his hashrate.
Unfortunately this is not always the case. First and foremost, if the mempool size is so small that the majority of
miners are incentivized to mine all of it at each block (Q > Qmem ), the profit per unit hash is a monotonically
increasing function of a miners hashrate in all parameter regimes (top equation of (12)). As a result, marginal profits
will increase with added hashrate incentivizing larger miners over smaller ones.
Even in the large mempool size regime (Q < Qmem ), low-efficiency miners will be severely penalized by the prefactor (bottom equation of (12)). In fact, whereas the unit profit of high-efficiency miners scales with a constant
prefactor high /H = R/H (currently 109 [sat/H]), that of low-efficiency miners scales proportionally to their
amortized cost per hash : low /H = T which can be orders of magnitude smaller (see Figure 2).
Lastly, the amortized hardware cost per unit of hash is in reality a function of the miners hashrate due to economy
of scale effects. Since a detailed analysis of how miner unit-hashrate costs decrease with enterprise size is outside the
scope of this work, we will simply model the amortized cost function by employing the point six power rule [5] as a
working approximation:

(h) =




where = 0.6 (hence the name of the rule) and should be fit empirically to some benchmark mining units amortized
cost per unit hash 0 [9]. Equation (13) models how the operational cost structure decreases as mining enterprises

grow. For large hashrates, this approximation does not take into account the fact that costs would actually grow very
rapidly beyond a certain point due to depletion of market supply.
We will now take the derivative of (12) with respect to the hashrate h and explore for what parameter regimes (12)
can be expected to be a monotonically decreasing function of hashrate (Figures 2 and 3). These limits will characterize
regimes where the networks miners are incentivized to decentralize. Since the efficiency factor low depends explicitly
on the hashrate through (low = HT ' HT (h/H) ), we must differentiate between high- and low- efficiency


Expected Profit Advantage: High-Efficiency Mining

In Section III we showed that the efficiency factor high = R is constant. Knowing this, we compute the derivative
of (12) as just described. One obtains:



R + M0
= 2 (1 h/H)
(1 h/H) + T H h(1+) ,


where we immediately see that, as long as < (1 h/H)(R + M0 ), the profit curve has a negative slope favoring low
hashrate miners down to some minimum h0 such that h |h=h0 = 0 (see Figure 3). However, from equation (9), since
all large block size limit results are valid only for > (1 h/H)R, the high-priority fees M0 must remain steadily
large (compared to the block subsidy R) across blocks for large mining pools to become penalized. As the block
reward decreases and network activity hopefully increases this might become the case as long as mining hardware
efficiency improves enough to keep amortized costs less than the cutoff value < R/HT which we have used to define
high-efficiency mining.


Expected Profit Advantage: Low-Efficiency Mining

Block subsidies will eventually become so small that improvements in hardware efficiency will not be able to
keep up. As a result, all miners will effectively become low-efficiency miners > R/HT . In such a scenario, the
hashrate-dependent economies of scale (13) must be taken into account when computing the derivative of (12) (and
particularly of low = (h)HT ) with respect to h. Since such a derivative is complex and not particularly enlightening
from an analytical viewpoint, we limit ourselves to show a plot of (12) in Figure 2. Across a wide range of network
impedances (larger values of correspond to lower impedances Z), the expected profit advantage of a miner is seen to
monotonically decrease as a function of the miners hashrate (above some minimum h0 ). A miner will still produce
more profit with larger hashrates, but the marginal profit accrued per unit of hashrate added decreases.

FIG. 2: Expected miner profit per unit block per unit hash hi /h (in units of sat/H) as a function of hashrate
for various values of = 12 B
- (solid), = 18 B
- (dashed) and = 30 B
- (dotdashed) plotted in both the high- regime
(blue, left axis) and low-efficiency (red, right axis) regimes. Larger values of correspond to lower impedances Z. For
definiteness, we have taken R = 25 B
- , M0 = 0.25 B
- , H = 400 P H and (h) = 2 1014 (h/H)0.6 [sat/H].

FIG. 3: Expected miner profit per unit block per unit hash hi /h (in units of sat/H) as a function of hashrate
for various values of = 12 B
- (solid), = 18 B
- (dashed) and = 30 B
- (dotdashed) plotted in both the high- regime
(blue, left axis) and low-efficiency (red, right axis) regimes. Larger values of correspond to lower impedances Z.
For definiteness, we have taken R = 25 B
- , M0 = 0.25 B
- , H = 400 P H and (h) = 2 1014 (h/H)0.6 [sat/H].
Monotonically increasing (decreasing) curves are expected to favor centralization (decentralization) of the Bitcoin



In this work we have expanded on previous work to include both the effects of miner self-propagation as well as a
more rigorous study of both the fee demand/supply curves Mdem and Msup in the small and large block size limits.
We establish the conditions under which it is valid to approximate the fee demand curve by its linear asymptotic
scaling and employ it to calculate the optimal block size mined by a rational miner. Expanding a previous proof on
the impossibility of unhealthy fee markets, we establish a sufficient condition on the low block size behavior of the

empirical fee demand curve for fee markets to always be existent.
Our analytical derivation of the optimal block size then allowed for a detailed computation of a miners expected
profit per block per unit hash. By studying how such profits change as a function of network parameters, we conclude
that large miner advantages (considered the root cause of mining centralization), will become negligible over time as
long as the block reward subsidy decreases enough to qualify all network participants as low-efficiency miners and the
mempool size grows large enough that no miners are incentivized to mine it entirely. This model does not take into
account centralization pressure as a result of the low payout variance offered by the aggregation of miners into mining
pools. It seems reasonable however to presume that, as long as payout variance is smaller than the miners expected
profit (thus allowing operational costs to be consistently covered), pooling incentives will be negligible beyond a
certain level.
The model also does not account for the head-start advantage that a miner possesses upon submitting a large block
to the rest of the network for validation. However, due to the Poisson-distributed character of block mining, if the
networks block validation time is less than the mining variance (which for Poisson events is identical to the expected
block time value T = 600 s) then temporal advantage effects will balance out over long time periods.
Last but not least, the paper assumed both a constant exchange rate for the bitcoin currency and a constant
network hashrate. These will in reality change over time as a function of the Bitcoin networks popularity. To
authors knowledge, however, their effect should not qualitativly alter the results and logic of this work.


The author would like to thank the Bitcoin-dev mail list, /r/Bitcoin and fruitful discussions with Peter R for
inspiring and driving the results of this work.

[1] N. Houy, The economics of Bitcoin transaction fees,

[2] G. Andresen, Back-of-the-envelope calculations for marginal cost of transactions,
gavinandresen/5044482 (2014).
[3] Peter R, A Transaction Fee Market Exists Without a Block Size Limit,
[4] C. Decker, R. Wattenhofer, Information Propagation in the Bitcoin Network, 13th IEEE International Conference on Peerto-Peer Computing (2013).
[5] F.T. Moore, Economies of Scale: Some Statistical Evidence, Quarterly Journal of Economics 73, 2, pp. 232-245 (1953).
[6] Miners have the option of setting lower - termed soft - block size limits if they desire.
[7] ZDW 80 [sec/MB]
[8] ZRN 3 [sec/MB]
[9] At the current price of 10-B , using a 7.722 [T H/s] Bitmain Antminer S5+ consuming 0.445 [W/GH] subject to power costs
of 0.1 [$/kWh] as the benchmark reference, one has 0 = (56.5 + 0.015/D) 1011 [sat/H], where D is the number of days
the miner will be operated with before retirement. Using this to fit the point six power rule (with D = 180 days) one obtains
= 2 1014 [sat/H] which is used to compute data in Figure 2.