From Mining to Markets: the Evolution of Bitcoin Transaction Fees

We investigate the role that transaction fees play in the Bitcoin blockchain’s evolution from a mining-based structure to a market-based ecology. We develop a game-theoretic model to explain the factors leading to the emergence of transactions fees, as well as to explain the strategic behavior of miners and users. Our model also highlights the role played by mining rewards and by volume, and examines how microstructure features such as exogenous structural constraints influence the dynamics and stability of the Bitcoin blockchain. We provide empirical evidence on the predictions of our model and discuss implications for Bitcoin’s evolution.