Combined summary - Mempool Based Fee Estimation on Bitcoin Core

Combined summary - Mempool Based Fee Estimation on Bitcoin Core

The email discussion delves into the complexities of estimating transaction fees in cryptocurrency networks, with a focus on Bitcoin.

It starts by questioning the efficacy of using median or average fees to predict future transaction costs, highlighting the risk of overpaying and the aim to optimize fee estimation to avoid this. A suggestion is made to consider the average fee of the lower half of transactions as a strategy to mitigate overestimation.

A student's project supervised until February, which investigated fee estimation through mempool statistics, is noted. The project, documented on GitHub, indicates that Bitcoin Core’s fee estimator often overshoots after periods of increased fee demand. The discussion suggests that average fee per byte might be more indicative of future fees than the median, noting the utility of mempool resting times and block time in predicting fee trends, despite the latter’s unpredictability.

The application of option pricing models like the Black-Scholes Equation to fee estimation is introduced, proposing a shift from solely relying on mempool statistics to considering the behavior of other network participants. The conversation also reviews the accuracy of fee rate estimates, especially during network congestion, and discusses refining visual data representations of fee rates using logarithmic scales for better user comprehension.

Replace-By-Fee (RBF) mechanisms are discussed, weighing the balance between user convenience and cost efficiency. Strategies to mitigate vulnerabilities in the fee estimation process, such as integrating a mempool-based estimate with the CBlockPolicyEstimator threshold, are proposed to improve reliability and reduce manipulation risks.

Miners' potential to manipulate transaction fees, risking their block rewards to artificially inflate transaction costs, is highlighted as a concern. This manipulation underlines the need for accurate and manipulative-resistant fee estimation methods. The recommendation involves utilizing direct blockchain data for real-time fee estimation adjustments and integrating mempool state information with data from previously mined blocks for precise predictions.

Kalle Alm's research at Scaling Bitcoin 2017 emphasizes optimizing fee estimation through mempool analysis, advocating for the use of the lesser value between confirmed and mempool estimates to adjust fees quickly and minimize manipulation risks. Alm's work also touches on the non-financial implications of RBF, presenting a nuanced view of the trade-offs involved. His presentation materials can be accessed via provided links, transcript, and video.

Bitcoin Core's approach to mempool-based fee estimation aims to generate accurate rates by analyzing transactions within a node's mempool. Despite its potential benefits, discrepancies between individual nodes’ mempools and those of miners, along with technical challenges, may impact accuracy. Ongoing development seeks to refine this method, with further research needed to enhance its efficiency and reliability.

Discussion History

ismaelsadeeq Original Post
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