Mempool Incentive Compatibility

Mempool Incentive Compatibility

Original Postby ajtowns

Posted on: March 19, 2024 01:10 UTC

In the discussion about the incentives for miners to replace transactions in a blockchain network, several key points emerge.

Miners are faced with decisions on whether to replace a transaction based on various factors that may or may not align with their direct financial incentives. The concept of a Schelling point is introduced as a scenario where miners might collectively agree to replace a transaction if it is perceived as beneficial for the network as a whole, even if individual gains from not doing so are minor. This collective action relies on the understanding that certain actions, while not directly profitable for each miner, could lead to an overall improvement in the network's efficiency or reliability.

Further exploration into the dynamics of transaction replacement reveals how the probability of a transaction being mined changes with the distribution of hashrate among miners or mining pools. For instance, a mining pool with a dominant share of the network's hashrate faces different incentives compared to one with a smaller share. The analysis delves into the mathematics of mining and fees, illustrating how the expected value of mining transactions changes based on the hashrate distribution and the number of blocks until a transaction is likely to be mined.

An interesting model is proposed, suggesting that mining pools might adjust their reward distribution mechanisms to account for the potential rewards from high-fee transactions. This idea implies that miners could be directly incentivized to mine replacement transactions with higher fees, especially if the original transaction is not expected to be confirmed in the near future. Such a mechanism would require careful consideration of the fee differential between the original and replacement transactions, ensuring that the incentive structure does not encourage unnecessary replacements.

The discussion concludes by outlining specific thresholds for when replacing a transaction might be considered acceptable within the network. It suggests that as long as a mining pool does not control an overwhelming majority of the network's hashrate, replacing transactions that are far from being mined could be justifiable under certain fee conditions. However, implementing such guidelines in practice poses significant challenges, including accurately assessing the likelihood of a transaction being mined and the distribution of hashrate among miners.

For more detailed insights, the original post provides further elaboration on these topics and can be found here.