Implementing Transaction Fee Mechanism in Permissioned Blockchains: An Economic Analysis
Prof. YUE Wei Thoo
Associate Head & Professor
Department of Information Systems
City University of Hong Kong
The transaction fee mechanism is widely adopted in public blockchains. Recently, some organizations find the need to adopt such a mechanism in private (permissioned) blockchains. For example, the transaction fee mechanism is debated and even introduced in time-sensitive business contexts such as interbank trading and asset trading platforms. The proposal is different from the first-come-first-serve (FCFS) mechanism widely implemented in most leading permissioned blockchains. This study uses a queuing and game-theoretic model to investigate the economic outcome of implementing a transaction fee mechanism in a permissioned blockchain setting. We evaluate its social welfare outcome and compare it with the outcome of using the FCFS mechanism. Our analysis shows that under the transaction fee mechanism, social welfare can be larger than that under the FCFS mechanism when a fraction of users choose to pay transaction fees. When the orderers respond strategically, the transaction fee mechanism is an effective mechanism to incentivize the orderers to work diligently. Our results demonstrate that the transaction fee mechanism should be considered in permissioned blockchains for achieving higher social welfare under certain business situations.
Wei Thoo YUE is a Professor of Information Systems in the Department of Information Systems at City University of Hong Kong. He received his Ph.D. in Management Information Systems from Purdue University. Prior to joining City University of Hong Kong, he was a faculty at University of Texas, Dallas. His research interests focus on the economic and operational aspects of information security and information systems. His work has appeared in Management Science, MIS Quarterly, Information Systems Research, Journal of Management Information Systems, Decision Support Systems, and other journals.
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