https://research.paradigm.xyz/ethereum-blockspace

“Market that can operate freely is like a wheel that can turn freely: it needs an axle and well-oiled bearings. How to provide that axle and keep those bearings well oiled is what market design is about.”

― Alvin E. Roth, Who Gets What — and Why: The New Economics of Matchmaking and Market Design

Outline

  1. Conclusion

Overview of the blockspace market

Blockspace is the commodity that powers the heartbeats of all cryptocurrency networks. In the blockspace market, miners are the producers, mining pools are the auctioneers, and users are the bidders. The influences of the blockspace market are so pervasive that they touch almost every facet of the cryptocurrency ecosystem.

After a user initiates a transaction, it is propagated peer-to-peer in each node’s mempool. Each transaction has a fee attached to it. The fee signals the desire to purchase blockspace, which allows the transaction to be processed and included in a block.

Every moment there are numerous proposed blocks existing in this “Schrödinger’s state” between unconfirmed and confirmed, competing to find the first hash output that satisfies the difficulty target. Each block has a probability of becoming the next block. By contributing billions of computations per second, the miners collapse the probability wave and materialize the ledger history.

Since the size of a block is capped, there is a limited number of transactions that can go through at a given time, thereby giving blockspace an implicit time-value. A transaction that stays unconfirmed for too long may be subject to market volatility, or get frontrun by arbitrage bots. The fee users pay to purchase blockspace, reflects their willingness to bid for its spacetime. The blockspace market connects the miners and users together.

https://research.paradigm.xyz/../assets/images/blockspace/image1.png

On the surface, the blockspace market looks complex and chaotic because it lacks central coordination. It relies on detailed rules, procedures and the confluence of supply and demand to make self-adjustments. How do we know if the current market design is optimized for success?

Nobel Laureate Alvin E. Roth is considered a pioneer in the field of market design. In his seminal book “Who Gets What - and Why” he states that in order to function properly the markets need to do at least three things:

  1. Market depth: a large enough number of potential buyers and sellers to interact. In the case of the blockspace market, the suppliers are incentivized by the block reward to provide hashpower. On the other hand, demand for blockspace increases as more people use the network for transactions.
  2. Safety: market participants must feel safe to reveal or act on confidential information they may hold. Due to the transparent nature of on-chain transactions, users submitting sealed bids may not always get the outcome that they intended. Furthermore, transactions require a high degree of settlement assurance. That is, there should be sufficient hashpower to make re-orgs expensive.
  3. Lack of congestion: transactions should go through or get cancelled in a timely manner. When a market doesn’t deal effectively with congestions that volume brings, participants may not be able to get their transaction included in a block without too much delay. As witnessed from the recent popularity of Ethereum Dapps, gas price also skyrocketed as a result of congestions.

In both Bitcoin and Ethereum’s history, how to optimize the design of the blockspace market structure often sparks many heated debates. In the following sections, we illustrate the structure of the Ethereum blockspace market from the perspectives of the supply (miner) and the demand (users). We examine if the current blockspace market design provides depth, ease congestion, or participation is safe and simple. Next, we discuss the popular proposals to optimize the market structure, as well as how the blockspace market will likely evolve in the future.

The supply side: the structure of Ethereum mining

The ultimate purpose of the entire mining industry is serving as a decentralized transparent clearinghouse for a single commodity: the blockspace.