Vitalik Buterin Proposes a Shift to Uniform Price Auction for Ethereum Miner Compensation

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Ethereum cofounder Vitalik Buterin has published a proposal to improve how cryptocurrency miners are paid. He believes that the current compensation model can be adjusted to benefit both miners and users. To that end, he has published a rather extensive document detailing how a uniform price auction can replace the current fee mechanism.

Improving Transaction Fee and Market Dynamics

Currently, almost all blockchain-based platforms use a method similar to first price auction, wherein users sign a transaction with the amount to be transferred and a corresponding transaction fee. This fee is also known as “gas” on the Ethereum blockchain.

If a transaction has a high gas set by the user, it will be prioritized and processed faster by the miners. As of this point in time, there is no way for users to calculate the optimal transaction fee at any given point in time.

The suggestion of a uniform price auction is relevant because there is no strategy for choosing the optimal bid price in a first price auction. Buterin explained:

“If you value a transaction getting included right now at $1, you would be willing to bid anything up to $1, but if everyone else is bidding $0.05, then you could keep more money by bidding $0.08 instead; optimizing this requires complex models of the economy and real-time blockchain usage.”

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Understanding “Uniform Price Auction”

The uniform price auction is a superior alternative to the existing system because it allows users to bid amounts equal to the valuation of the transaction. Furthermore, even if they allocate a higher gas expenditure that exceeds other operations on the network, they will not have to pay more than the standard rate.

However, this method can be maliciously targeted by attackers and even miners. For instance, a mining entity could potentially send bogus transactions in a block, artificially clogging up the network. This will, in turn, lead to an increase in the gas price for ordinary operations. Furthermore, a miner could choose to verify only new blocks with high fees attached, neglecting others in the process.

Miners could also exploit the system by asking legitimate users to submit transactions with high transaction fees. They will then compensate this cartel of users by paying the excess amount through a different channel.

Future Adoption Likely?

Vitalik Buterin said:

“Our goal is to discourage the development of complex miner strategies and complex transaction sender strategies in general, including both complex client-side calculations and economic modeling as well as various forms of collusion; the latter especially is dangerous as it creates an incentive for staking pools that can centrally manage the process of extracting gains from collusion.”

He added that while the proposal does not achieve perfect optimality in mathematical terms, it is an attempt to find the minimal protocol change that leads to a very significant improvement over the status quo.

Importantly, miners will not undertake any financial loss after migrating to a uniform price auction. This is because they will be free to select transactions having the highest valuations and include them in their block. Buterin said, “We can improve this further by allowing transaction senders to express their fee in the form of ‘whatever the minimum fee is, plus an increment fee,’ for users who want their transactions to be processed faster than other transactions.”