User Welfare in Cryptocurrency Transaction Markets: An Empirical Study on EIP-1559

Abstract

Guaranteed by the novel technical design, blockchain-based platforms can ensure the authenticity and transparency of transactions. However, compared with traditional ways of trading, the transaction throughput is usually restricted in blockchain networks, and users have to compete for limited block space. On Ethereum, a featured permissionless blockchain-based platform, users conducted various activities in a name-your-own-price way. Users faced uncertainty about how to bid appropriately and were prone to severe overpaying problems. Taking advantage of the upgrade of the Ethereum transaction fee mechanism on August 5, 2021, we describe the logic of user bidding and analyze whether the new transaction fee mechanism introduced by EIP-1559 helps increase user welfare. Through empirical analysis, we revealed that EIP-1559 could alleviate user overpayment, especially among addresses with lower transaction values. In addition, observations of bidding performance with EIP-1559 across time proved the existence of learning effects.