On Algorand Transaction Fees: Challenges and Mechanism Design

Abstract

Algorand is a public proof-of-stake (PoS) blockchain with a throughput of 750 MB of transactions per hour, 125 times more than Bitcoin. While the throughput of Algorand depends on the participation of most of its nodes, rational nodes may behave selfishly and not cooperate with others. To encourage nodes to participate in the consensus protocol, Algorand rewards nodes in each round. However, currently Algorand does not pay transaction fees to participating nodes, rather storing it for future use. In this paper, we show that this current approach of Algorand motivates selfish block proposers to increase their profits by creating empty blocks. Such selfish behavior reduces the throughput of Algorand. Therefore, the price of Algo will decrease in the long run. Because of this price reduction, nodes will leave Algorand, compromising its security. Moreover, lack of an appropriate mechanism to pay fees to participants causes additional issues, such as lack of transparency, centralization, and inability of nodes to prioritize transactions. To overcome this challenge, we design a perfectly competitive market and propose an algorithm for computing optimal transaction fees and block size in Algorand We also propose an algorithm that reduces the cost of Algorand, without compromising its security. We further simulate the Algorand network and show how the optimal transaction fee and block size can be calculated in practice.