BUIP069: (closed) Academic paper - Mining, Taxation and Public Goods in Bitcoin


New Member
Aug 2, 2017
BUIP069: Academic paper - Mining, Taxation and Public Goods in Bitcoin

Nicola Dimitri (BU member)

Project Title: Academic paper - Mining, Taxation and Public Goods in Bitcoin

Bitcoin address: 1N9ukmAq6EhhVigrAHiMMzSHdEwDAcLskP

Project Motivation

Mining is a fundamental activity for the functioning of bitcoin communities. The increasing costs of such activity recently posed a number of questions. One such issue is that fees paid by users for registration of their transactions exhibited a steep increase, over some time periods, most likely the outcome of several elements such as the size of registration blocks, the average amount of a transaction, the increase in the dollar/bitcoin exchange rate.

Transaction fees are offered for two main reasons: (i) to increase the likelihood that a transaction will be confirmed as soon as possible (ii) as a tax, paid by users to the miners for the latter to maintain and sustain the bitcoin network and system functioning. Under the second interpretation, fees could be thought of as a contribution to miners for their delivery of a public good (blockchain confirmation)

However, unlike governmental taxes transaction fees are not mandatory but voluntary. Yet, should they be too low it is unlikely that a transaction will be confirmed soon, or confirmed at all, since due to a limited block size successful miners clearly tend to include in the next block those transactions proposing higher fees.

Because daily transactions fees collected by miners reached a meaningful level with time, though currently (9 July 2018) they are below their peak, it would be interesting to investigate the following question.

What if bitcoin miners would deduct a share of their transaction fees (or more in general revenues) to improve the exchange system and its functioning? As above, considering the system functioning as a public good also for the miners, what if miners themselves contributed to enhance its efficiency?

Though miners are already investing on some of these initiatives at individual level, what seems to be missing is a jointly sponsored fund, where resources could be spent in activities of common, mutual, interest for all miners. Examples of such activities could be communication and training campaigns, to diffuse knowledge of the system functioning and its advantages, for both individual users and businnesses. Funds could also be used to sustain interaction activities with monetary authorities, financial intermediaries and related subjects.

Every miner would benefit from such initiatives.

The above question raises few issues. For example, on the one hand, it is clear that if such contribution would be left completely voluntary there may be room for free riding, opportunistic, behavior by individual miners. That is, some may prefer the other miners to invest more than they themselves do, to enjoy the benefits of the system improvements at no or low costs. However, in this case the final outcome could be that nobody, or only few miners, would accept to deduct such share from their revenues to the benefit of the whole community. On the other hand, if such contribution is made mandatory by the majority of miners then this could potentially discourage some of them to continue their activity unless the system (public good) improvements, and expected increase in future revenues, would more than compensate one’s contribution.

The starting view of this project is that a decision to introduce such contribution should resolve a trade-off, between paying to improve the system vs increasing expected future revenues. If the latter would prevail on the former then miners may be willing to contribute.

Project Objectives

The objectives of this project are the following:

  • Conceptualise how a miner’s contribution to a commonly managed fund, given by the share of his own revenue, could enter into his decision making, and what sort of role it could play. In a simple static model (Dimitri, Ledger 2017) I argued that revenues would affect only how much to invest in computational resources and not whether to invest. This result may need to be rivisited under the assumption that a deduction of revenues now could increase revenues later.
  • The reference model would still be strategic, game theoretic, plausibly as in Dimitri 2017, however now some of the main parameters would probably have to change and time will have to enter explicitly into the framework.
  • Indeed, for example, a preliminary sketch of some quantities of the model could be as follows. I would envisage that a miner’s revenues
    , rather than being constant (as in Dimitri 2017) should now be seen as a function R(ns) of the share 0<s<1, of deducted revenues per miner, and the number of contributing miners n. In fact, if sR(ns) is the deducted sum for the contribution, then r(s)=(1-s)R(ns) would be the miner’s net (of deduction) revenues. The shape of R(ns) would reflect how revenues are expected to change as a result of the deducted sums invested in the system improvement. Assuming R(ns) to be twice differentiable, the share maximising the miner’s revenue s* could be found by considering the first derivative


If s* is found by means of first order conditions, that is r’(s*)=0 then

R’(ns*)/ R(ns*)= 1/((1-s*)n)

or also


where e(R(ns))=nsR’(ns)/R(ns) is the elasticity of the function R(ns) that is the % variation of R(ns) when ns changes by 1%.

If r is the miner’s revenue with no deduction, and r(s*) the optimum miner’s revenue with deduction, then if r(s*)>r it would be profitable for the miners to introduce the deduction to improve the system functioning.

Expected Impact

Th outcome of the project will be a research paper, with both academic and policy content. We expect the findings to help shedding light, for the BU community, on the conditions making a fees deduction, to improve the system, desirable for the miners. If miners would decide to do so, they would act in a so called “coopetitive” way (Brandeburger-Nalebuff, 1995), a combination of cooperation and competition. This is because while, on the one hand, they would cooperate to improve the system while on the other hand they would compete to mine successfully. Indeed, a better working system and a wider network of users will be in every miner’s interest. Investing to do so would be a cooperative act by miners. However, once this is done and the revenues opportunities increased, for every miner, then they would keep competing with each other to solve the cryptopuzzle and confirm transactions.

Project Duration (Expected) If Approved 6 months, starting 2 weeks after approval

Budget 10.000 € (ten thousands euro) The budget is computed based on the following considerations. The paper is expected to take about 200 working hours, spread over 6 months, at an hourly fee of 50 euro. In case of acceptance, funds could be paid in three instalments

i) 3000€ two weeks after approval

ii) 3000€ three months after the first instalment (i)

and the remaining

iii) 4000€ six months after the first instalment

Payment (ii) will be made conditional on approval by BU on satisfactory progress of the project. BU may ask for further progress before paying. Payment (iii) could be anticipated, if the final version would be ready and approved earlier than six months after the first instalment. It could also be delayed if BU would ask for more work before approval, or if the author would ask for more time.
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Staff member
Aug 22, 2015
Hi @Nic as discussed. I have allocated a BUIP number for this proposal.
I suggest a title change to "Academic paper - Mining, Taxation and Public Goods in Bitcoin", as the request is not to directly support such a mining change, but to approve funding for an academic paper to explore this subject, regardless of the conclusion.

Comment by BU members is invited for this BUIP.


New Member
Aug 2, 2017
Dear Andrew

many thanks. I agree with the suggested title change; please proceed with it. Indeed, although to my knowledge the topic is being under consideration also from an operational point of view, my idea is more to discuss general conditions under which such taxation scheme could be beneficial for the whole community.
[doublepost=1532246628][/doublepost]Dear Andrew

as a follow up to my previous message please let me know in case further changes or actions would be requested for the proposal before voting


Staff member
Aug 28, 2015
Would this paper address how to decide what to do with any funds received?
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New Member
Aug 2, 2017
Dear theZerg

many thanks for the interesting question. Though in principle the analysis is intended to be general, discussing conditions for nodes to participate and benefit out of such fund, I would be happy to receive requests at this stage on profitability-viability of specific projects. Those could accompany the analysis as case studies, examples, to discuss the applicability of the ideas. Alternatively, if problems with space, they might be the content of a second paper fully dedicated to applications.
I'd much like to receive further feedback on this


Well-Known Member
Sep 29, 2015
My initial reaktion to this proposal is that BU should not in any way be involved in projects trying to impose taxes on miners.

Miners are supporting the ecosystem today through both donations and investments. I'm not a big fan of taxes.
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New Member
Aug 2, 2017
Many thanks for your comment. The term taxation, as it appear in the title of the project, may indeed evoke the idea of imposition, as in standard governmental taxes, but it is mainly used for its being instrumental to funding public goods.
However, as you can see in the proposal, the project is focused on possible voluntary contributions to a fund, to support initiatives of mutual interest for all miners and the community. As I mention in the proposal, currently miners are certainly funding initiatives and generously providing donations. Yet, and this to my knowledge was a question of interest also for other members, there are no jointly agreed and supported (by miners) policy initiatives, for example, to improve the functioning of the system, enlarge the network of users etc. These would all be points of mutual interest, that voluntary sponsoring initiatives could help scaling up to a level that a single miner could perhaps not achieve individually.
Hope this makes the content of the project clearer


New Member
Mar 3, 2017
i am having trouble supporting this proposal. I would be more interested in a paper that would contemplate the other end of this - how a fund could be managed in some unique or new way. Neither central authority nor voting seems like a great answer. Are there methods of organization that allow a meaningful way for a fund to be used to the benefit of the ecosystem (and benefit of the contributors) without central authority? Without direct vote? Bounty system?


New Member
Aug 2, 2017
Many thanks to raise this very good point. As in the project description, the main goal of the paper is twofold: (i) discuss conditions under which a voluntary contribution to a fund, supporting initiatives of large-common interest for the community, could be attractive for a miner. Potential free-riding is a classical problem and so (ii) discuss also how could such agreements be found and truly implemented.
In economics this is a problem of so called "Mechanism Design", an area which in recent years received much attention also by the CS community. Broadly speaking, a main goal of the area is to find (institutional, social,..) mechanisms such that is in everyone's interest to truly disclose his personal preferences and behave accordingly. It could be claimed that the area was initiated by the celebrated William Vickrey paper in 1961, where he proposed the second price auction which induces bidders to offer a price equal to their true willingness to pay for an object.
For example, a main problem I would like to consider in the paper, as I understand akin to your considerations, is as follows. Suppose a subgroup of miners (not all of them) finds an agreement to set up and manage a fund supporting some initiatives. Further, suppose such initiatives should only benefit the members of the subgroup and not all the miners, just because the rest of them did not agree. How could this be possible, if at all? If this could indeed be possible then those who did not agree, just because they can not enjoy the benefits since they did not contribute, would be forced to say what they truly think and act consequently as they can not free ride.
Besides the framework I'm sketching in the proposal, a natural environment where such questions could be effectively posed and analysed is the one provided by Cooperative Games (CG). In CG the goal is to find procedures on how to "split a jointly produced cake" , in some "stable" way (solution concept) among subjects. This is in fact an approach I'm also thinking to use to discuss the issue of benefits splitting. The most frequently used solution concepts in CG are the Core and the Shapley Value.
Hope this better clarifies that discussion of questions like the one you pose was already planned, but would be more than happy to further discuss the issue.