Miner Collusion and the Bitcoin Protocol

Bitcoin users can offer fees to the miners who record transactions on the blockchain. We document the blockchain rarely runs at capacity, even though there appears to be excess demand further higher fee orders are not always prioritized. We show these patterns are consistent with miners exercising market power. If users believe that only high fee transactions will be executed expeditiously then we show how strategic capacity management can be used to increase fee revenue. Using a novel data set, we present evidence consistent with strategic capacity management. We show that mining pools facilitate collusion, and estimate that they have extracted at least 300 million USD a year in excess fees by making processing capacity artificially scarce.