by Yinhong “William” Zhao

Abstract 

Delaying a financial transaction can be costly, but the cost of delay is difficult to estimate in traditional finance. I exploit the unique data offering and market design of the Ethereum blockchain to estimate the cost of delaying financial transactions in decentralized finance (DeFi). I construct a dynamic auction model for the Ethereum transaction fee market that relates users’ optimal transaction fee bids to their delay cost functions and network conditions, and I structurally estimate the delay cost functions for different users and transaction types. The average cost of delaying a transaction by one minute is 8.78 US dollars, but the distribution of delay costs is highly skewed to the right. Delay costs are higher for complex transactions and users who trade more frequently. I estimate that welfare loss due to network delay on Ethereum was 14.03 million US dollars per day in July 2021, and I apply the delay cost estimates to evaluate the welfare losses under alternative transaction fee mechanisms.

Campbell Harvey, Faculty Advisor
Michelle Connolly, Faculty Advisor

JEL Codes: D44; G10; L17;

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