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Transaction Fee Mechanism Design in a Post-MEV World

Authors Maryam Bahrani, Pranav Garimidi, Tim Roughgarden

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Maryam Bahrani
  • Ritual, New York, NY, USA
Pranav Garimidi
  • a16z Crypto, New York, NY, USA
Tim Roughgarden
  • a16z Crypto , New York, NY, USA
  • Columbia University, New York, NY, USA

Funding

  • Roughgarden, Tim: Research at Columbia University supported in part by NSF awards CCF-2006737 and CNS-2212745, and research awards from the Briger Family Digital Finance Lab and the Center for Digital Finance and Technologies.

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Maryam Bahrani, Pranav Garimidi, and Tim Roughgarden. Transaction Fee Mechanism Design in a Post-MEV World. In 6th Conference on Advances in Financial Technologies (AFT 2024). Leibniz International Proceedings in Informatics (LIPIcs), Volume 316, pp. 29:1-29:24, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2024)
https://doi.org/10.4230/LIPIcs.AFT.2024.29

Abstract

The incentive-compatibility properties of blockchain transaction fee mechanisms have been investigated with passive block producers that are motivated purely by the net rewards earned at the consensus layer. This paper introduces a model of active block producers that have their own private valuations for blocks (representing, for example, additional value derived from the application layer). The block producer surplus in our model can be interpreted as one of the more common colloquial meanings of the phrase "maximal extractable value (MEV)." We first prove that transaction fee mechanism design is fundamentally more difficult with active block producers than with passive ones: With active block producers, no non-trivial or approximately welfare-maximizing transaction fee mechanism can be incentive-compatible for both users and block producers. These results can be interpreted as a mathematical justification for augmenting transaction fee mechanisms with additional components such as order flow auctions, block producer competition, trusted hardware, or cryptographic techniques. We then consider a more fine-grained model of block production that more accurately reflects current practice, in which we distinguish the roles of "searchers" (who actively identify opportunities for value extraction from the application layer and compete for the right to take advantage of them) and "proposers" (who participate directly in the blockchain protocol and make the final choice of the published block). Searchers can effectively act as an "MEV oracle" for a transaction fee mechanism, thereby enlarging the design space. Here, we first consider a TFM that is inspired by how searchers have traditionally been incorporated into the block production process, with each transaction effectively sold off to a searcher through a first-price auction. We then explore the TFM design space with searchers more generally, and design a mechanism that circumvents our impossibility results for TFMs without searchers. Our mechanism (the "SAKA" mechanism) is incentive-compatible (for users, searchers, and the block producer), sybil-proof, and guarantees roughly 50% of the maximum-possible welfare when transaction sizes are small relative to block sizes. We conclude with a matching negative result: even when transaction sizes are small, no DSIC and sybil-proof deterministic TFM can guarantee more than 50% of the maximum-possible welfare.

Subject Classification

ACM Subject Classification
  • Theory of computation → Computational pricing and auctions
  • Security and privacy → Distributed systems security
Keywords
  • MEV
  • Transaction Fee Mechanisms
  • Auctions

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