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Transaction Fee Mechanism Design with Active Block Producers

Author

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  • Maryam Bahrani
  • Pranav Garimidi
  • Tim Roughgarden

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 term ``MEV.'' The main results of this paper show 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 the current interest in augmenting transaction fee mechanisms with additional components such as order flow auctions, block producer competition, trusted hardware, or cryptographic techniques.

Suggested Citation

  • Maryam Bahrani & Pranav Garimidi & Tim Roughgarden, 2023. "Transaction Fee Mechanism Design with Active Block Producers," Papers 2307.01686, arXiv.org, revised Oct 2023.
    • Handle: RePEc:arx:papers:2307.01686
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    File URL: http://arxiv.org/pdf/2307.01686
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    References listed on IDEAS

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    1. Tim Roughgarden, 2021. "Transaction Fee Mechanism Design," Papers 2106.01340, arXiv.org, revised Dec 2023.
    2. Matheus V. X. Ferreira & David C. Parkes, 2022. "Credible Decentralized Exchange Design via Verifiable Sequencing Rules," Papers 2209.15569, arXiv.org, revised Apr 2023.
    3. Matheus V. X. Ferreira & Daniel J. Moroz & David C. Parkes & Mitchell Stern, 2021. "Dynamic Posted-Price Mechanisms for the Blockchain Transaction Fee Market," Papers 2103.14144, arXiv.org, revised Nov 2021.
    4. Mohammad Akbarpour & Shengwu Li, 2020. "Credible Auctions: A Trilemma," Econometrica, Econometric Society, vol. 88(2), pages 425-467, March.
    5. repec:cup:cbooks:9781316779309 is not listed on IDEAS
    6. Roughgarden,Tim, 2016. "Twenty Lectures on Algorithmic Game Theory," Cambridge Books, Cambridge University Press, number 9781316624791, January.
    7. Roughgarden,Tim, 2016. "Twenty Lectures on Algorithmic Game Theory," Cambridge Books, Cambridge University Press, number 9781107172661, January.
    8. Meryem Essaidi & Matheus V. X. Ferreira & S. Matthew Weinberg, 2022. "Credible, Strategyproof, Optimal, and Bounded Expected-Round Single-Item Auctions for all Distributions," Papers 2205.14758, arXiv.org.
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    Cited by:

    1. Vincent Gramlich & Dennis Jelito & Johannes Sedlmeir, 2024. "Maximal extractable value: Current understanding, categorization, and open research questions," Electronic Markets, Springer;IIM University of St. Gallen, vol. 34(1), pages 1-21, December.
    2. Tarun Chitra, 2023. "Towards a Theory of Maximal Extractable Value II: Uncertainty," Papers 2309.14201, arXiv.org.
    3. Hao Chung & Tim Roughgarden & Elaine Shi, 2024. "Collusion-Resilience in Transaction Fee Mechanism Design," Papers 2402.09321, arXiv.org, revised Jun 2024.
    4. Yoav Kolumbus & Joe Halpern & 'Eva Tardos, 2024. "Paying to Do Better: Games with Payments between Learning Agents," Papers 2405.20880, arXiv.org.
    5. Yotam Gafni & Aviv Yaish, 2024. "Barriers to Collusion-resistant Transaction Fee Mechanisms," Papers 2402.08564, arXiv.org.

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