Research Summary
The research report introduces a model of active block producers with their own private valuations for blocks. The paper shows that transaction fee mechanism design is more challenging with active block producers than with passive ones. It also suggests that no non-trivial or approximately welfare-maximizing transaction fee mechanism can be incentive-compatible for both users and block producers when there’s Miner Extractable Value (MEV). The paper highlights the need for augmenting transaction fee mechanisms with additional components such as order flow auctions, block producer competition, trusted hardware, or cryptographic techniques.
Actionable Insights
- Understanding MEV Impact: Miner Extractable Value (MEV) significantly changes the dynamics of transaction fee mechanisms, making it more challenging to design a system that is incentive-compatible for both users and block producers.
- Reconsidering UX and BPIC: The research suggests that we may need to compromise on either user experience (as expressed by the DSIC property) or block producer incentive compatibility (BPIC).
- Expanding TFM Design Space: There is a need to expand the transaction fee mechanism design space, potentially incorporating order flow auctions or block producer competition to expose information about a block producer’s private valuation to a transaction fee mechanism.
