Briefing
The foundational problem of transaction fee mechanism (TFM) design is the inherent conflict between incentive compatibility for users and block producers and the maximization of social welfare in an environment with active, self-interested block producers who capture Maximal Extractable Value (MEV). This research establishes a formal impossibility result, proving that no non-trivial or approximately welfare-maximizing TFM can be incentive-compatible for both users and active block producers simultaneously. The breakthrough is the proposal of the SAKA mechanism, a new TFM that operates within the bounds of this impossibility by explicitly modeling the searcher-proposer dynamic, achieving both full incentive compatibility and a provable 50% welfare guarantee. This new theory fundamentally re-frames the design space for blockspace allocation, providing a concrete, mathematically-proven blueprint for mitigating adversarial MEV extraction and restoring economic efficiency to the decentralized block production process.
Context
The prevailing theoretical challenge in blockchain economics centered on the design of Transaction Fee Mechanisms (TFMs), such as EIP-1559, which assumed a passive block producer motivated solely by net consensus-layer rewards. The emergence of Maximal Extractable Value (MEV) introduced the “active block producer” problem, where the proposer has a private, application-layer valuation for a block’s content, creating a conflict of interest. This active role, formalized by the searcher-builder-proposer supply chain, rendered traditional TFM analysis incomplete.
The core limitation was the lack of a mechanism that could simultaneously guarantee ∞ (1) Incentive Compatibility (IC) for all actors (users, searchers, proposers), ensuring they act honestly; and (2) High Social Welfare , ensuring the most valuable transactions are included. The existing auction-based systems, while efficient for MEV extraction, failed the welfare and fairness criteria due to Bertrand-style competition dynamics.
Analysis
The paper’s core idea is to first formally prove a critical Impossibility Result ∞ a deterministic, sybil-proof, and approximately welfare-maximizing TFM cannot be incentive-compatible for both users and active block producers. This theoretical boundary sets the stage for the SAKA mechanism, which stands for S earcher A uction and K eep A ll. SAKA is a deterministic, IC, and sybil-proof TFM designed for the Proposer-Builder Separation (PBS) model. Conceptually, SAKA works by transforming the blockspace allocation into a two-tiered auction ∞ users bid for inclusion, and searchers bid to include their bundles (which capture MEV).
The key difference from previous models is that the block producer (proposer) is incentivized to truthfully select the block that maximizes total value, as the mechanism is structured to be IC for them. The design circumvents the impossibility by accepting a bounded, but provable, reduction in maximum possible social welfare, ensuring a 50% welfare guarantee when transaction sizes are small relative to the block size. This is a foundational trade-off ∞ perfect incentive alignment is achieved at the cost of a guaranteed minimum welfare loss.
Parameters
- Welfare Guarantee – Minimum ∞ 50% of the maximum-possible welfare is guaranteed by the SAKA mechanism when transaction sizes are small relative to block sizes.
- Actors Modeled – Active Participants ∞ Three distinct actors ∞ users, searchers, and block producers ∞ are modeled with private valuations and strategic incentives.
- Mechanism Property – Incentive Compatibility ∞ The SAKA mechanism is proven to be IC for all three active participants ∞ users, searchers, and the block producer.
Outlook
The SAKA mechanism and its underlying impossibility result provide a crucial new direction for research in decentralized block production. The immediate next step involves the practical implementation and empirical testing of SAKA within existing Proposer-Builder Separation (PBS) frameworks to validate its performance under real-world network conditions and transaction volume. Strategically, this work opens the door for a new generation of Layer 1 and Layer 2 transaction ordering protocols that can mathematically guarantee a balance between economic efficiency and fairness. Over the next three to five years, mechanisms based on this principle are expected to become the default standard for decentralized sequencing, mitigating the centralization risks and systemic instability caused by unconstrained MEV competition and fostering a more equitable on-chain environment for all users.
