Briefing
The core research problem is the failure of existing Transaction Fee Mechanisms (TFMs) to maintain incentive-compatibility (IC) when accounting for active block producers who extract Maximal Extractable Value (MEV) from transaction ordering. This paper establishes a foundational impossibility result, proving that no non-trivial, approximately welfare-maximizing TFM can be IC for both users and block producers under this active model. The breakthrough is the design of a novel mechanism, SAKA (Searcher-Auction-K-Auction), which circumvents this theoretical barrier by formally integrating the roles of searchers and proposers into the TFM design, leveraging the searcher’s bid as an MEV oracle to achieve full IC for all participants. The single most important implication is that achieving a fair and efficient on-chain market requires a radical redesign of the fee mechanism to explicitly model and internalize the MEV extraction process, moving beyond the passive block producer assumption.
Context
Prior academic work on Transaction Fee Mechanisms, such as the analysis of EIP-1559, operated under the simplifying assumption of a passive block producer motivated purely by consensus layer rewards. This model failed to capture the emergent reality of the MEV supply chain, where block producers (proposers/validators) are active economic agents with private valuations for blocks, derived from application-layer value extraction (MEV). This theoretical limitation created a gap where real-world competitive dynamics, characterized by Bertrand-style competition, led to a Prisoner’s Dilemma-like outcome that reduced overall system welfare.
Analysis
The paper’s core idea is to re-frame the TFM problem by formally separating the economic roles of the searcher (who identifies MEV) and the proposer (who finalizes the block). The proposed SAKA mechanism works by running a first-price auction among searchers for each transaction bundle, where the winning bid serves as a cryptoeconomic oracle for the transaction’s true MEV. This MEV estimate is then used within a K-auction structure to determine the final price charged to the user. This logical separation allows the mechanism to recover the desirable property of Dominant Strategy Incentive Compatibility (DSIC) for users and searchers, ensuring they bid truthfully, which was previously deemed impossible in the unified, active-producer model.
Parameters
- Impossibility Theorem Scope ∞ No non-trivial, approximately welfare-maximizing TFM can be Incentive-Compatible for both users and block producers in the active model.
- SAKA Welfare Guarantee ∞ Roughly 50% of the maximum-possible welfare when transaction sizes are small relative to block sizes.
- Matching Negative Result ∞ No IC, sybil-proof, and deterministic TFM can guarantee more than 50% of the maximum-possible welfare under those same conditions.
Outlook
The immediate next step for this research is the rigorous formal verification and potential deployment of SAKA or similar mechanisms in live environments to validate the theoretical IC properties against real-world adversarial strategies. In the next 3-5 years, this work will catalyze a fundamental shift in blockchain architecture, moving away from simple fee markets toward integrated, mechanism-designed block production systems that treat MEV as a formally modeled input rather than an external exploit. This opens new avenues for research in designing incentive-compatible, welfare-optimizing mechanisms for all layer-2 sequencing and cross-chain communication protocols.
Verdict
This research delivers a foundational mechanism design framework that moves the field past a critical impossibility result, establishing the first provably incentive-compatible and welfare-guaranteeing transaction fee mechanism for the MEV era.
