Transaction Fee Mechanism Design with Active Block Producers

The incentive-compatibility properties of blockchain transaction fee mechanisms have been investigated with passive block producers, which are motivated by the net rewards earned at the consensus layer. Here, Pranav Garimidi (a16z crypto research) explores active block producers, which have their own private valuations for blocks. These private valuations might stem, for example, additional value derived from the application layer (colloquially understood as “MEV”). In this model, transaction fee mechanism design is fundamentally more difficult: 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.

About the speaker

Pranav is a Research Analyst at a16z Crypto. He completed his degree in Computer Science from Columbia University and is broadly interested in studying mechanism design problems in blockchains with a particular focus on thinking about how mechanisms interface with MEV.

About a16z crypto research

a16z crypto research is a multidisciplinary lab that works closely with our portfolio companies and others toward solving the important problems in the space, and toward advancing the science and technology of the next generation of the internet.