Transaction Fee Mechanism Design with Active Block Producers with Pranav Garimidi | a16z crypto | Summary and Q&A

TL;DR

Transaction mechanisms face complexity and impossibility results in the presence of MEV, but potential solutions include encrypted mempools, order flow auctions, and PBS and MEV burn.

Key Insights

• 🗯️ MEV complicates transaction mechanisms by introducing challenges in determining valuations and charging the right prices.
• 🚫 The impossibility results of non-zero payments and the necessity of knowing block producer valuations highlight the difficulties in achieving efficient mechanisms.

Transcript

uh all right welcome everyone to today's a16z crypto research seminar uh very happy to introduce our very own pranav garamidi um who's full-time here at a16c crypto he's going to talk about transactionary mechanisms EIP 1559 and other designs and in particular uh how Mev uh changes our understanding of them so yeah thanks Tim yeah so today we'll be... Read More

Questions & Answers

Q: What are the ideal properties of a transaction mechanism?

The ideal properties include selecting the most optimal set of transactions, having incentive compatibility for the block producer, and ensuring users have dominant strategies.

Q: How does EIP 1559 fit into the transaction mechanism model?

EIP 1559 introduces a tipless mechanism where transactions bid the base fee, but it still faces challenges in terms of incentivizing the block producer and achieving optimal welfare.

Q: How does MEV impact transaction mechanisms?

MEV introduces challenges in determining the block producer's valuation and creates distortions in the mechanisms, making it difficult to charge the right prices and achieve optimal results.

Q: Are there any potential solutions to address the challenges posed by MEV?

Encrypted mempools, order flow auctions, and PBS and MEV burn are potential solutions to elicit information about block producer and transaction valuations, align incentives, and improve transaction mechanisms.

Summary & Key Takeaways

• Transaction mechanisms, known as tfms, are challenging when block producers have different valuations for transactions compared to users.

• A key distinction is between passive block producers and active block producers who consider application-level value from transactions.

• The informal model of tfms is followed by the impossibility result of non-zero payments, while approximate versions rely on users knowing the block producer's valuation.