Quantifying Price Improvement in Order Flow Auctions

TL;DR

This paper develops a framework to evaluate onchain order flow auctions, quantifies their impact on price improvement, and identifies key factors like liquidity and routing efficiency that influence trading outcomes on Ethereum platforms.

Contribution

It introduces a systematic methodology for attributing price improvements in onchain auctions to system inputs, applied to Ethereum trading interfaces, revealing significant enhancements and liquidity effects.

Findings

Auction interfaces provide 4-5 basis points of price improvement.

Added liquidity for large swaps is a key source of improvement.

Systematic attribution of improvements to routing and fee settings.

Abstract

This work introduces a framework for evaluating onchain order flow auctions (OFAs), emphasizing the metric of price improvement. Utilizing a set of open-source tools, our methodology systematically attributes price improvements to specific modifiable inputs of the system such as routing efficiency, gas optimization, and priority fee settings. When applied to leading Ethereum-based trading interfaces such as 1Inch and Uniswap, the results reveal that auction-enhanced interfaces can provide statistically significant improvements in trading outcomes, averaging 4-5 basis points in our sample. We further identify the sources of such price improvements to be added liquidity for large swaps. This research lays a foundation for future innovations in blockchain based trading platforms.