Revisiting the Primitives of Transaction Fee Mechanism Design

TL;DR

This paper introduces a new criterion called off-chain influence proofness for transaction fee mechanisms, demonstrating that existing standards like EIP-1559 do not meet it, and proposing a cryptographic auction that does.

Contribution

The paper proposes off-chain influence proofness as a novel desideratum and shows how a cryptographic second-price auction can satisfy it, unlike prior mechanisms.

Findings

EIP-1559 is not off-chain influence proof.

Cryptographic second-price auction satisfies off-chain influence proofness.

Impossibility result for mechanisms satisfying all previous properties plus off-chain influence proofness.

Abstract

Transaction Fee Mechanism Design studies auctions run by untrusted miners for transaction inclusion in a blockchain. Under previously-considered desiderata, an auction is considered `good' if, informally-speaking, each party (i.e., the miner, the users, and coalitions of both miners and users) has no incentive to deviate from the fixed and pre-determined protocol. In this paper, we propose a novel desideratum for transaction fee mechanisms. We say that a TFM is off-chain influence proof when the miner cannot achieve additional revenue by running a separate auction off-chain. While the previously-highlighted EIP-1559 is the gold-standard according to prior desiderata, we show that it does not satisfy off-chain influence proofness. Intuitively, this holds because a Bayesian revenue-maximizing miner can strictly increase profits by persuasively threatening to censor any bids that do not transfer a tip directly to the miner off-chain. On the other hand, we reconsider the Cryptographic (multi-party computation assisted) Second Price Auction mechanism, which is technically not `simple for miners' according to previous desiderata (since miners may wish to set a reserve by fabricating bids). We show that, in a slightly different model where the miner is allowed to set the reserve directly, this auction satisfies simplicity for users and miners, and off-chain influence proofness. Finally, we prove a strong impossibility result: no mechanism satisfies all previously-considered properties along with off-chain influence proofness, even with unlimited supply, and even after soliciting input from the miner.