Auctioning Time to Mitigate Latency Races: Theory and Evidence from Blockchains

TL;DR

This paper proposes auctioning artificial time priority in blockchain markets to reduce wasteful latency races, demonstrating through a natural experiment that it decreases redundant transactions and increases platform revenue.

Contribution

It introduces Timeboost, a novel time-priority auction mechanism for blockchains, and provides empirical evidence of its effectiveness in reducing latency-related inefficiencies.

Findings

Redundant transactions decrease after implementing Timeboost.

Platform revenue increases relative to comparable networks.

Empirical evidence supports theoretical predictions about auctioning time priority.

Abstract

High-frequency trading, in both traditional and decentralized markets, induces latency races and redundant order flow as traders spend resources to win time-sensitive opportunities. We show that auctioning artificial time priority can redirect resources away from wasteful speed races toward auction payments. While such waste is difficult to measure in traditional markets, blockchain transactions provide transparent records of these competitive costs through observable duplicate submissions. We study the introduction of Timeboost, a time-priority auction mechanism on Arbitrum, a blockchain that batches transactions before settlement on Ethereum, as a natural experiment. We find that redundant transactions decrease and platform revenue increases relative to comparable networks, consistent with our theoretical predictions.