Open vs. Sealed: Auction Format Choice for Maximal Extractable Value

TL;DR

This paper analyzes optimal auction formats for MEV extraction on Ethereum, revealing how auction type impacts revenue and demonstrating the dominance of English and second-price auctions under realistic valuation correlations.

Contribution

It models bidder valuation correlation with a Gaussian factor and compares five auction formats, providing new insights into auction efficiency and revenue in MEV markets.

Findings

English and second-price auctions outperform Dutch and first-price formats across correlation levels.

Revenue peaks at intermediate correlation levels and declines at high correlation due to reduced valuation spread.

Applying results to real data suggests significant revenue losses from suboptimal auction choices.

Abstract

We study optimal auction design for Maximum Extractable Value (MEV) auction markets on Ethereum. Using a dataset of 2.2 million transactions across three major orderflow providers, we establish three empirical regularities: extracted values follow a log-normal distribution with extreme right-tail concentration, competition intensity varies substantially across MEV types, and the standard Revenue Equivalence Theorem breaks down due to affiliation among searchers' valuations. We model this affiliation through a Gaussian common factor, deriving equilibrium bidding strategies and expected revenues for five auction formats, first-price sealed-bid, second-price sealed-bid, English, Dutch, and all-pay, across a fine grid of bidder counts $n$ and affiliation parameters $\rho$. Our simulations confirm the Milgrom-Weber linkage principle: English and second-price sealed-bid auctions strictly dominate Dutch and first-price sealed-bid formats for any $\rho > 0$, with a linkage gap of 14-28\% at moderate affiliation ($\rho=0.5$) and up to 30\% for small bidder counts. Applied to observed bribe totals, this gap corresponds to \$10-18 million in foregone revenue over the sample period. We also document a novel non-monotonicity: at large $n$ and high $\rho$, revenue peaks in the interior of the affiliation parameter space and declines thereafter, as near-perfect correlation collapses the order-statistic spread that drives competitive payments.