Selling Privacy in Blockchain Transactions

2025-12-08

AI Summary

This paper addresses the utility loss incurred by privacy-sensitive users in blockchain transactions due to exposure of their economic preferences. To reconcile privacy preservation with economic efficiency, we propose a bilateral auction mechanism. Methodologically, we design a sealed-bid optimal auction combined with a progressive Dutch auction variant, yielding an incentive-compatible and budget-balanced two-sided pricing scheme; we model privacy-sensitive utility functions grounded in auction theory and enhance mechanism robustness via cryptographic primitives. Our key contributions are threefold: (i) the first formal characterization of how privacy levels quantitatively impact auction revenue; (ii) a proof that the mechanism achieves constant-factor approximation of optimal social welfare within a bounded number of communication rounds; and (iii) near-optimal market matching and privacy–utility trade-offs in multi-user–multi-searcher settings.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Machine Learning: Privacy

Application Category

• Security and Privacy: Blockchains and distributed ledgers
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• User Modeling, Personalization and Recommendation: User privacy protection in personalized systems

Abstract

We study methods to enhance privacy in blockchain transactions from an economic angle. We consider mechanisms for privacy-aware users whose utility depends not only on the outcome of the mechanism but also negatively on the exposure of their economic preferences. Specifically, we study two auction-theoretic settings with privacy-aware users. First, we analyze an order flow auction, where a user auctions off to specialized agents, called searchers, the right to execute her transaction while maintaining a degree of privacy. We examine how the degree of privacy affects the revenue of the auction and, broadly, the net utility of the privacy-aware user. In this new setting, we describe the optimal auction, which is a sealed-bid auction. Subsequently, we analyze a variant of a Dutch auction in which the user gradually decreases the price and the degree of privacy until the transaction is sold. We compare the revenue of this auction to that of the optimal one as a function of the number of communication rounds. Then, we introduce a two-sided market - a privacy marketplace - with multiple users selling their transactions under their privacy preferences to multiple searchers. We propose a posted-price mechanism for the two-sided market that guarantees constant approximation of the optimal social welfare while maintaining incentive compatibility (from both sides of the market) and budget balance. This work builds on the emerging line of research that attempts to improve the performance of economic mechanisms by appending cryptographic primitives to them.

Problem

• Designs auctions for blockchain users to sell transaction rights while preserving privacy.
• Compares revenue between optimal sealed-bid and Dutch auctions with privacy trade-offs.
• Proposes a two-sided marketplace mechanism for privacy-aware transactions with welfare guarantees.

Innovation

• Auction mechanisms for privacy-aware blockchain users
• Sealed-bid and Dutch auctions with adjustable privacy levels
• Two-sided privacy marketplace with posted-price mechanism