The Viability of Blockchain Markets under Discrete Clearing and Paid Priority

2026-05-17

AI Summary

This study investigates the feasibility of blockchain markets serving as the sole venue for price formation, with a focus on how discrete clearing mechanisms and pay-for-priority transaction ordering affect market efficiency. Integrating game theory and market microstructure theory, the authors develop an equilibrium model that incorporates block timing and competition over transaction ordering. The analysis reveals an endogenous participant selection problem induced by pay-for-priority: as information acquisition costs decline or liquidity demand rises, only high-valuation traders remain active, exacerbating price bias and degrading liquidity. Furthermore, while longer block times enhance security, they may also precipitate market collapse, underscoring the critical role of mechanism design in effective price discovery.

Abstract

This paper develops a model to evaluate the viability of blockchain markets as the sole venue for price formation. Blockchains clear at discrete intervals called block time, and transactions are executed sequentially according to priority fees paid by traders who compete for queue position. We show that these features undermine the viability of markets. Paid-priority ordering induces endogenous selection, where only traders with sufficiently high valuations participate. The participation cutoff rises with competition, which intensifies with lower information costs or higher liquidity demand. This hinders price discovery and biases prices. It also impairs liquidity: the cutoff concentrates trading among aggressive traders and increases adverse selection that liquidity suppliers absorb in a single clearing round. Although longer block times enhance consensus security, they amplify these effects and can cause markets to shut down.

Problem

• blockchain markets
• discrete clearing
• paid priority
• price discovery
• market viability

Innovation

• blockchain markets
• discrete clearing
• paid priority
• price discovery
• adverse selection