Searcher Competition in Block Building

2024-07-10

Conference on Advances in Financial Technologies

AI Summary

This paper investigates how searcher competition intensity affects validator capture of maximum extractable value (MEV) in competitive block-building markets, such as Ethereum’s. Methodologically, it introduces the game-theoretic core solution—previously unexploited in MEV literature—as a robust solution concept for MEV allocation; defines each searcher’s marginal contribution to the coalition’s value as their theoretical payoff upper bound; and, under submodular value assumptions, proves the existence and uniqueness of a dominant-strategy incentive-compatible (DSIC) core-selecting mechanism. Theoretically, validator MEV capture rate asymptotically converges to 100% as the number of searchers increases. Empirically, regression analysis on on-chain bundle data confirms a statistically significant positive correlation between the number of re-submissions exploiting the same arbitrage opportunity and the median validator revenue, validating the theoretical prediction.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Search and Optimization: Metareasoning and Metaheuristics

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Web Mining and Content Analysis: Web data provenance, reliability, and authenticity
• Search and Retrieval-Augmented AI: Web evaluation methodologies and metrics

Abstract

We study the amount of maximal extractable value (MEV) captured by validators, as a function of searcher competition, in blockchains with competitive block building markets such as Ethereum. We argue that the core is a suitable solution concept in this context that makes robust predictions that are independent of implementation details or specific mechanisms chosen. We characterize how much value validators extract in the core and quantify the surplus share of validators as a function of searcher competition. Searchers can obtain at most the marginal value increase of the winning block relative to the best block that can be built without their bundles. Dually this gives a lower bound on the value extracted by the validator. If arbitrages are easy to find and many searchers find similar bundles, the validator gets paid all value almost surely, while searchers can capture most value if there is little searcher competition per arbitrage. For the case of passive block-proposers we study, moreover, mechanisms that implement core allocations in dominant strategies and find that for submodular value, there is a unique dominant-strategy incentive compatible core-selecting mechanism that gives each searcher exactly their marginal value contribution to the winning block. We validate our theoretical prediction empirically with aggregate bundle data and find a significant positive relation between the number of submitted backruns for the same opportunity and the median value captured by the proposer from the opportunity.

Problem

• Quantifying validator MEV extraction based on searcher competition levels
• Analyzing core allocation mechanisms for blockchain value distribution
• Establishing relationship between arbitrage competition and proposer value capture

Innovation

• Uses core solution concept for robust MEV predictions
• Implements dominant-strategy core-selecting mechanisms
• Quantifies validator surplus as function of searcher competition