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MEV Auction

Multi-unit auctions, unlike their single-unit counterparts, present complex allocation mechanisms. The MEV Auction platform implements several innovative strategies:

1. An enhanced uniform price auction,
2. A Bifurcated Block Structure (splitting the block into halves),
3. Elastic Supply Scheduling,
4. Contract based bidding.
5. Backwards compatible with MEV-Boost
6. Exclusive Relay endpoint for Validator usage

Block Structure

We divide a block in two parts: ⍺-blockspace and β-blockspace

⍺-blockspace is a very time sensitive kind of priority transactions. These transactions often come in last second.

β-blockspace however can be considered non-priority sensitive, meaning it is not very time sensitive, hence can be priced differently.

⍺-blockspace

• ⍺-blockspace - represents the top part of the blockspace. Economically, this is where competitive searchers want to place their transactions (e.g. for arbitrages etc.).¹

β-blockspace

• β-blockspace - represents the rest of the blockspace. Economically, this is where low-priority transactions - direct transfers, low volume swaps, some kind of intents, etc. - would go. The rationale for this is simple: above and below represent two very different markets: The first serves strategic actors, whereas the second serves 'everyone else' - people not interested in speculation that just want to transact, e.g., to pay for stuff.²

gantt
    title Future auction for `below`
    dateFormat YY-MM
    axisFormat %m
    tickInterval 1month
    section Epoch i
        We know slots for Epoch i+2 are 03,08 and 11 : crit, done, milestone, 00-01, 1m
        Auction for `below`, slots 03,08,11 : 00-01, 6M
        Futures awarded : milestone, 00-07, 1m
        Users can transact: active, 00-07, 6M
    section Epoch i+1
        Users can transact: active, 01-01, 12M
    section Epoch i+2
        Slot 03, future can be used : crit, active, milestone, 02-03, 1
        Slot 08, future can be used : crit, active, milestone, 02-08, 1
        Slot 11, future can be used : crit, active, milestone, 02-11, 1

The Auction platform uses the SecureRPC.com relay, in which permissioned validator sets use exclusively. As such, we will know 2 epochs in advance in which slots we will mint a block. So, we can sell that blockspace about 2 epochs in advance, providing a forward contract market for β-blockspace.

Elastic Supply Schedule

Elastic Supply Schedule: Breaking away from the rigidness of a fixed supply, we're introducing elasticity. When prices dip low, we'll strategically limit the availability of options. This dynamic approach ensures a balance between supply and demand, maintaining value and interest.

Revamped Tie-Breaking Rule: In the world of auctions, ties are inevitable. Our approach is different. We're moving away from the conventional method that prioritizes higher marginal bids. Instead, we're implementing a novel rule that intensifies competition, particularly for those crucial marginal quantities.

Why These Changes Matter

Shortcomings of the standard uniform price auction

Traditionally, with a fixed supply, there's a looming risk of plummeting prices. This phenomenon, identified by Wilson in 1979, highlights a bidder's tendency to underbid. In multi-unit auctions, this is a critical challenge. In a uniform price auction, underbidding on the marginal unit doesn't just lower the price for that unit; it slashes the overall price you pay.

The real danger of severe under-pricing hinges on demand factors, which are often unpredictable and not easily deduced from existing data. The debate over whether discriminatory or uniform price auctions yield higher revenue remains unresolved, both theoretically (as discussed by Ausubel et al. 2011) and empirically.

Tie Breaking Rule

The traditional tie-breaking rule, which prioritizes higher marginal bids, is inherently flawed. It doesn't account for the strategic value of the marginal unit. This is particularly problematic in multi-unit auctions, where the marginal unit is often the most valuable. The current rule fails to capture the true value of the marginal unit, leading to suboptimal outcomes. This is due to the discrete nature of bids, it can happen that there is market-clearing price (where demand=supply). The typical rule applied in many auctions favors high marginal bids first. We will consider an alternative that introduces more pressure at the quantity at the margin.

Elastic Supply Curve Detail

Maximum capacity is fixed, but the supply curve

\(S:P→Q\)

varies with price, offering different quantities of options.

The supply function is designed to be initially concave, then constant at maximum capacity. This approach, theoretically supported by Licalzi (2005), aims to mitigate dramatic underpricing.

Footnotes

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1. Previously this was called 'above' ↩

2. Previously this was called 'below' ↩