RFP 10 - Partial Block Auctions for Sequencers

Partial block building
1

Researcher: TBD

Summary

Rollup auctions are not optimized for speed for MEV. In many rollups, sequencers simply do first in first out (FIFO) auctions such as in Arbitrum, which is generally suboptimal. The present initiative seeks to develop an improved auction mechanism for rollups.

Specifically, this research contributes:

  • An optimized auction mechanism where sequencers can also give pre-confirmations and boost the amount of MEV returned to the rollup

Background & Problem Statement

Background

Core background concepts/definitions are as follows:

Pre-Confirmations (preconfs):

Pre-confirmations are a growing concept in the rollup space. Many rollups offer pre-confirmation of their blocks before they are committed, i.e. before they are sent down to a data availability (DA) layer. Some mechanisms for enabling pre-confirmation of rollup blocks are as follows:

  • Soft finality is guaranteed over rollup transactions before they are posted to a DA layer based on the consensus between node operators on a shared settlement layer or sovereign rollup. This only works for rollups where transaction settlement occurs on a separate layer from the DA layer.
  • Sequencers are required to post collateral that can be penalized by the rollup if they do not post the block to the DA after a certain timeframe.

Technical details of various pre-confirmation models can be found in the references attached at the end of this document.

Pre-confirmations act to speed up the user experience. Based rollups, for example, can offer pre-confirmations. Justin Drake of Ethereum Research states that Based preconfs offer a competitive user experience for based sequencing, with latencies on the order of 100ms.

However, pre-confirmations have a limited security model, as there is a limited ability to make guarantees to many participants simultaneously.

Maximal Extractable Value (MEV):

MEV is a type of profit that can be extracted from pending transactions through various mechanisms such as including, excluding, or reordering the transactions in blocks.

In recent years, MEV has been explored and described in research, though with ever-changing technology, it is not fully understood. Daian et al., for example, were the first to coin the term “MEV” in their 2019 paper exploring a number of types of MEV extraction on Ethereum.

Some core types of MEV extraction are listed below:

  • Frontrunning: searchers use bots to scan mempools for profitable transactions, replicating user transactions with a higher gas price so that new transaction will be chosen over the initial user’s transaction
  • Sandwich attacks: a front-running strategy to manipulate crypto prices, accomplished by searchers placing a trade right before and after a large DEX trade to benefit from the artificial price change
  • Arbitrage: traders leverage a price difference between two exchanges (such as two DEXes or a CEX and a DEX), making a buy at the lower price and then selling at the higher price for a profit; this also aligns the prices of the exchanges and makes the market more efficient
  • Liquidation: when users do not repay their loans on a lending protocol, their collateral can often be liquidated by anyone to earn a liquidation fee

Problem Statement

The problem here is that rollup auctions are not optimized for either speed or MEV extraction.

Thus, the question that this research aims to address is as follows:

  • How can we create an optimized rollup auction mechanism where sequencers can also give pre-confirmations and boost the amount of MEV returned to the rollup?

Plan & Deliverables

Expected outputs/deliverables are as follows:

  • A model for an optimized auction mechanism where sequencers can also give pre-confirmations and boost the amount of MEV returned to the rollup; This would be similar to partial block auctions for Ethereum.

The plan for achieving this output is outlined below:

Experiment 1: Assessing Current Rollup Auction Mechanisms

We will collect data on current auctions on various rollups, specifically looking at missed opportunities for MEV extraction.

Experiment 2: Developing a Rollup Auction Model to Improve MEV Extraction & Incorporate Pre-Confirmations

Using the data from the first experiment, we will develop a model for rollup auctions where (1) MEV extraction and return to the rollup is optimized, and (2) pre-confirmations are incorporated, enabling a faster experience for users and protocols. This will likely be a partial block auction model for sequencers. This could also include introducing top of block guarantees for the sequencer.

References

How to Participate

If you’re a researcher who believes that you would be a good fit to contribute to any of the Composable RFPs, please reach out to Composable’s Lead Research Associate, Sydney Sweck, at sydney@composable.finance. In the email, be sure to include:

  • The RFP number(s) you’d like to contribute to
  • Your relevant background experience
  • How you think you could contribute to the research