Hello, I am in the business of MEV. There are some good ideas in this proposal. I have a critique and alternative proposals. Some things you say aren’t true but I won’t go into too much detail because a lot of the game is a well-kept secret.
Transaction ordering is powerful because it determines which transactions succeed and which fail, and also what happens should they succeed. Miners have dictatorial power over this $10m+/year market because there are no rules regarding transaction ordering. Even if there were rules miners still win by excluding transactions.
Block proposers are most analogous to traditional blockchain miners. It is critical that they preserve the censorship resistance that we see in blockchains today
Proposers are still incentivized to exclude transactions. You introduce another source of censorship: independent reordering. Separating these powers is an improvement but the sequencer, the producer, and the transactors could still be the same party, and the sequencer could have conflicts of interest outside of the block.
This auction assigns the right to sequence the last N transactions.
Changing the order of transactions impacts state. This would substantially increase the effective confirmation time leading to instability and a higher rate of reverted transactions.
It also impacts gas usage. If a block proposer only selects the transactions but does not order them, there can be no block gas limit. It is nontrivial to prove that a set of transactions cannot be ordered below a given gas threshold. Using transaction gas limits is sufficient but you end up with barren blocks and substantial gas-usage volatility; the network would be massively under-utilized. A related concern is that the sequencer doesn’t care how much gas is used.
If, within a timeout the sequencer has not submitted an ordering which is included by block proposers, a new sequencer is elected.
This process could last an unbounded amount of time. Block proposers could have incentivizes to exclude the ordering. Moreover the ordering itself could be reverted by a future reordering. Instead you could have a hash of the ordering be part of the bid itself, since the MEV is known at the time of the bid.
In addition to extracting MEV, the MEVA provides the current sequencer the ability to provide instant cryptoeconomic guarantees on transaction inclusion. They do this by signing off on an ordering immediately after receiving a transaction from a user – even before it is sent to a block producer.
I don’t see a reason for the sequencer to do this. An index is not a strong guarantee either. You could even withhold such a proof until you actually provide the sequence.
As long as the sequencer stands to lose more than it can gain from an equivocation, we can expect the sequencer to provide realtime feed of blockchain state which can be monitored, providing, for instance, realtime price updates on Uniswap.
They don’t have to provide this information to the public in realtime.
Bidders colluding to reduce competition and keep the auction price artificially low breaks the ability to accurately discover and tax the MEV.
Collusion requires barriers to entry. You create a barrier to entry by incentivizing the probable-winner to submit more MEV transactions and punishing their competitors for losing. Once you start winning you will probably keep winning indefinitely.
This can help to establish a price floor because with low barriers of entry we can expect enough competition that there will be at least one honest sequencer bid.
Sequence bidding is not free.
Proposals
MEV is potentially significantly higher than transaction fee revenue.
MEV is the true block reward. Gradually diminish the inflationary block reward instead of trying to tax MEV. Let “dumb” block producers maintain viability via open-source software. Preserve confirmation time.
Define a standard transaction ordering algorithm to increase the cost of censorship.
Ban or punish inclusion of transactions that would revert at the top-level. These waste shared computational resources anyway. Preventing block producers from winning revert rewards removes a barrier to entry and reduces the power of the block producer. Let block producers manage revert-DOS off-chain.