Transaction Fee Mechanism for Order-Sensitive Blockchain-Based Applications

Demand for blockchains such as Bitcoin and Ethereum far exceeds supply, thereby requiring a selection mechanism that, from a transaction pool, chooses a subset of transactions to be included “on-chain”. Historically, every transaction submitted to the pool is associated with a bid (in the blockchain’s native currency). A miner then decides which set of transactions from the pool should be included in a block. When the block is published, the bid of each included transaction is transferred from its creator to the miner. However, in newer applications such as decentralised finance (DeFi), transaction inclusion in a block is no longer sufficient. In fact, the order in which the transaction is executed is of paramount importance. While research exists on mitigating transaction ordering manipulations, there is a lack of work on transaction fee mechanisms (TFMs) that are order-robust. This paper investigates order-robust TFMs from a mechanism design perspective and shows several impossibility results. For instance, we demonstrate that the recent EIP-1559 TFM is not incentive-compatible for order-sensitive transactions. On the other hand, we present and prove a necessary condition for an order-robust TFM.