The Evolution of Blockchain: From Public to Private Mempools

49 Pages Posted: 21 Jan 2022 Last revised: 6 May 2022

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Ruizhe Jia

Columbia University

Ye Wang

ETH Zürich - Department of Information Technology and Electrical Engineering

Date Written: December 31, 2021

Abstract

We study the economic incentives behind the adoption of private pools. Validators may choose to not monitor private pools to preserve rents extracted from arbitrageurs, hence creating execution risk for users. Private pools neither eliminate frontrunning risk nor reduce transaction fees. The welfare of validators increases, but the welfare of arbitrageurs goes down. A private pool leads to higher aggregate welfare compared to a public pool only blockchain. Empirically, we find that Flashbots private pools increase arbitrageurs' cost-to-revenue ratio by a third.

Keywords: Blockchain, Miner Extractable Value, Frontrunning arbitrage, Relay Services.

JEL Classification: C73, G2, D40, G10, G21, L14, O33

Suggested Citation

Capponi, Agostino and JIA, RUIZHE and Wang, Ye, The Evolution of Blockchain: From Public to Private Mempools (December 31, 2021). Available at SSRN: https://ssrn.com/abstract=3997796 or http://dx.doi.org/10.2139/ssrn.3997796

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

RUIZHE JIA

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Ye Wang

ETH Zürich - Department of Information Technology and Electrical Engineering ( email )

8092 Zürich
Switzerland

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