Why Bundling Fails Without Proper Fee Market Design

Without a formal auction, searchers and builders engage in off-chain, opaque competition, leading to value leakage and network instability.\n- Value Extraction: Searchers capture ~$1B+ annually from users via arbitrage and liquidations.\n- Inefficiency: Priority gas auctions (PGAs) waste gas and create chain congestion spikes.\n- Centralization Risk: Ad-hoc bundling favors sophisticated players with capital and infrastructure.

Proposer-Builder Separation (PBS) and shared auction layers like Flashbots' SUAVE create a transparent, competitive market for block space.\n- Credible Neutrality: Builders compete on execution quality, not just relationships.\n- Efficiency Gains: Auction revenue flows to validators/protocol, not just searchers.\n- Intent Future: Enables cross-domain intent-based systems (UniswapX, CowSwap) by standardizing preference expression.

Flashbots catalyzed the shift from dark forests to open markets. Their MEV-Boost middleware is now used by ~90% of Ethereum validators.\n- Market Creation: Turned MEV from a threat into a commoditized, auction-priced resource.\n- Builder Ecosystem: Fostered competition between entities like Titan, Rsync, and beaverbuild.\n- SUAVE Vision: Aims to decentralize the auction layer itself, becoming a mempool and block builder for all chains.

On high-throughput chains, auction design is critical for fairness. Jito's MEV infrastructure on Solana demonstrates an integrated approach.\n- Native Integration: Jito's client modifications and bundled transactions streamline the auction flow.\n- Stakeholder Alignment: 100% of tip revenue is distributed to stakers via the JitoSOL pool.\n- Throughput Proof: Handles Solana's ~3k TPS without congesting the base layer with PGAs.

L2s and app-chains face the same ordering problems. Shared sequencer networks (Astria, Espresso) are the auction layer for the modular stack.\n- Cross-Rollup Arbitrage: Auctions can capture and redistribute value from inter-L2 MEV.\n- Decentralization Path: Provides a credibly neutral alternative to a single, centralized sequencer.\n- Fast Finality: Pre-confirmations from an auction layer enable better UX for intent-based bridges like Across.

Proper auction infrastructure is the prerequisite for the intent-centric future. It shifts the paradigm from transaction execution to outcome fulfillment.\n- User Sovereignty: Users express what they want (e.g., best price), not how to do it.\n- Solver Markets: Projects like UniswapX and CowSwap rely on competitive solvers bidding to fulfill intents.\n- Protocol Revenue: Auctions convert extracted MEV into a sustainable, on-chain revenue stream.

Without a price signal, block space becomes a free resource. This leads to spam and network congestion, crippling user experience for everyone.\n- Unchecked Spam: Arbitrage bots and MEV searchers flood the network with zero-fee transactions.\n- Congestion Collapse: Legitimate user transactions are priced out, leading to >30s latency and failed trades.\n- No QoS Guarantees: Critical operations like oracle updates or liquidations cannot be prioritized.

A first-price auction for bundle inclusion creates a centralized, extractive market. Dominant builders like Flashbots or bloXroute can form oligopolies.\n- Builder Censorship: Cartels can exclude certain transactions or protocols, acting as gatekeepers.\n- Extractive Pricing: Users pay ~200-300% more in hidden MEV costs instead of transparent fees.\n- Stagnant Innovation: No competitive pressure to improve bundle efficiency or pass savings to users.

Bundlers and sequencers cannot sustainably operate without predictable fee revenue. This leads to protocol fragility and security risks.\n- Sequencer Risk: Underfunded operators may go offline or censor to cut costs, breaking liveness.\n- Subsidy Dependence: Reliance on token emissions for security creates ponzinomic models that inevitably collapse.\n- Validator Apathy: Without fees, the cost to validate complex bundles may exceed rewards, threatening decentralization.

Early L2 rollups demonstrated the chaos of a missing fee market. Congestion caused by meme coin frenzies like $AIDOGE led to $10M+ in lost user funds from failed transactions.\n- Meme Coin Congestion: A single token launch could paralyze the network for hours.\n- Economic Attacks: Bad actors could cheaply spam the chain to trigger liquidations or break DeFi arbitrage.\n- Reactive Patching: Teams were forced to implement rushed, suboptimal fee switches post-crisis.

A free market allocates block space to its highest-value use. Without one, bundles are ordered arbitrarily, destroying billions in potential MEV capture and user savings.\n- Wasted MEV: Inefficient ordering leaves $1B+ annually in cross-DEX arbitrage on the table.\n- Poor Price Execution: User swaps on Uniswap or Curve get worse rates due to non-optimal sequencing.\n- Stifled Innovation: No economic incentive to build advanced bundling strategies or privacy tech like RIP-7212.

Intent-based systems like UniswapX and cross-chain bridges like LayerZero and Across require predictable, fast settlement. A congested, fee-less base layer breaks these primitives.\n- Failed Cross-Chain Settlements: Intents expire or revert, causing settlement risk and broken user journeys.\n- Fragmented Liquidity: Bridges cannot guarantee timely execution, forcing them to hold larger capital reserves.\n- Protocol Risk: The security of entire application stacks built on top becomes unreliable.

Without a proper auction, builders are forced into a zero-sum, winner-take-all game. This leads to centralization around a few dominant builders (e.g., Flashbots SUAVE) and MEV cartels that extract value from users.

• Result: ~80%+ of blocks built by 2-3 entities.
• Failure Mode: High censorship risk and protocol fragility.

Proposer-Builder Separation (PBS) creates a two-sided market, but naive implementations like first-price auctions are gamed. Builders submit just-in-time bids to outbid competitors by the smallest margin, capturing most MEV for themselves.

• Result: Inefficient price discovery and proposer revenue leakage.
• Solution Path: MEV-Share, MEV-Boost++, or MEV smoothing via commit-reveal schemes.

A broken fee market externalizes costs onto users via failed transactions, time-bandit attacks, and unpredictable gas. Projects like UniswapX and CowSwap abstract this via intent-based and batch auction models, proving users will pay for reliability.

• Key Insight: The real cost isn't just gas; it's execution risk.
• Architectural Mandate: Design for conditional execution and guaranteed settlement.

Extending bundling across chains (e.g., LayerZero, Axelar, Across) without synchronized fee markets creates arbitrage hell. Sequencers on one chain have no visibility into the state of another, leading to atomic arbitrage and cross-domain MEV that users ultimately pay for.

• Core Problem: Asynchronous fee markets.
• Emerging Fix: Shared sequencing layers and unified auction models.

Block space is a perfectly inelastic commodity—you cannot create more of it in the short term. A naive fee market treats it like an elastic good, leading to wild price volatility and inefficient allocation. The solution is EIP-1559-style base fee with tip auctions, separating congestion pricing from priority pricing.

• Mechanism: Base fee burns, priority fee auctions.
• Outcome: Predictable base costs, efficient priority allocation.

A fee market fails if it cannot remain neutral under extreme financial pressure (e.g., OFAC sanctions, protocol governance attacks). Centralized sequencer pools and dominant builders become single points of failure and censorship. The design must enforce permissionless participation and non-discriminatory ordering at the protocol level.

• Litmus Test: Can a sanctioned transaction be included?
• Architecture: Decentralized validator sets, enshrined PBS.