Bid Submission

A bid submission begins when a user broadcasts a signed transaction to the network's mempool (memory pool). This is a peer-to-peer network of unconfirmed transactions where nodes and validators select which bids to include. Key aspects include:

• Transaction Fees: Users specify a fee (e.g., maxPriorityFeePerGas in Ethereum) to incentivize inclusion.
• Propagation: Nodes gossip transactions, but network topology can cause delays.
• Frontrunning Risk: Public mempools expose transaction details, creating opportunities for MEV (Maximal Extractable Value) extraction.

In Proof-of-Stake (PoS) systems like Ethereum post-merge, the protocol selects a validator to propose the next block. This validator is responsible for collecting transactions from the mempool and constructing a block. The process involves:

• Consensus Algorithm: Validators are chosen pseudo-randomly based on their staked ETH.
• Block Proposal: The selected validator becomes the block proposer, with the sole right to submit the block for that slot.
• Builder-Blocker Separation: In practice, proposers often receive pre-built blocks from specialized block builders via a separate marketplace.

Specialized actors called searchers and builders compete to create the most profitable block. They submit complex bid bundles to validators, a core component of MEV (Maximal Extractable Value). This ecosystem includes:

• Searchers: Run algorithms to identify profitable opportunities (e.g., arbitrage, liquidations).
• Builders: Construct full blocks from these bundles, optimizing for total value.
• Relays: Trusted intermediaries that receive blocks from builders and forward them to validators, often providing cryptographic proofs of execution and payment.

To mitigate frontrunning and protect sensitive transaction details, protocols use privacy-preserving bid submission mechanisms. A common technique is the commit-reveal scheme:

• Commit Phase: A user submits a cryptographic commitment (hash) of their transaction data.
• Reveal Phase: After a delay, the user reveals the full transaction data.
• Applications: Used in decentralized exchanges for fair ordering, in voting systems, and by private transaction services like Flashbots Protect to shield bids from public mempools.

Protocols implement specific auction rules to determine which bids are accepted. Ethereum's EIP-1559 is a prominent example that reformed bid submission:

• Base Fee: A protocol-determined, algorithmically adjusted fee that is burned. Users must pay at least this amount.
• Priority Fee (Tip): An optional extra tip to incentivize the validator for faster inclusion.
• Fee Market: The base fee adjusts per block based on network congestion, creating a more predictable bidding environment compared to a pure first-price auction.

Bid submission varies across layer-2s and other chains. In optimistic rollups (e.g., Arbitrum, Optimism), a sequencer typically has the exclusive right to submit transaction batches (bids) to the parent chain (L1). ZK-Rollups (e.g., zkSync, StarkNet) submit validity proofs along with state updates. Key differences include:

• Sequencer Centralization: Often a single entity submits blocks, though decentralization is a goal.
• Data Availability: The cost and method of submitting data to L1 (e.g., calldata, blobs) is a major component of the bid.
• Finality: Submission to L1 provides ultimate settlement security.

Front-running occurs when a malicious actor (often a bot) sees a pending bid transaction in the mempool and submits their own transaction with a higher gas fee to be processed first. This is a primary vector for Maximal Extractable Value (MEV) in auctions. Mitigations include:

• Commit-Reveal Schemes: Bidders submit a cryptographic commitment first, revealing the bid later.
• Private Mempools: Using services like Flashbots to submit bids directly to block builders.
• Batch Auctions: Processing all bids submitted in a block simultaneously.

A valid bid must meet all smart contract criteria (e.g., sufficient collateral, correct format). Bid finality refers to the irreversible acceptance of a bid by the protocol. Key risks include:

• Reorg Attacks: A blockchain reorganization could invalidate a seemingly accepted bid.
• Oracle Manipulation: If bid valuation depends on an external price feed, a corrupted oracle can invalidate outcomes.
• Conditional Failures: Bids that rely on complex, on-chain conditions may fail execution, wasting gas and missing the auction window.

Many auction designs require bonded collateral to participate, which is at risk of slashing (confiscation) for malicious behavior. This enforces honest participation.

• Purpose: Prevents spam, guarantees settlement capability, and penalizes bid withdrawal violations.
• Risks: Smart contract bugs in the slashing logic can lead to unjust loss of funds.
• Examples: Ethereum's validator deposits for consensus auctions, or liquidity commitments in DeFi liquidation auctions.

The public nature of most blockchains exposes bid strategy. Lack of privacy allows competitors to adjust their bids reactively. Solutions aim to hide bid details until settlement:

• Zero-Knowledge Proofs (ZKPs): Prove a bid is valid without revealing its amount or source.
• Trusted Execution Environments (TEEs): Compute sealed bids inside secure hardware enclaves.
• Homomorphic Encryption: Allows computation on encrypted bid data.

The auction logic is encoded in a smart contract, making it susceptible to exploits. This is the ultimate trust layer.

• Code Vulnerabilities: Bugs, reentrancy, or logic errors can lead to fund loss or manipulated outcomes.
• Upgradability Risks: If the contract is upgradeable, malicious governance could change rules mid-auction.
• Admin Keys: Contracts with privileged functions (e.g., pausing, withdrawing) introduce centralization risk. Immutable, audited contracts are the gold standard.

Bid submission is a race against block time and network conditions. Congestion creates uncertainty and can be weaponized.

• Gas Auctioning: Legitimate bidders must outbid others for block space, increasing costs.
• Block Timing Attacks: Manipulating block proposal time to invalidate a specific bid's eligibility window.
• Solution: EIP-1559's base fee provides more predictable gas costs, and deadline parameters in contracts define clear cut-off times.

A competitive process where participants submit bids to win a right or asset. In blockchain, common types include:

• First-price auctions: Highest bid wins and pays its full bid amount.
• Second-price (Vickrey) auctions: Highest bid wins but pays the second-highest bid amount.
• Batch auctions: Used in protocols like CowSwap, orders are aggregated and cleared at a uniform clearing price.

An entity (user, validator, or smart contract) that creates and submits a bid. Key roles include:

• Proposer-builder separation (PBS): In Ethereum, specialized builders submit block bids to proposers.
• MEV Searchers: Submit transaction bundles with bids to validators for inclusion.
• Liquidators: In DeFi, submit bids to purchase undercollateralized positions at a discount.

The set of conditions a bid must meet to be considered by the auction mechanism. This ensures system integrity and includes:

• Economic validity: The bid must be backed by sufficient collateral or a bond.
• Temporal validity: The bid must be submitted within the auction's time window.
• Format validity: The bid must adhere to the required data structure (e.g., a signed message, a specific calldata format).

A two-phase protocol used to prevent frontrunning and ensure fair bidding. The process is:

1. Commit Phase: Bidders submit a cryptographic hash of their bid (amount + secret).
2. Reveal Phase: Winning bidders reveal their original bid data. The hash is verified against the commit. This is critical in decentralized auctions where bid visibility could influence other participants.

The finalization of an auction where the winning bid is executed and assets are transferred. Key steps involve:

• Clearing price determination: Calculating the price at which the auction clears (e.g., in a batch auction).
• Transaction execution: The winning bid's payload (block, swap, liquidation) is processed on-chain.
• Payouts: The auctioneer receives payment, and the bidder receives the auctioned item or a fee rebate.