Chainfeeds Summary:
Scroll researcher Toghrul Maharramov discusses how blockchain protocols can achieve value accretion through transaction fees, MEV, and token issuance, as well as the tradeoffs between incentivizing validators and maintaining protocol security.
Source:
https://x.com/toghrulmaharram/status/1843723223365550174
Author:
Toghrul Maharramov
Perspective:
Toghrul Maharramov: Priority fees accrue during periods of congestion (whether local or global) or in time-sensitive transactions. As the overall capacity of the protocol increases and tends towards infinity (assuming demand does not scale linearly with capacity), the probability of global congestion tends towards zero. While local congestion is still possible in protocols that adopt local priority auctions, the likelihood of this decreases as capacity increases towards infinity. Regardless of protocol architecture, time-sensitive transactions may continue to exist; however, their number is expected to scale sub-linearly with the total number of transactions, making their proportion smaller and smaller. Therefore, the protocol faces a strategic decision: 1) limit capacity to maximize value accretion per transaction through priority fees, or 2) maximize capacity to increase value accretion through more base fee payments and a larger volume of time-sensitive transactions. This presents a classic "quality vs. quantity" tradeoff. A significant portion of protocol revenue comes from MEV, the extent of which varies by protocol and its usage. For example, Solana accrues more value through MEV as a proportion of total protocol revenue compared to Ethereum. Common types of MEV include back-running (such as arbitrage between centralized and decentralized exchanges or between decentralized exchanges), front-running, and a combination of front and back-running (often referred to as a sandwich attack), as well as liquidations. Some MEV is beneficial to the capital efficiency of applications on the protocol, while others are viewed as malicious. While validators can independently optimize for value accretion through MEV, they often collaborate with professional entities. These entities have an incentive to share a portion of the MEV earnings with validators to ensure the execution of time-sensitive and MEV-generating transactions. In the preceding discussion, the priority fees and MEV generated by applications have been conspicuously overlooked. Are these applications willing to "leave a lot of money on the table"? This is where appchains and application-specific ordering (ASO) come into play. Both of these approaches attempt to internalize the maximization of priority fees and MEV within the application, leaving the base fees to the underlying protocol. In appchains, this is achieved by physically separating the state of the application. However, for some applications, real-time or near-real-time composability is critical, which is not easily provided by appchains. This is where application-specific ordering (ASO) becomes particularly relevant.
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