Using Priority Fee Auctions to Capture Application-Level MEV

Summary

This document presents MEV taxes: smart contract fees tied to a transaction’s priority fee. Under competitive priority ordering, searchers bid for valuable transaction opportunities through priority fees; an application can charge an additional fee based on that bid and capture much of the resulting value. The proposal is applied to DEX order routing, AMM arbitrage and loss-versus-rebalancing, and wallets selling rights to backrun user transactions.

The article illustrates how these fees could alter searcher incentives and describes potential benefits such as faster order completion, improved execution for swappers, and less MEV leakage from applications and users. The mechanism depends on block proposers sorting transactions by priority fee without censorship, peeking, or delay. The authors note that this rule set is not trustlessly enforced today, so the approach depends on sequencer behavior on applicable L2s and may not work on Ethereum L1. The discussion is a mechanism design proposal, not evidence of broad deployed results.

Key ideas

• Competitive priority ordering turns searcher competition for MEV into bidding through transaction priority fees.
• A smart contract can impose an additional fee tied to the priority fee and retain part of the opportunity’s value.
• The proposal applies to DEX routing, AMM arbitrage, and wallet backrunning rights.
• Priority fee auctions may improve trade execution and reduce some forms of MEV leakage.
• The mechanism depends on block proposers following uncensored, competitive ordering rules.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.