State Lock Auctions
Aligning Incentives in Ethereum's Transaction Arena
The following article expands on a recent research post on State Lock Auctions by Daniel Marzec.
This article is a general overview of the research post and expands more on our thoughts building up to some native primitive use cases and business models.
We were interested in exploring this novel idea on our understanding that as DeFi composability and on-chain activity grow exponentially, there will invariably be second-order effects that alter ecosystem incentives and dynamics, especially around maximizing the utility of scarce block space.
Introduction
The goal of this proposal is to enable arbitrageurs, referred to as "searchers", to lock access to specific contract state at the top of a new block. By locking certain state that a searcher intends to access with their arbitrage transaction, this provides visibility into what state will be accessed to the block builders constructing the rest of the block. With this foresight into the top transaction, block builders can more confidently build out the remainder of the block's transactions around this locked state access without running into conflicts.
The proposal outlines an auction process that works as follows.
First, there is an open auction before the cutoff time for the block. During this open auction, searchers can submit bids to lock access to state. A bid consists of:
An access list detailing the specific state (contract addresses and storage slots) they want to lock,
The actual arbitrage transaction that will access this state when included at the top of the block,
A separate payment transaction that will ensure the cost of the lock is covered,
The searcher's actual bid value.
When a searcher submits a bid, the relay validates certain rules - namely that the bid amount meets a minimum reserve price which is based on the number of storage slots being locked, that the transaction matches the access list, and that the transactions together pay the bid amount if placed at the top of the block.
At the cutoff time, the relay looks at all the valid bids submitted and selects the one with the highest value. This winning access list is then disclosed publicly so all builders can see what state is locked.
After this point, the winning searcher has some flexibility to update their arbitrage transaction, as long as the new transaction still accesses the same state per the access list. This allows them to adjust their strategy if needed while keeping other builders aware of the state that will be accessed.
The block builders can now query this winning access list, and start constructing partial block payloads that are compatible with whatever transactions will interact with this locked state at the top of the block. The builders submit these partial payloads to the relay, who is then responsible for appropriately combining the winner's transactions, the partial blocks, calculating the final state root for the block, and handling the payment distributions.
What’s the main problem?
The core problem highlighted is that Ethereum's MEV-boost auction currently has no visibility into the state requirements of the transactions bid into block inclusion slots.
Note: We previously did a deep dive into MEV here. We recommend reading that research for a much better understanding of this proposal.
MEV-Boost is a core component of the Flashbots suite of tools aiming to improve the efficiency, decentralization, and transparency of Ethereum's block production process. Specifically, MEV-Boost promotes a separation between block proposers (validators) and builders via a middleware layer. This proposer-builder separation (PBS) model allows validators to access a decentralized, competitive market of block-building specialists to construct block candidates for validation and finalization. Builders bid for inclusion by proposers based on the quality and expected value of their proposed block.
The first-price auction model used in MEV-boost has inadvertently encouraged vertical integration, with searchers morphing into "searcher-builders" in an attempt to gain a competitive edge by bidding more strategically in the auction.
As background, MEV-boost implements a first-price auction where the highest bidder wins the right to place a transaction first in the block, and pays the amount they bid rather than the second-highest amount (as per a Vickrey auction format).
This transparency into bid values has led searchers - who are traders seeking to execute arbitrage transactions before price movements propagate in markets - to adopt a particular strategy. By seeing what bid thresholds are required to lead blocks, they realize placing higher bids can be profitable if it allows reliably executing profitable trades early.
However, to fund these increasingly competitive bids, searchers have recognized they cannot simply bleed capital fighting over each block. Instead, many searchers have undergone vertical integration - acquiring or building their own Ethereum mining and transaction bundling capabilities. This transformer searchers into "searcher-builders".
As searcher-builders, they can now strategically insert additional transactions into the remainder of blocks they win in the auction. This generates more transaction fee revenue that helps subsidize the high bids they are placing to lead off blocks with their key arbitrage transactions.
This integration of
searching (identifying profitable transaction ordering) and
building (bundling transactions in block proposals)
has raised barriers to entry.
New participants lack the capital and infrastructure for this level of vertical integration. It also leads to suboptimal market dynamics as searchers focus less on innovating extraction strategies and more on scaling hardware operations.
This causes the following downstream issues:
Transaction conflicts: Winning transactions clobber state needed by subsequent bundled transactions, destroying value. Under the existing MEV-boost process, arbitrageurs bid competitively for the right to have their transaction placed earliest in newly constructed blocks where price movements haven't propagated. However, block builders responsible for arranging all other transactions after the auction winner have zero insight into what state the first transaction will access.
As a result, transaction B, which builds the next set of operations for a swap into the block, may inadvertently overwrite state variables (like liquidity pool reserves) that were accessed in winning arbitrage transaction A earlier in the block sequencing. This destroys value as the state mutation from the first transaction is nullified before extraction can occur.
Inefficient block construction: The next set of waste occurs from the redundant block-building efforts once creator transaction failure passes on from these data conflicts. Builders invest significant computation cycles into optimally arranging transaction orderings, only to see extended sequences upended from earlier state inconsistencies.
Without a mechanism to surface dependencies between transactions reading and writing distributed storage, blocks puzzlingly become corrupted as solid logic of interdependent operations gets invalidated by race conditions wasting builder resource allocation.
Market consolidation: Searchers integrate into building to manage state changes, reducing competition. The unreliability of operating purely as a "searcher" that externalizes block creation has over time led arbitrage focused entities to acquire their own proprietary building capabilities. By becoming "searcher-builders", participants can then carefully insert supplemental transactions in surrounding block space that won't undermine their won high priority arbitrage.
This vertical integration allows players to create a protective context, but has greatly increased barriers to entry as significant capital now becomes required for hardware, algorithms, and bidding budgets to have reliable access to profitable transaction ordering. New innovators in the field with novel transaction sequencing insights but without resource capacities face huge challenges breaking through.
The increased consolidation also shrinks diversity of approaches, as focus shifts to industrial scaling rather than creative value discovery. Hence the entire ecosystem suffers from these compounding downstream implications.
What is a State Lock?
Ethereum’s state is a comprehensive ledger containing all account balances, smart contract code, and contract storage. The state is a collection of key-value pairs, with the key being a unique identifier composed of a contract address combined with a storage slot index, and the value being the data stored at that location.
For instance, if a contract at address 0xABC...DEF stores data in storage slot 12345, querying the blockchain with the combined key of the address and slot index retrieves the data stored at that specific location.
A state lock (as proposed) ensures that a transaction can have exclusive access to specific storage slots during the block construction process. This exclusive access means that once a transaction with a state lock is included in a block, no other transaction can alter the locked storage slots until the block is finalized, thus avoiding conflicting transactions within the same block.
Source: State Lock Auctions: Towards Collaborative Block Building
The state lock is achieved by signaling intent through a well-defined proposal mechanism that specifies:
The contract addresses whose storage is to be locked.
The storage slot positions that are to be locked.
The transaction that intends to access and modify these locked locations.
This signaling does not hide the data or the logic of the transaction but ensures that the intent to access certain state variables is clear and conflict-free.
The state lock mechanism aims to maintain two essential properties:
Visibility: The addresses and storage slots that a transaction intends to access are made publicly visible as part of the block construction protocol. This visibility is crucial for coordination among block proposers and validators, helping to manage the state effectively and reduce transaction conflicts.
Exclusivity: While visibility is maintained, the exclusivity of the state lock ensures that only the transaction that placed the lock can read from or write to the locked state during the construction of the current block. This exclusivity is crucial for maintaining the atomicity of transaction execution.
By implementing state locks, Ethereum could manage concurrent transaction execution more effectively, reducing the likelihood of conflicts and ensuring that transactions are executed in a predictable and orderly fashion. This contributes to the overall robustness and reliability of Ethereum's blockchain and its smart contract platform.
Breaking down
To analyze this proposal quantitatively, we can break down its components and evaluate their implications.
The core idea behind State Lock Auctions is to enable a more collaborative and efficient block building process by allowing participants (searchers) to lock specific states (or sets of states) on the blockchain. (check appendix for definitions of variables)
1. Auction Mechanism: Imagine you're at an auction where people are bidding to lock a treasure chest (the "state" in blockchain terms) for a while so they can safely store their valuables (transactions) without anyone else tampering with them.
Consider a blockchain where there are (N) participants interested in locking a specific state at any given time.
Each participant can request to lock one or more states, with each request (R_i) specifying the state (S_j) and the bid amount (B_ij).
The auction operates in discrete time intervals (slots), with each slot having a cutoff time (T_cutoff) for submissions. The highest bidder for a state at (T_cutoff) wins the right to lock the state.
2. Pricing Model for State Locks: Imagine each chest has a base price, like a starting bid at an auction, but the final cost to lock it can go up depending on how many people want to lock the same chest.
Lock Cost: The cost (C) to lock a state is determined dynamically, based on demand. A simple model might set (C = C_base + 𝛿 |A|), where
C_base) is a fixed base cost,
|A| is the size of the access list (number of states to be locked), and
Δ is a function increasing with |A|
Bid Evaluation: Bids are evaluated based on their value (B_{ij}) relative to the lock cost (C). Only bids B_{ij} ≥ C are considered valid.
3. Impacts on Transaction Efficiency and Throughput
Transaction Inclusion: With state locks, participants can secure transaction inclusion, potentially increasing the value extracted from each block. If we assume an average increase in transaction value of ΔV due to more strategic operation execution, the total value extracted per block could increase significantly across (N) transactions.
Throughput Consideration: The mechanism might introduce a delay (D) in block construction due to the auction process. However, this delay is offset by the increased certainty and efficiency in executing transactions, leading to a net gain in system throughput and value extraction.
4. Economic Implications
The auction generates revenue R =∑C_i for each block, where (C_i) is the cost paid by the winning bidder for each state lock. This revenue could contribute to the blockchain's security by increasing the rewards for validators.
Introducing state lock auctions can alter market dynamics by leveling the playing field between large and small participants. The quantitative impact on market participation can be modeled by comparing the distribution of participants able to win auctions before and after the implementation.
L2IV Thoughts
As DeFi composability and on-chain activity grows exponentially, there will invariably be second-order effects that alter ecosystem incentives and dynamics, especially around maximizing utility of scarce block space.
Emergence of Novel Roles and Specialization
We have already witnessed MEV searchers, relays, and on-chain data analysts emerge from the race to extract value from ordered transactions. As demand continues outpacing the supply of sequenced transaction slots, more specialized arbitrage niches will arise from needing to unlock greater efficiency.
Increasing Strategic Block Building
Scarcity breeds heightened competition, and the zero-sum dynamics around transaction slots are incentivizing more strategic block-building behavior. Block builders forego immediate returns by withholding block space supply using empty blocks, reordering tools sabotage competitors’ progress to remain ahead in the search for arbitrage, and extracted value from users gets recycled into subsidizing transaction fees to sustain position - all indicators of the lengths participants will go to chase throughput access.
Secondary Markets Around Priority
Priority is becoming valuable enough that secondary markets around the priority slot access itself will likely emerge. We see the earliest evidence via the growth of transaction order exchanges allowing participants to trade sequence positions. Derivative contracts around block space may eventually trade similarly to commodities as scarcity makes inclusion probabilities more volatile.
Hence, we believe we can expect quite a few new primitives inspired by the state lock auction proposal:
Advanced DeFi Instruments: State Lock Auctions can significantly reduce the occurrence of failed transactions due to state conflicts, making DeFi protocols more reliable and efficient. This reliability could enable the creation of more complex financial instruments that require precise execution conditions, such as HFT platforms, on-chain derivative contracts, and dynamic hedging tools. These instruments could operate with a higher degree of certainty regarding transaction outcomes, encouraging more sophisticated financial strategies on the blockchain.
Enhanced Arbitrage & Liquidation Mechanisms: With State Lock Auctions, arbitrageurs and liquidators can secure their transactions' inclusion with a guarantee that the necessary state will not be altered before their transactions are executed. This certainty could lead to the development of more aggressive arbitrage strategies that rely on split-second advantages. Similarly, liquidation bots could operate more efficiently, knowing that their transactions to liquidate undercollateralized positions will not fail due to unexpected state changes.
Decentralized Order Books and Matching Engines: DEXes could use State Lock Auctions to build more efficient on-chain order books and matching engines. By locking in the state necessary for trade execution, these DEXes can ensure that orders are filled accurately and fairly without the risk of front-running or other MEV-related activities disrupting the order flow.
If you are building within any of the primitives, please reach out to us. We will be happy to discuss and assist you in moving forward with the idea.
Conclusion
And in wrapping up here, can we take a moment to appreciate the potential of these state lock auctions? What began as a peek under the hood at gridlock on Ethereum's data highways may prove a vital upgrade as traffic soars.
By creating simple on-ramps for smart contracts to signal what data they'll modify, we can coordinate congestion and avoid pile-ups down the line. No fancy math required - just common sense rules so parallel workloads don't trip over one another as they hustle to shape Web3's future.
Of course, details remain on precisely how we’ll charge for these priority permissions. Yet as this research piece has shown, some modest additions enabling organized signaling may stack the blocks smoothly again. Both superior efficiency and business innovation feel attainable if watchdog governance teams act to implement robust versions of the logic outlined.
Appendix:
1. Auction Mechanism Variables
N (Participants): total number of participants. Each participant is trying to ensure exclusive access to certain state variables for their transactions.
R_i (Lock Requests): This symbolizes the individual requests submitted by each participant (indexed by i) to lock a state. It's an expression of interest in securing a specific part of the state.
S_j (State to be Locked): This is the specific state or set of states that participants wish to lock. It can refer to particular storage slots within the Ethereum blockchain that are relevant to executing their transactions.
B_ij (Bid Amount): This is the amount of money that participant “i” is willing to pay to lock state “j”. It's a bid in the auction to secure the exclusive right to access the state.
T_cutoff (Cutoff Time for Submissions): This is the deadline for all bids to be submitted within a specific auction slot. It defines the end of the bidding period for that particular auction round.
2. Pricing Model for State Locks Variables
C (Lock Cost): This variable represents the cost to lock a state, which is determined based on the demand for that particular state. It's a dynamic value that changes as the level of interest in locking certain states fluctuates.
C_base (Base Cost): This is the fixed base cost for locking a state, regardless of demand. It sets the minimum price floor for state lock auctions.
|A| (Size of the Access List): This denotes the number of state variables or storage slots that a participant wishes to lock. It reflects the scope of the lock request.
δ (Demand Function): This function increases the cost of the lock proportionally to the size of the access list |A|. It's used to calculate the total cost of locking multiple states.
3. Impacts on Transaction Efficiency and Throughput Variables
ΔV (Average Increase in Transaction Value): This represents the potential average increase in the value extracted from each block due to more strategic execution of operations facilitated by state locks.
D (Delay in Block Construction): This variable represents the potential time delay introduced by the auction process in the block construction timeline. It's the additional time taken to finalize which transactions get included in a block due to the state lock auction mechanism.
4. Economic Implications Variables
R (Revenue Generation): This is the total revenue generated from the auction, equal to the sum of the costs paid by the winning bidders for each state lock. It represents the financial benefit to the blockchain ecosystem from the auction.
C_i (Individual State Lock Cost Paid by Winner): This is the cost paid by the winning participant for each state lock they have secured in the auction.
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Author: Arhat Bhagwatkar, Research Analyst, L2IV (@0xArhat)