Paper: arXiv 2405.00537

Abstract

This work introduces a framework for evaluating onchain order flow auctions (OFAs), emphasizing the metric of price improvement. Utilizing a set of open-source tools, our methodology systematically attributes price improvements to specific modifiable inputs of the system such as routing efficiency, gas optimization, and priority fee settings. When applied to leading Ethereum-based trading interfaces such as 1Inch and Uniswap, the results reveal that auction-enhanced interfaces can provide statistically significant improvements in trading outcomes, averaging 4-5 basis points in our sample. We further identify the sources of such price improvements to be added liquidity for large swaps. This research lays a foundation for future innovations in blockchain based trading platforms.

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 6.0/10 (capped from 8.0: no out-of-sample test; see penalty flags)
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs advanced mathematical frameworks including a Taylor Series expansion for attribution and formal definitions of price improvement, while also demonstrating high empirical rigor through open-source tools, analysis of historical blockchain data, and statistical significance testing.

Research Flowchart

  flowchart TD
  A["Research Goal<br>Quantify Price Improvement in OFAs"] --> B["Data & Inputs<br>Open-Source Tools & Ethereum Trading Interfaces"]
  B --> C["Methodology<br>Systematic Attribution Analysis"]
  C --> D{"Computational Process"}
  D --> E["Analyze Routing Efficiency"]
  D --> F["Analyze Gas Optimization"]
  D --> G["Analyze Priority Fee Settings"]
  E & F & G --> H["Key Findings<br>4-5 bps Avg Price Improvement"]
  H --> I["Outcome<br>Source: Added Liquidity for Large Swaps"]

Cited References (12)

  1. Bid–Ask Spreads (2010) — link
  2. Intraday time and order execution quality dimensions (2008) — link
  3. Trade Execution Costs and Market Quality after Decimalization (2003) — link
  4. Quantifying Blockchain Extractable Value: How dark is the forest? (2022) — link
  5. Dimensions of execution quality: Recent evidence for US equity markets (2005) — link
  6. Issues in assessing trade execution costs (2003) — link
  7. Price Improvement in Dealership Markets (2005) — link
  8. Payment for Order Flow And Asset Choice (2022) — link
and 4 more
  1. A Comparison of Execution Quality across U.S. Stock Exchanges (2017) — link
  2. Execution Risk (2006) — link
  3. Just-in-time Liquidity on the Uniswap Protocol (2023) — link
  4. The Paradox of Just-in-Time Liquidity in Decentralized Exchanges: Can More Providers Lead to Less Liquidity? (2023) — link

0 of 12 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.