The Design Process
Last updated
Last updated
The basis for our market construction and product design prioritizes maximizing Validator income taking into consideration (among others):
the feasibility / ability for what Validators could sell
the near-term roadmap for Ethereum L1
the customized orderflow that traders would desire
Making the gas markets accessible (and of interest) to as many players as possible
At a micro level, we look to introduce as few new concepts or terms as needed while also limiting any possibility of fragmentation. The result is as follows…
In a risk-neutral environment, it is optimal to sell an entire block, and where possible, to sell consecutive blocks whenever sufficient market information has been factored into the price.
Assuming perfect information, an entire block captures the most information and affords the buyer the most flexibility to insert and prioritize any combination of their own trades (alongside bundles including public mempool trades) into the block
As a prerequisite for a marketplace, it is essential that we standardize Gas Market Products as much as possible. While there may be many future variants and permutations, to the extent we can reduce these to as few types as possible, the easier it will be to establish a sufficient number of both buyers and sellers for a marketplace.
Secondary markets are important for any asset or instrument with value. When you have a secondary market, the economic cost turns from the purchase price (i.e. absolute cost) to the carrying cost (i.e. relative cost). That is, if you buy an instrument at T=0, and sell at T = 1 sec, then the carrying cost is only the difference in price between those two periods (alongside the time-value of money to be pedantic).
A Secondary market further enables price discovery answering the question of “what is the right price” for an instrument - the right answer of course being the ‘market price’ having digested (theoretically) all the available information to arrive at that specific level. Without price discovery, both the buyer and seller risk not maximizing their utility which invariably hurts both sides leading to deadweight loss.
For these reasons, product standardization and a secondary market are important, if not critical for gas market products to be priced properly, and for the market as a whole to reach its full potential.
A block is worth more than the sum of its parts.
While entire blocks may have secondary markets, there are times of imperfect information (and/or imperfect execution, or irrational exuberance) whereby it would be optimal to deconstruct or decompose a block into its constituent parts. This is where product standardization comes into play again.
In these scenarios, external parties value parts of the blockspace (for unknown reasons, e.g. private order flow) moreso than the holder of the current block. This then enables the original buyer the ability to strip down and sell off portions of the block thus decreasing their carrying cost or increasing the inherent value of the block accordingly.
There are three possible scenarios from holding the whole block:
Note that the following scenarios are not too dissimilar to what an integrated Block Builder faces today - they are easily able to buy the whole block when it makes sense, albeit with some uncertainty. This uncertainty ultimately results in a less-than-optimal value capture for the Proposer.
Scenario 1: The Buyer composes the block however they like, potentially capturing value greater than the original purchase price.
Scenario 2: The Buyer is unable to capture most of the value themselves. They meanwhile see strong demand for blockspace beyond their current capacity/knowledge and so they strip the block into it's constituent parts and sell them off accordingly.
Scenario 3: The Buyer is very much unable to capture any of the value. While at a slight loss, they are still able however to salvage some value by decomposing it into an array of different blockspace products accordingly.
By standardizing or commoditizing products, creating secondary markets, and allowing for decomposition, we enable market participants outside of the typical PBS players to enter these markets, for example, Market Makers.
Market Makers do not necessarily need to know how the PBS flow works, they only need to know that there are Four Products: Whole Blocks, Inclusion Guarantees, Execution Guarantees, and the public mempool, that they can simply rearrange and optimize for on an ongoing basis.
This is quite similar in principle to Options market making. In a perfect world, one can trade Options (i.e. the singular instrument), or one can trade the Greeks (e.g. Vol, Delta, Theta, Gamma, etc...) for which Options can be decomposed into.
As such, our Product Roadmap is designed to start with larger gas-market products (with greater potential value) and then strip these down only when necessary.
