Paper: arXiv 2611.13616

Authors: Ruizhe Jia, Shihao Yu

Abstract

On blockchain-based exchanges, faster blocks weaken the priority-fee competition among arbitrageurs and shift rents from the block producer to them. Equilibrium liquidity peaks at an interior block speed; beyond a threshold, an active liquidity provider cream-skims and passive capital shrinks. Evidence from the Base Flashblocks upgrade, a tenfold block-speed increase, confirms the predictions. Priority-fee bids decrease sharply and arbitrageurs’ net profit rises. The active liquidity provider rebalances faster, avoids toxic flow, and earns a higher profit. Pool depth falls and effective spreads widen despite closer tracking of external prices.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: This paper presents a novel theoretical model explaining the impact of block speed on blockchain-based exchanges, which is then rigorously tested using a quasi-experiment from the Base Flashblocks upgrade. The combination of a strong theoretical foundation with robust empirical validation makes it a significant contribution. The findings challenge conventional wisdom regarding faster block speeds and liquidity.

Research Flowchart

  flowchart TD
    A[Research Goal: Impact of Block Speed on Blockchain Exchanges] --> B{Key Methodology: Game-Theoretic Model & Empirical Analysis};
    B --> C[Data/Inputs: Transaction Data, Priority-Fee Bids, Liquidity Pool Depth, Spreads (from Base Flashblocks upgrade)];
    C --> D{Computational Processes: Model Simulation, Statistical Analysis of Empirical Data};
    D --> E[Key Finding 1: Faster Blocks ↓ Priority Fees, ↑ Arbitrageur Profit];
    E --> F[Key Finding 2: Active LP rebalances faster, avoids toxic flow, ↑ Profit];
    F --> G[Key Finding 3: Equilibrium Liquidity peaks at interior block speed; beyond threshold, pool depth ↓, effective spreads ↑];