Quantifying Price Improvement in Order Flow Auctions

ArXiv ID: 2405.00537 “View on arXiv”

Authors: Unknown

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.

Keywords: Order flow auctions, On-chain trading, Price improvement, Ethereum, Market microstructure

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 8.0/10
• Quadrant: Holy Grail
• Why: 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.

  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"]