- Revert protection increases market efficiency by preventing losses due to failed trades and improving block space allocation.
- Layer 2 blockchains benefit from RP, which reduces auction profits but maximizes long-term revenue and market participation.
- Rollback protection reduces fees for failed transactions, encourages smarter bidding, but adds block building challenges such as mempool spam.
Researchers from Uniswap Labs and Columbia University recently analyzed the effects of revert protection (RP) on blockchain transaction fees. Their research, which focused on maximum extractable value (MEV) and priority auctions in Layer 1 and Layer 2 blockchains, revealed improvements in market efficiency when RP was enabled.
Without rollback protection, users must use arbitrary bidding strategies to avoid losses due to failed trades. This approach creates inefficiencies in the use of blockspace and negatively impacts market performance. However, when RP is present, participants benefit from more predictable outcomes, resulting in improved transaction success rates and optimized block space allocation.
epic article from some of our favorite people!
IMO return protection on L2s is becoming one of the most important features for users. https://t.co/IEigbP4Vfz
— Georgios Konstantopoulos (@gakonst) October 21, 2024
Key Findings in Blockchain Auctions
The research highlights the value of RP, especially in Layer 2 solutions, where transaction fees still generate revenue, but overall auction profits decline without RP. Four key factors determined the effectiveness of RP in blockchain auctions, MEV opportunity value, base fees, return penalties and participant numbers.
Additionally, the rollback protection ensures that users do not have to pay for failed transactions, which ultimately reduces auctioneers’ revenues in the short term. However, the research shows that offering RP in equilibrium maximizes revenue by encouraging more participants to participate in the auction process.
Improved auction performance with return protection
The research showed that return protection also leads to more efficient use of blockspace. Participants are encouraged to make more strategic bids, knowing that they will not have to pay unnecessary fees for failed transactions. This effect was observed in both Layer 1 and Layer 2 blockchains, with more efficient allocation of resources across these platforms.
Despite the clear benefits, the study recognized potential disadvantages of offering RP. Builders must simulate blocks during the block building process, which can hinder performance. Furthermore, the lack of fees for failed transactions could encourage spam in the mempool, placing additional burdens on block builders.