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arxiv: 2605.17425 · v1 · pith:R73VZHWHnew · submitted 2026-05-17 · 💱 q-fin.GN · econ.GN· q-fin.EC· q-fin.TR

The Viability of Blockchain Markets under Discrete Clearing and Paid Priority

Agostino Capponi , \'Alvaro Cartea , Fay\c{c}al Drissi This is my paper

Pith reviewed 2026-05-19 22:47 UTC · model grok-4.3

classification 💱 q-fin.GN econ.GNq-fin.ECq-fin.TR
keywords blockchain marketsdiscrete clearingpaid priorityendogenous selectionprice discoveryliquidity impairmentadverse selectionmarket viability
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The pith

Blockchain markets with discrete clearing and paid priority undermine their own viability by selecting only high-valuation traders.

A machine-rendered reading of the paper's core claim, the machinery that carries it, and where it could break.

This paper constructs a model of blockchain-based markets that clear at fixed intervals and sequence trades by the priority fees traders pay. It demonstrates that this setup causes endogenous selection: traders participate only when their valuation justifies the expected fees and costs, and the minimum valuation required rises with greater competition. As a result, price discovery suffers, prices become biased, and liquidity providers face greater adverse selection because trading clusters among aggressive participants in each discrete round. Longer block times, intended to bolster consensus security, actually strengthen these distortions and can drive markets to close down.

Core claim

Blockchains clear at discrete intervals called block time, and transactions are executed sequentially according to priority fees paid by traders who compete for queue position. Paid-priority ordering induces endogenous selection, where only traders with sufficiently high valuations participate. The participation cutoff rises with competition, which intensifies with lower information costs or higher liquidity demand. This hinders price discovery and biases prices. It also impairs liquidity as the cutoff concentrates trading among aggressive traders and increases adverse selection that liquidity suppliers absorb in a single clearing round. Although longer block times enhance consensus security

What carries the argument

The participation cutoff arising from traders' rational comparison of private valuations to expected priority fees and information costs, which rises with competition intensity.

If this is right

  • Price discovery is hindered and prices become biased.
  • Liquidity is impaired because trading concentrates among aggressive traders, increasing adverse selection for liquidity suppliers.
  • Longer block times, while enhancing consensus security, amplify the distortions and can lead to market shutdown.

Where Pith is reading between the lines

These are editorial extensions of the paper, not claims the author makes directly.

  • Markets might function better if blockchains adopted non-priority-based ordering like first-come-first-served or random allocation to reduce selection effects.
  • These issues could explain observed inefficiencies in current decentralized exchanges operating on blockchains.
  • Protocol upgrades shortening block times might improve market viability but at the potential cost of reduced security.

Load-bearing premise

Traders rationally compare their private valuations against the expected priority fees and information costs when deciding whether to participate.

What would settle it

Data from blockchain markets showing whether participation drops and prices bias more as priority competition increases or block times lengthen, or if markets close under those conditions.

Figures

Figures reproduced from arXiv: 2605.17425 by Agostino Capponi, \'Alvaro Cartea, Fay\c{c}al Drissi.

Figure 1
Figure 1. Figure 1: Left panel: Average absolute trading volume as a function of queue position in the block for transactions in multiple Uniswap v3 pools; 0 corresponds to first position and 1 to last position. The transactions are between 1 January 2023 and 31 December 2023 in 15 different Uniswap v3 pools with multiple transactions in at least 10 different blocks. For each pool, the trading volumes are normalized by the st… view at source ↗
Figure 2
Figure 2. Figure 2: Distribution of priority fees as a function of timing within the blockchain slot. Informed traders are typically associated with higher priority fees, as shown empirically in Capponi et al. (2023b) and theoretically in our model below. The figure shows that they tend to submit their transactions very close to the end of the blockchain slot. The data is from EthPandaOps and it includes 107 transactions obse… view at source ↗
Figure 3
Figure 3. Figure 3: Scatter plots of the slippage and the price impact of 2.622 million LT transactions against the approximations (A2) and (A3). The transactions are between 1 January 2023 and 31 December 2023 in 38 different Uniswap v3 pools. For each pool, the slippages and price impacts are scaled between [0, 1] for buy orders and [−1, 0] for sell orders. 40 [PITH_FULL_IMAGE:figures/full_fig_p040_3.png] view at source ↗
read the original abstract

This paper develops a model to evaluate the viability of blockchain markets as the sole venue for price formation. Blockchains clear at discrete intervals called block time, and transactions are executed sequentially according to priority fees paid by traders who compete for queue position. We show that these features undermine the viability of markets. Paid-priority ordering induces endogenous selection, where only traders with sufficiently high valuations participate. The participation cutoff rises with competition, which intensifies with lower information costs or higher liquidity demand. This hinders price discovery and biases prices. It also impairs liquidity: the cutoff concentrates trading among aggressive traders and increases adverse selection that liquidity suppliers absorb in a single clearing round. Although longer block times enhance consensus security, they amplify these effects and can cause markets to shut down.

Editorial analysis

A structured set of objections, weighed in public.

Desk editor's note, referee report, simulated authors' rebuttal, and a circularity audit. Tearing a paper down is the easy half of reading it; the pith above is the substance, this is the friction.

Referee Report

0 major / 3 minor

Summary. The paper develops a theoretical model of blockchain markets that clear at discrete block-time intervals with transactions ordered by paid priority fees. It claims these features induce endogenous trader selection, where only participants with sufficiently high private valuations enter the market. The resulting participation cutoff rises with competition intensity (driven by lower information costs or higher liquidity demand), which in turn impairs price discovery, biases transaction prices, concentrates trading among aggressive traders, amplifies adverse selection for liquidity suppliers in each clearing round, and can cause markets to shut down even as longer block times improve consensus security.

Significance. If the derivations and equilibrium analysis hold, the paper offers a valuable contribution to the intersection of market microstructure and blockchain economics. It supplies a coherent causal mechanism linking protocol-level design choices (discrete clearing and fee-based priority) to participation thresholds and liquidity outcomes, which could inform both exchange design and regulatory discussions around decentralized trading venues. The explicit treatment of endogenous selection and its feedback onto adverse selection in a single-round clearing is a strength.

minor comments (3)
  1. The abstract condenses the causal chain into a single paragraph; expanding the description of how the participation cutoff is derived from traders' rational comparison of valuations, fees, and information costs would improve accessibility without lengthening the paper substantially.
  2. In the model section, clarify the exact functional forms used for trader valuations and the information-cost distribution so that readers can verify the comparative-statics results on the cutoff's response to competition parameters.
  3. Figure or table presenting the equilibrium cutoff as a function of block time, information cost, and liquidity demand would make the shutdown threshold result more transparent and easier to compare with the analytical expressions.

Simulated Author's Rebuttal

1 responses · 0 unresolved

We thank the referee for their positive evaluation of the manuscript and for recommending minor revision. The report accurately summarizes our core findings on endogenous selection in blockchain markets. We address the referee summary below and will incorporate minor clarifications in the revised version.

read point-by-point responses

  1. Referee: REFEREE SUMMARY: The paper develops a theoretical model of blockchain markets that clear at discrete block-time intervals with transactions ordered by paid priority fees. It claims these features induce endogenous trader selection, where only participants with sufficiently high private valuations enter the market. The resulting participation cutoff rises with competition intensity (driven by lower information costs or higher liquidity demand), which in turn impairs price discovery, biases transaction prices, concentrates trading among aggressive traders, amplifies adverse selection for liquidity suppliers in each clearing round, and can cause markets to shut down even as longer block times improve consensus security.

    Authors: We appreciate the referee's precise restatement of the model's implications. The derivations in Sections 3 and 4 establish the participation cutoff and its comparative statics with respect to information costs and liquidity demand. The single-round adverse selection effect follows directly from the concentration of aggressive traders at the cutoff. We will add a short clarifying paragraph in the introduction to emphasize that longer block times improve security but exacerbate the viability issues, as already shown in Proposition 5. revision: yes

Circularity Check

0 steps flagged

No significant circularity

full rationale

The paper constructs a theoretical model of trader participation under discrete block clearing and paid-priority fees, deriving endogenous selection and rising cutoffs directly from rational valuation comparisons against expected fees and information costs. No step reduces by construction to a fitted parameter, self-referential definition, or load-bearing self-citation; the viability-undermining conclusions follow from the stated equilibrium conditions on participation and adverse selection without importing unverified uniqueness theorems or renaming external patterns. The derivation remains self-contained against the model's own assumptions.

Axiom & Free-Parameter Ledger

0 free parameters · 1 axioms · 0 invented entities

The model rests on standard rational-trader assumptions applied to blockchain-specific features; no explicit free parameters or invented entities are named in the abstract.

axioms (1)
  • domain assumption Traders decide participation by comparing private valuations to priority fees and information costs in a competitive queue.
    This assumption directly generates the endogenous selection and rising cutoff described in the abstract.

pith-pipeline@v0.9.0 · 5670 in / 1211 out tokens · 40240 ms · 2026-05-19T22:47:13.664256+00:00 · methodology

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Reference graph

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