Revert Protection Enhances Blockchain Market Efficiency, Study Finds

• Revert protection boosts market efficiency by preventing losses from failed transactions and improving blockspace allocation.
• Layer 2 blockchains benefit from RP, lowering auction profits but maximizing long-term revenue and market participation.
• Revert protection cuts fees for failed transactions, encouraging smarter bids but adding block-builder challenges like mempool spam.

Researchers from Uniswap Labs and Columbia University recently analyzed the effects of revert protection (RP) on blockchain transaction fees. Their study, which focused on the maximal extractable value (MEV) and priority auctions across Layer 1 and Layer 2 blockchains, revealed improvements in market efficiency with RP enabled.

Without revert protection, users must employ random bidding strategies to avoid losses from failed transactions. This approach creates inefficiencies in blockspace usage and negatively impacts market performance. However, when RP is in place, participants enjoy more predictable outcomes, resulting in improved transaction success rates and optimized blockspace allocation.

Key Findings in Blockchain Auctions

The research highlights the value of RP, particularly in Layer 2 solutions, where transaction fees still generate revenue but overall auction profits decrease without RP. Four key factors determined the effectiveness of RP in blockchain auctions, MEV opportunity value, base fees, revert penalties, and participant numbers.

Moreover, revert protection allows users to avoid paying for failed transactions, ultimately reducing auctioneer revenue in the short term. However, the study found that in equilibrium, offering RP maximizes revenue by encouraging more participants to engage with the auction process.

Improved Auction Performance with Revert Protection

The research demonstrated that revert protection also leads to more efficient blockspace usage. Participants are incentivized to make more strategic bids, knowing that they won’t incur 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 acknowledged potential downsides to offering RP. Builders are required to simulate blocks during the block-building process, which can hinder performance. Additionally, the absence of fees for failed transactions could encourage spam in the mempool, creating additional burdens on block builders.