Financial Engineering Seminar: “Price Formation In Memory Pools”

Abstract

Market frictions arise from liquidity costs, asymmetric information, and strategic behavior. In decentralised markets, these costs also stem from gas fees in memory pools (mempools), which are repositories for unconfirmed public transactions waiting to be selected by a miner. In mempools, transactions with higher gas fees are more likely to be prioritised by miners, so competitive agents enter “priority gas auctions” (PGAs) by submitting, or resubmitting, pending transactions at higher gas fees to obtain better prices. We propose a model for PGAs in mempools with pre-trade transparency, and we show that better informed agents, large price fluctuations, low liquidity supply, network congestion, competition from centralised exchanges, and deterministic block times in proof-of-stake protocols increase priority fees. These fees shift revenue generation from liquidity providers to proposers and builders.

Biography

Fayçal is currently a postdoctoral researcher at the Oxford-Man Institute, University of Oxford. He obtained a PhD in Mathematics from Université Paris 1 Panthéon-Sorbonne in 2023, where his thesis focused on financial decision problems in traditional electronic markets and in decentralised trading platforms. Prior to his doctoral studies, he spent five years in the hedge fund industry, engaging in research and development related to derivatives pricing and systematic trading. With blockchain technologies and asset digitisation reshaping the financial landscape and challenging traditional stakeholders, Fayçal's recent research focuses on the economics and market microstructure of decentralised financial systems and automated market makers.