In the Espresso Market Design, rollups operators are rewarded proportionally to the highest bid on the rollup sequencing rights.
This introduces the problem of bid shilling where rollup operators will artificially inflate the bid on their own sequencing rights in the hope of getting a higher share in a (non singleton) bundle that includes this rollup.
The risk for the rollup in this case seems limited: If the the rollup bid has to be paid (because the rollup is not included in a larger bundle) then the rollup operator will get rewarded back anyways and thus will only have to pay some (small) fee.
If we use the rollup reserve price to reward the operator instead, it seems that it becomes harder for such operator to artificially obtain a large share of the reward for a bundle. The reason is that a reserve price that is too high will simply discourage all bidders and thus the rollup operator will not be rewarded at all.
Thank you for raising this insightful question! Having a reserve price can certainly help mitigate bid shilling. However, it may also lead to unpredictability, making it challenging to gauge strategies effectively. Another potential issue is that it may exclude lower-tier bidders who are discouraged by the reserve threshold, even though they may provide valuable competition otherwise.
If we run a public auction, rollup operators can simply set their bids just below others, which can still lead to manipulation. Running a blind auction could help address this issue. Another potential solution is to implement a reserve pricing model that adjusts the price based on historical bidding data, to keep a balance between being attractive and fair. Ultimately, an ideal mechanism would encourage broader participation as well as the interests of rollup operators.
However, it may also lead to unpredictability, making it challenging to gauge strategies effectively.
Why would bidders change their strategies if the reserve price is about rewarding the rollups?
Another potential issue is that it may exclude lower-tier bidders who are discouraged by the reserve threshold, even though they may provide valuable competition otherwise.
Would not these low bidders loose the auction against stronger bidders anyways? The reserve price is only to compute the reward of each rollups, I think the bids would remain the same.
Running a blind auction could help address this issue.
I agree. This would solve this issue and others as well.
Another potential solution is to implement a reserve pricing model that adjusts the price based on historical bidding data, to keep a balance between being attractive and fair.
This is an interesting idea. Concretely how would that work? I imagine rollups submitting theirs bids/reserve price and the system computing some moving average to avoid sharp changes in the rollups rewards.
To clarify, here I’m referring to the strategies of reserve price setting rather than bidding. It’s challenging because if the reserve price is too high, it may discourage bidders from participating, requiring adjustments to bring it back in line with market demand. On the other hand, if it’s too low, it fails to deter bid shilling effectively, defeating the purpose of having a reserve price in the first place.
Agreed, lower-tier bidders will naturally lose in the auction. However, a high reserve price can discourage even initial participation from them. Even if they don’t win, their bids can contribute valuable market signals, helping create a more comprehensive picture of demand. While not part of the current design, having a wider range of bids could help maintain a competitive environment.
Exactly! Here’s how I think it could work: Rollups would propose a reserve price and submit their bids, with the system using a moving average, as you described, to establish a baseline. This dynamic reserve price would adjust periodically to reflect market demand while avoiding abrupt fluctuations. This would also discourage rollups from inflating bids because that would also gradually change the reserve price.
I see. This makes sense when the bids are public as in the current design. If the bids are private then I guess lower-tier bidders’ input would not matter.