Study Finds Transaction Fees Ineffective in Algorand’s FCFS Network

Researchers have constructed a private Algorand network to delve into the intricacies of transaction ordering, a critical aspect of blockchain technology. The study focuses on the First-Come-First-Served (FCFS) mechanism used by Algorand, aiming to understand how transactions are prioritized and executed within the network. The primary objective is to identify key factors that influence transaction ordering, particularly in scenarios involving arbitrage opportunities.

The research involves setting up a private network that mirrors the Algorand mainnet, providing greater control and visibility over network conditions. This setup allows for the introduction of various latencies, distribution of stakes among participation nodes, and scaling of transaction issuance to emulate different network scenarios. The experiments are conducted using the METHODA framework, which extends the EnGINE toolchain and supports scalable experiments with a number of nodes and can emulate delays using Network Emulator (netem).

The study designs three distinct scenarios to answer specific questions about transaction ordering. The first scenario examines how latency and transaction fees affect the ordering of transactions when two entities compete for prior execution. The second scenario explores the impact of connectivity between relay and participation nodes with differently distributed stakes on transaction ordering. The third scenario investigates the possibility of prioritizing a transaction by having visibility over the network topology.

In the first scenario, the researchers observe that higher transaction fees do not guarantee prioritization within Algorand’s FCFS network. The absence of additional latency between nodes results in consistent prioritization of transactions from one entity over another, regardless of the fee attached. This finding underscores the ineffectiveness of transaction fees in securing prioritization in Algorand’s network.

The second scenario reveals that the frequency of proposer selection is positively correlated with the stake in the network. When a high-staked node is chosen as the proposer, transactions from entities connected to well-positioned relays are more likely to be prioritized. This highlights the importance of network positioning and connectivity to high-staked nodes in achieving transaction precedence.

The third scenario confirms that the selection frequency of proposers matches their stake within the network. It also shows that latency plays a crucial role in transaction ordering. When searchers’ utilized nodes have similar latency to relays and equivalent stakes, they have an equal chance of executing their competing transactions first. This scenario emphasizes the significance of minimizing latency and strategic positioning in transaction execution.

The key findings from the experiments indicate that transaction fees do not influence prioritization in Algorand’s FCFS network. Network latency is critical in ordering transactions, and the proximity of a node to a high-staked proposer significantly affects transaction sequencing. Arbitrage traders aiming to exploit market opportunities should prioritize transmitting their transactions to well-connected relays with multiple high-staked nodes to increase the probability of their transactions being processed earlier.

The research provides valuable insights into the dynamics of transaction ordering in FCFS blockchains like Algorand. By understanding the key factors that influence transaction prioritization, arbitrage traders and network participants can develop more effective strategies for exploiting market opportunities and enhancing their competitive edge. Future research plans include refining the arbitrage detection algorithm and extending network experiments to the Algorand mainnet to explore potential latency correlations between high-staked block proposers and successful MEV searchers. This ongoing research will contribute to a deeper understanding of MEV dynamics in FCFS blockchains and pave the way for more efficient and secure transaction processing.