CIP-20 introduced an auction based solver mechanism. However, due to budgetary reasons, a low cap of 0.01 ETH was included to ensure that rewards were within budget. This has led to numerous problems. For one, the symmetric cap especially affects failed solutions as these have value equal to the reference score while successful solutions usually result in payments which are relatively smaller. This significantly distorts the competition as the usual game theory breaks down whenever the cap is in play. For example, this Dune query by Haris shows that several solvers which are making good profits would be losing significant amounts of money under the ideal uncapped mechanism. This means that the best solutions are not being utilized. In addition, the low cap also reduces the incentive for solvers to try to make large improvements e.g. to high value orders.
Our proposal is very simple: we suggest to scale performance rewards by a constant scaling factor 0 < \alpha < 1, so that we may increase the cap substantially to ensure that it functions as desired in almost all cases.
In detail, this would involve changing reward from observed surplus + observed fee - reference score to observed surplus + observed fee - observed gas cost - reference score and increasing the cap on this quantity. Then payments to solvers would change from total_reward to total_gas_spent + total_reward * \alpha.
This proposal would require the choice of two parameters: the new cap and \alpha. These should be chosen so that total rewards are roughly equal to the desired budget. In addition, one may want to consider the resulting maximum batch reward/penalty which would be equal to the product of these two parameters.
From a rough analysis, we would suggest the values: new cap = 1 ETH and \alpha = 0.5. This would take the maximum batch reward/penalty from 0.01 ETH to 0.5 ETH. However, this is a substantial change and we are open to other suggestions here.
Please tell me what you think! I personally think this is a substantial improvement over the status quo.