This proposal re-evaluates and updates the default parameters of the Top-of-Block auction module. It introduces key improvements that simplify the tokenomics, improve the efficiency of the bidding system, allow access to the proceeds by governance, and signal future value-aligned use of auction revenues.

About Top-of-Block Auction

The Top-of-Block auction is a modification to the block construction mechanism on Osmosis that allows a bidder to ensure that their transaction goes first in the block. This mechanism enables Osmosis to tap into cross-chain, or CEX<>DEX arbitrage transactions while allowing competition for block space not to impact most users’ experience.

For more about the Top-of-Block Auction, check out the launch blog post: https://forum.osmosis.zone/t/an-introduction-to-the-top-of-block-auction-mechanism/2736

Current Status

The Top-of-Block auction module was initially deployed with default parameters.
These are:

• Max Bundle Size: 5
• Escrow Account Address: Module Address
• Reserve Fee, the minimum bid that can be submitted: 1 USDC
• Min bid increment: 1 USDC
• Proposer Fee: 5%

Despite being functional, the auction system has seen limited adoption since its deployment. This proposal aims to align the module more closely with current governance goals by lowering barriers to participation, making this revenue more accessible, and proposing that the USDC collected to be used for both OSMO liquidity provision and future discretionary token burns.

Proposed Changes

1. Redirect Auction Proceeds to the Community Pool The Top-of-Block auction proceeds are directed to the Osmosis Community Pool via a forwarding contract by this proposal:

• Existing assets held in the module account (115,456 USDC at the time of writing) will be transferred to the community pool or to the community pool forwarding contract during a future software upgrade.
• The escrow address will be changed to a forwarding smart contract: osmo1jayxmrajq8nzw2knatgsjdkdhnkw8flkgqs84pvphs3ut2hts5xq9hacch
  • This smart contract is capable of forwarding USDC into the community pool and is required as the community pool requires funding by MsgFundCommunityPool rather than just a direct transfer.

2. Reduce Minimum Reserve and Increment to 0.1 USDC The reserve price and bid increment are to be reduced from 1 USDC to 0.1 USDC, allowing for more frequent usage and enabling more competitive bidding for block space over smaller arbitrage opportunities.

This makes the system accessible to a broader range of participants, increasing the likelihood of regular use.

3. Set Proposer Bonus to 0% Following the precedent of Proposal 31, the bonus to the proposer of a block will be set to zero by this proposal. This change aligns with governance’s prior decision to eliminate proposer-based reward disparities, which currently disproportionately reward validators with the highest earnings. The revenue captured is expected to benefit all validators equally through future governance-directed mechanisms.

4. Signal Future Use of Funds This proposal signals that future auction proceeds should be directed by governance toward a token burn mechanism.

Increasing the use of non-OSMO revenue as a buyback and burn mechanism aligns usage with long-term deflationary goals for OSMO. While this proposal does not approve the exact mechanism, a future proposal that includes the actual spend message may:

• Provide OSMO/USDC liquidity using USDC-only entries into OSMO/USDC pools.
• Earn yield while passively supporting price stability.
• Burn OSMO if fully converted, reducing max supply.

Forum Post: https://forum.osmosis.zone/t/top-of-block-auction-parameters-review/3793