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The incentive-compatibility properties of blockchain transaction feemechanisms have been investigated with *passive* block producers that aremotivated purely by the net rewards earned at the consensus layer. This paperintroduces a model of *active* block producers that have their own privatevaluations for blocks (representing, for example, additional value derived fromthe application layer). The block producer surplus in our model can beinterpreted as one of the more common colloquial meanings of the term ``MEV.''  The main results of this paper show that transaction fee mechanism design isfundamentally more difficult with active block producers than with passiveones: with active block producers, no non-trivial or approximatelywelfare-maximizing transaction fee mechanism can be incentive-compatible forboth users and block producers. These results can be interpreted as amathematical justification for the current interest in augmenting transactionfee mechanisms with additional components such as order flow auctions, blockproducer competition, trusted hardware, or cryptographic techniques.

Transaction Fee Mechanism Design with Active Block Producers