Reference Gas Price

Reference Gas Price (RGP) is a fee-aware toxicity filtering mechanism adopted from DeepBook. It creates economic dis-incentives against toxic flow without requiring protocol-level changes to transaction prioritization.

Background

In order book markets, toxic flow occurs when fast or informed takers systematically exploit stale maker quotes. This forces market makers to widen spreads or reduce size, degrading liquidity quality for everyone including retail traders.

Centralized exchanges address this through cancel prioritization, where cancel requests are processed before new orders. However, this approach requires sequencer-level control that general-purpose L1s like Sui cannot provide without protocol updates. RGP offers an alternative that works within existing chain constraints.

How It Works

The core insight is that on Sui, takers who aggressively pay above the reference gas price are signaling intent to gain sequencing priority - typically to front-run or exploit stale maker quotes. RGP uses this gas premium as a toxicity signal.

The system operates as follows:

1. Track a baseline gas price over a rolling window to establish normal network conditions

2. Flag taker transactions that exceed a configurable threshold above this baseline

3. Apply penalties to flagged transactions (higher execution fees), which are redistributed as rebates to market makers

Key Properties

RGP does not slow down retail users or penalize typical trading flow. It specifically targets taker activity that aggressively overpays for sequencing priority, which represents the most toxic class of flow. The mechanism is adaptive and transparent, operating entirely within onchain execution logic.

The penalty fees collected from toxic takers are redistributed as rebates to market makers. This creates a positive feedback loop: the more aggressive the toxic behavior, the more makers benefit, which incentivizes continued liquidity provision and helps maintain tighter spreads.

Unlike cancel prioritization, RGP can be implemented on general-purpose chains without protocol updates. It treats all order actions (place, cancel, post) fairly and includes tunable parameters that can be adjusted based on observed market behavior.

Why Not Cancel Prioritization?

Cancel prioritization systems introduce their own form of toxicity: adverse cancels. When cancels are prioritized, market makers can wait to see where the price moves and then cancel orders that would result in unfavorable fills. This creates a scenario where makers effectively get free optionality at the expense of takers.