ShillProof: A Cross-Layer Auction System with Verifiable Bidding and Decentralized Sequencer Selection

Shill bidding threatens the integrity of online auctions by allowing malicious participants to manipulate prices through deceptive behavior. Existing on-chain mitigation strategies rely on post-hoc penalties, but they suffer from high gas costs and limited scalability, especially under frequent bidding activity. To address this, we present ShillProof, a cross-layer auction framework that shifts fraud filtering into the consensus logic of an Optimistic Rollup to improve both performance and fairness. ShillProof achieves the following: (i) fraud filtering embedded in the Layer 2 consensus to block malicious bids before confirmation, (ii) verifiable settlement using Merkle roots and a bounded challenge period, and (iii) decentralized sequencer rotation via a commit-reveal and Chainlink VRF mechanism. Evaluation shows over 70% reduction in execution time per bid and a 3× throughput improvement over prior on-chain designs. Security tests demonstrate that censorship and bid omission can be publicly contested, ensuring cross-layer transparency and integrity.