Application Layer MEV involves extracting value from transactions at the level of decentralized applications. This form of value extraction occurs through specific smart contract interactions rather than solely at the blockchain’s base layer. It refers to the profit opportunities available to participants who can influence the ordering or inclusion of transactions within a block by interacting directly with application logic. Such opportunities arise from actions like liquidations, arbitrage, or sandwich attacks performed against user trades on decentralized exchanges.
Context
The discussion surrounding Application Layer MEV centers on its impact on market fairness and efficiency within decentralized finance. Efforts are underway to develop protocols and mechanisms that can reduce or redistribute this extracted value. Understanding this concept is crucial for comprehending how certain actors can gain advantages in digital asset markets.
A novel AMM mechanism uses a constant potential function to batch-process transactions, provably eliminating miner arbitrage and enforcing honest user behavior.
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