AMM Mechanism Achieves Strategy Proofness through Constant Potential Function → Research

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Briefing

The core research problem is the systemic extraction of value (MEV) from Automated Market Makers (AMMs) by block producers, which centralizes the infrastructure layer and harms users. This paper introduces a foundational mechanism design breakthrough → a new AMM protocol that processes all transactions within a block as a single batch, maintaining a constant potential function across the state transition. This mechanism formally proves arbitrage resilience on legacy chains and, critically, achieves strategy proofness for individual users on chains with sequencing fairness, shifting the MEV defense from the consensus layer to the application layer.

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Context

The prevailing challenge in decentralized finance was the assumption that MEV was an unavoidable consequence of public mempools and discretionary transaction ordering by block producers. Established theory focused on mitigating MEV through consensus-level changes, such as fair ordering protocols, yet the application layer (AMMs) remained vulnerable to front-running and arbitrage. This vulnerability fostered a centralized off-chain market for block space, departing from the original vision of decentralized equilibrium.

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Analysis

The paper’s core mechanism re-engineers the AMM’s pricing and execution logic by treating all transactions in a block as a single atomic batch instead of sequential processing. The key primitive is the constant potential function , an invariant that the AMM’s state must satisfy after the batch is executed. This design fundamentally differs from previous AMMs because it eliminates the sequential advantage → the final state is determined by the aggregate effect of all trades, not their individual order, thereby mathematically neutralizing the profit from reordering or insertion and guaranteeing arbitrage resilience.

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Parameters

Arbitrage Resilience → Proof that block producers cannot gain risk-free profit from transaction reordering.
Strategy Proofness → Proof that a user’s best response is to follow the honest strategy on sequencing-fair blockchains.
Application Layer Defense → The mechanism design is implemented at the smart contract level, making it consensus-agnostic.

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Outlook

This research opens a new, highly promising avenue for decentralized finance by establishing that MEV can be solved at the application layer through rigorous mechanism design. Future work will focus on generalizing the constant potential function approach to more complex DeFi primitives like lending protocols and perpetuals. The long-term implication is the potential for a new generation of DeFi applications with provable economic security and fairness, leading to a more decentralized and equitable on-chain financial system within the next three to five years.

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Verdict

This work provides a foundational, mathematically rigorous blueprint for constructing economically secure and fair decentralized finance primitives.

Automated Market Makers, Arbitrage Resilience, Strategy Proofness, Mechanism Design, Constant Potential Function, Transaction Sequencing, Decentralized Finance, MEV Mitigation, Application Layer Security, Batch Transaction Processing, Economic Security, Foundational Theory, Smart Contract Design, Risk-Free Profit, Sequencing Fairness Signal Acquired from → dagstuhl.de