Briefing
The core research problem is the systemic instability and centralization risk caused by Maximal Extractable Value (MEV) in Automated Market Makers (AMMs), a challenge previously deemed unsolvable at the consensus layer. This paper proposes a foundational breakthrough by introducing a novel AMM mechanism that operates at the application layer, processing all transactions within a block in a single batch according to pre-defined rules that maintain a constant potential function. This new design fundamentally shifts the defense paradigm, offering a provable guarantee of arbitrage resilience for proposers and, critically, achieving strategy proofness for users on sequencing-fair blockchains. This mechanism design provides a clear path to building truly fair and incentive-compatible decentralized financial primitives.
Context
The prevailing challenge in decentralized finance was the impossibility of fully mitigating MEV at the consensus layer alone, as demonstrated by prior theoretical results. The control over transaction sequencing by block proposers (miners/validators) created an unavoidable opportunity for risk-free extraction via front-running and sandwich attacks, fostering a centralized, off-chain ecosystem for transaction ordering. This limitation meant that the security of DeFi applications was fundamentally tied to the fairness of the underlying block production, an assumption that is often violated by rational economic actors.
Analysis
The core mechanism is an application-layer AMM that abstracts transaction processing into a single, atomic batch operation per block. Instead of processing transactions sequentially, which allows for profitable re-ordering, the mechanism uses a set of pre-defined rules to clear all orders simultaneously, ensuring the pool’s state is updated only once. The logic is enforced by requiring the mechanism to maintain a constant potential function ∞ a state invariant ∞ after processing the entire batch. This mathematical constraint ensures that any attempt by a proposer to insert an arbitrage trade or re-order transactions for profit is negated by the mechanism’s final state calculation, thereby removing the economic incentive for malicious sequencing.
Parameters
- Arbitrage Resilience ∞ Proves a miner cannot gain risk-free profit.
- Incentive Compatibility ∞ Guarantees an individual user’s best response is to follow the honest strategy.
- Constant Potential Function ∞ The mathematical invariant maintained by the AMM after batch processing.
- Application Layer ∞ The new locus of MEV mitigation, shifting from the consensus protocol.
Outlook
This theoretical framework opens a critical new avenue for research, focusing on application-specific mechanism design to internalize and eliminate harmful MEV. In the next three to five years, this principle is expected to unlock a new generation of DeFi protocols ∞ including lending, perpetuals, and stablecoin mechanisms ∞ that are strategy-proof by construction. The research roadmap now shifts toward generalizing the constant potential function approach to more complex financial primitives, fundamentally securing the application layer against economic manipulation and allowing for a truly decentralized financial equilibrium.
Verdict
This application-layer mechanism design fundamentally re-architects the security boundary of decentralized finance, establishing a new theoretical benchmark for provable incentive compatibility and MEV mitigation.
