Briefing
The core research problem is the systemic centralization and user harm caused by Maximal Extractable Value (MEV) extraction, which previous work suggested was impossible to fully solve at the consensus layer. This paper introduces a foundational breakthrough ∞ a new Automated Market Maker (AMM) mechanism designed at the application layer that processes all transactions in a block while maintaining a constant potential function. This novel design provides provable guarantees, including arbitrage resilience and, when paired with a sequencing-fair consensus, incentive compatibility. The single most important implication is the demonstration that foundational economic security and fairness can be engineered directly into decentralized applications, fundamentally shifting the MEV mitigation paradigm from the protocol layer to the smart contract layer.
Context
The established theoretical limitation centered on the challenge of achieving incentive compatibility for all network participants at the consensus layer, where the control over transaction ordering allows miners or validators to extract value through front-running and back-running. This has led to an off-chain ecosystem that compromises the envisioned decentralized equilibrium. The prevailing academic challenge was to design a system that could prevent these arbitrage opportunities, given the transparent mempool and the inherent power of the block proposer.
Analysis
The core mechanism is a new AMM design that batch-processes all transactions within a block based on pre-defined rules. Conceptually, this differs from previous approaches by shifting the focus from preventing the block proposer from seeing transactions to designing the application’s state transition function to be immune to reordering. By ensuring a constant potential function is maintained after the batch is processed, the mechanism eliminates the possibility of risk-free profit extraction by the block proposer, thereby achieving arbitrage resilience. This application-layer approach guarantees that a user’s optimal strategy is to submit their transaction honestly, establishing provable strategy proofness.
Parameters
- Mechanism Layer ∞ Application Layer (Smart Contract). Explanation ∞ The new mechanism is implemented directly within the AMM’s logic, not the underlying blockchain consensus protocol.
- Security Guarantee 1 ∞ Arbitrage Resilience. Explanation ∞ Proves that a single miner cannot gain risk-free profit from transaction ordering.
- Security Guarantee 2 ∞ Incentive Compatibility. Explanation ∞ The stronger guarantee that a user’s best response is to follow the honest strategy, achieved when the consensus is sequencing-fair.
Outlook
This research opens new avenues for mechanism design, suggesting that future decentralized applications will be architected with provable economic security guarantees built into their core smart contract logic. The real-world application is the potential for truly strategy-proof DeFi primitives in 3-5 years, where front-running and sandwich attacks are economically impossible by construction, not just cryptographically obscured. Future work will focus on integrating this application-layer mechanism with emerging sequencing-fair consensus protocols to realize the full incentive compatibility guarantee.
Verdict
This application-layer mechanism design fundamentally redefines the scope of MEV mitigation, demonstrating that provable economic fairness is an achievable property of smart contract architecture.
