Briefing
The core research problem centers on the destabilizing centralization risk introduced by Maximal Extractable Value (MEV) in Automated Market Makers (AMMs), where block producers profit by manipulating transaction order. This paper introduces a novel AMM mechanism that processes all transactions within a block by strictly maintaining a constant potential function across the batch. This foundational breakthrough shifts MEV mitigation from the consensus layer, where theoretical impossibilities exist, to the application layer, establishing a new paradigm that provides provable guarantees of arbitrage resilience and, under sequencing-fairness, full strategy proofness for all users.
Context
The prevailing challenge in decentralized finance was the belief that MEV, particularly in high-frequency applications like AMMs, could only be mitigated through complex, often-flawed, modifications to the underlying consensus protocol. Prior academic work had established theoretical limitations, suggesting it was impossible to eliminate MEV entirely at the consensus layer, forcing the ecosystem to accept off-chain solutions like Proposer-Builder Separation (PBS) which introduced new trust assumptions and centralization vectors.
Analysis
The mechanism operates by treating all transactions in a block as a single batch, executing them according to pre-defined rules that ensure the AMM’s core invariant, the constant potential function , is preserved post-batch. Unlike traditional AMMs that process transactions sequentially, creating a time window for front-running, this batch-clearing approach eliminates the transient arbitrage opportunities that form the basis of MEV. For a chain that offers sequencing-fairness, the mechanism achieves strategy proofness , meaning the optimal economic strategy for any user is simply to submit their honest trade, removing the incentive for complex, value-extracting behaviors.
Parameters
- Core Guarantee → Strategy Proofness (The optimal strategy for an individual user is to submit their honest transaction, eliminating the incentive for MEV-related behaviors like front-running.)
- AMM Invariant → Constant Potential Function (The mechanism ensures this function is maintained after the batch execution, which is the mathematical basis for arbitrage resilience.)
- Mitigation Layer → Application Layer (The solution is implemented as a smart contract, not a modification to the core blockchain consensus protocol.)
Outlook
This application-layer mechanism design opens a new avenue for creating provably fair and credibly neutral DeFi primitives. Future research will focus on generalizing this constant potential function approach to other complex DeFi applications, such as lending protocols and derivatives platforms, potentially unlocking a new generation of decentralized applications with mathematically guaranteed fairness. The long-term implication is a roadmap where application security is decoupled from consensus protocol complexity, allowing for greater innovation at both layers.
