Briefing
The research addresses the critical problem of Maximal Extractable Value (MEV) in Automated Market Makers (AMMs), which undermines user fairness and drives centralization by incentivizing block producers to exploit transaction ordering. The foundational breakthrough is a novel application-layer mechanism design that processes all transactions within a block as a single batch, governed by pre-defined rules that maintain a constant potential function. This new approach formally proves two key guarantees ∞ arbitrage resilience for legacy chains and the strictly stronger strategy proofness for chains with sequencing fairness, concluding that a combination of application-layer mechanism design and consensus-level sequencing fairness is the essential architectural path toward eliminating harmful MEV.
Context
The prevailing challenge in decentralized finance was the impossibility of fully addressing MEV solely at the consensus layer, as the block producer’s unilateral control over transaction inclusion and sequencing inherently created a risk-free profit opportunity. This control fostered a centralized off-chain ecosystem, departing from the original decentralized vision and leading to theoretical models that formalized the problem as a game of incomplete information within the MEV supply chain. Prior works often attempted to augment the consensus protocol with properties like sequencing fairness, yet lacked a formal, mathematical framework to translate these properties into provable guarantees at the application level.
Analysis
The core mechanism shifts the focus from who orders the transactions to how the transactions are processed by the smart contract. The new AMM is designed as a batch auction where all orders in a block are processed simultaneously. Previous approaches processed transactions sequentially. Conceptually, the mechanism defines a mathematical invariant ∞ a constant potential function ∞ for the AMM’s state.
By ensuring that the batch processing rules always result in a final state that maintains this function, the mechanism mathematically eliminates the profit-seeking arbitrage opportunity that forms the basis of MEV. This design forces the block producer to include transactions that move the AMM to a state that is arbitrage resilient by construction, thereby guaranteeing that a user’s optimal strategy is simply to submit their true order.
Parameters
- Arbitrage Resilience ∞ The mechanism’s guarantee that a block producer cannot gain risk-free profit on single-proposer blockchains.
- Strategy Proofness ∞ The stronger guarantee that an individual user’s best response is to follow the honest strategy, provable on chains with sequencing fairness.
- Constant Potential Function ∞ The mathematical invariant that the new AMM mechanism is designed to maintain during batch processing to eliminate arbitrage.
- Weak Fair-Sequencing Model ∞ The consensus-level property assumed for the stronger strategy proofness guarantee, meaning transactions are sequenced by approximate arrival time.
Outlook
This research opens a critical new avenue for decentralized application (dApp) development, shifting the burden of MEV mitigation from complex, hard-to-implement consensus changes to verifiable, smart contract-level mechanism design. In the next 3-5 years, this theoretical framework is expected to unlock a new generation of DeFi primitives ∞ such as strategy-proof AMMs and lending protocols ∞ that are inherently fair to users. Future research will focus on generalizing the constant potential function design to more complex DeFi applications and integrating this application-layer mechanism with emerging decentralized sequencer protocols to achieve a globally optimal, fair-sequencing environment.
Verdict
This research provides the foundational, mathematically rigorous proof that Maximal Extractable Value can be mitigated by designing incentive-compatible mechanisms at the application layer, fundamentally securing decentralized finance.
