Briefing
The foundational problem of Miner Extractable Value (MEV) arises from the block producer’s unilateral control over transaction ordering, fostering a centralized off-chain ecosystem and allowing risk-free profit extraction that harms ordinary users. This research introduces a novel Automated Market Maker (AMM) mechanism that addresses this challenge at the application layer, shifting the focus from the consensus protocol to the financial primitive itself. The breakthrough is a swap mechanism that processes all transactions within a block according to pre-defined rules, ensuring a constant potential function is maintained after batch execution.
This design achieves guaranteed arbitrage resilience regardless of block producer control, and under a weak fair-sequencing model, it achieves the stronger property of incentive compatibility , compelling users to report their true demand. This application-layer paradigm fundamentally re-architects DeFi security, proving that financial protocols can be inherently designed to eliminate value extraction and foster truly equitable transaction environments.
Context
The prevailing theoretical limitation in decentralized finance was the vulnerability of on-chain liquidity to MEV, primarily front-running and back-running, which miners and specialized arbitragers exploit to gain risk-free returns. This capability allows a single, selected block producer to auction off favorable transaction placements, creating a centralizing pressure that undermines the decentralized equilibrium of the underlying blockchain infrastructure. Prior academic works demonstrated impossibilities in fully addressing MEV at the consensus layer alone, leading to a challenge where the economic security of the application layer remained fundamentally dependent on the fairness of an increasingly centralized block production process.
Analysis
The paper’s core mechanism re-defines the transaction execution model for AMMs by imposing an invariant on the batch processing of transactions within a block. Instead of allowing a block producer to arbitrarily sequence transactions for maximum profit, the new swap mechanism enforces a set of pre-defined rules to process the batch, ensuring a specific constant potential function is maintained. This logic fundamentally differs from previous approaches by embedding the MEV-mitigation logic directly into the application’s state transition function, rather than relying on external cryptographic primitives or consensus-level modifications.
The mechanism’s design ensures that even if an arbitrager controls the block, the rule-based, batch-clearing process prevents them from gaining a risk-free profit, thereby neutralizing the economic incentive for malicious sequencing. This transforms the AMM from a passive liquidity pool into an active, strategy-proof clearing house.
Parameters
- Arbitrage Resilience Guarantee ∞ The mechanism is proven to eliminate risk-free profit for a block producer, holding true even when the arbitrager has full control over transaction inclusion and sequencing.
- Incentive Compatibility Condition ∞ The stronger guarantee that a user’s best response is to follow the honest strategy, which is achieved when the underlying block proposal process ensures weak fair-sequencing.
Outlook
This research opens a critical new avenue for decentralized application development, demonstrating that cryptoeconomic security can be enforced at the application layer, independent of the consensus layer’s vulnerabilities. The next steps involve generalizing this mechanism design principle beyond AMMs to other complex DeFi primitives, such as lending protocols and derivatives platforms. In the next three to five years, this theory is poised to unlock a new generation of “MEV-resistant by design” protocols, fundamentally shifting the competitive landscape of decentralized finance by ensuring a provably fairer and more equitable experience for all users. The focus of research will move toward formalizing and implementing a provably fair sequencing layer that can universally satisfy the condition required for the mechanism’s stronger incentive compatibility guarantee.
Verdict
This application-layer mechanism design constitutes a foundational shift in DeFi security, proving that intrinsic protocol logic can eliminate systemic value extraction and restore economic fairness to decentralized exchange.
