Briefing
The core research problem is the systemic instability and user harm caused by Miner Extractable Value (MEV) extraction within Automated Market Makers (AMMs). This paper proposes a foundational breakthrough ∞ a novel AMM mechanism that batch-processes all transactions in a block under a constant potential function rule set. This application-layer design fundamentally alters the game theory, proving that for chains with fair sequencing, the system achieves incentive compatibility , meaning the rational user strategy is to transact honestly, thereby eliminating the risk-free profit opportunities that undermine blockchain security and fairness.
Context
The prevailing challenge in decentralized finance was the impossibility of fully eliminating MEV at the consensus layer, as established by prior academic work. This theoretical limitation meant that block producers could always exploit their control over transaction ordering to extract value via front-running and back-running, creating an off-chain ecosystem that centralized power and harmed ordinary users, a phenomenon that compromised the decentralized equilibrium of the infrastructure layer.
Analysis
The core idea is a shift from continuous, sequential transaction processing to a discrete, batch-based mechanism governed by a constant potential function. Conceptually, the AMM is designed to only accept a batch of trades if the total state change maintains a pre-defined economic invariant, effectively internalizing the value that would otherwise be externalized as MEV. This process guarantees arbitrage resilience by ensuring that a block producer cannot execute a profitable arbitrage trade within the batch without violating the constant potential rule, fundamentally differing from previous AMM models that only enforced the invariant between blocks.
Parameters
- Incentive Compatibility ∞ The core game-theoretic guarantee that an individual user’s best response is to follow the honest transaction strategy.
Outlook
This application-layer approach opens a new avenue for mechanism design, moving beyond the constraints of the consensus layer to address economic security directly within decentralized applications. The theory is poised to unlock a new generation of DeFi primitives, such as AMMs and lending protocols, that are strategy-proof by design, promising a future where transaction fairness is cryptoeconomically guaranteed, leading to significantly lower entry barriers and greater stability in decentralized markets within the next three to five years.
Verdict
This research provides a decisive, application-layer solution to the foundational MEV problem, proving that cryptoeconomic fairness can be engineered into decentralized financial primitives.
