Briefing
The foundational problem of Miner Extractable Value (MEV) in Automated Market Makers (AMMs) stems from the sequential, in-block ordering of transactions, which allows block producers to profit from front-running and arbitrage opportunities. This research proposes a novel AMM mechanism that resolves this by processing all transactions within a block as a single batch, governed by a new pricing function that ensures a constant potential function is maintained. This core mechanism proves a strong property of arbitrage resilience, meaning a block producer cannot generate risk-free profit even with full control over transaction inclusion and ordering. The most critical implication is that this application-layer solution moves the industry closer to achieving true incentive compatibility, where honest user behavior is the dominant strategy, even in a decentralized and strategic environment.
Context
The prevailing theoretical limitation in decentralized finance is the vulnerability of classical AMM designs to MEV, particularly through arbitrage and front-running. In the standard model, a block producer’s dictatorial control over transaction sequencing allows them to observe a user’s trade, insert a profitable transaction before it (front-run), and then another after it (back-run) to capture the price difference. This strategic behavior, which extracts value from users and destabilizes the pool, is an inherent flaw in the sequential execution model, necessitating a mechanism-design solution beyond simple consensus-layer fixes.
Analysis
The core breakthrough is the shift from sequential, path-dependent execution to batch-level, path-independent execution. The new mechanism treats all transactions submitted to a block as a single, atomic set of orders. Instead of processing trades one by one, the mechanism uses a new pricing function to calculate a single, uniform clearing price for all assets based on the net effect of the entire batch of trades.
This is conceptually equivalent to solving a constrained optimization problem that maximizes the value of the pool’s invariant function, such as the constant product formula, after all trades are executed. By applying a single, post-batch price to all transactions, the mechanism eliminates the possibility of an attacker profiting from ordering manipulation within the block, thereby proving arbitrage resilience by construction.
Parameters
- Arbitrage Resilience → Proven guarantee that a block producer cannot gain risk-free profit by controlling transaction inclusion, ordering, or injecting their own orders.
- Incentive Compatibility → Achieved under a weak fair-sequencing model, where a user’s best response is to follow the honest strategy.
Outlook
This application-layer mechanism opens a new research avenue focused on application-specific mechanism design to solve problems previously thought to require consensus-layer changes. Future work will concentrate on extending this model to handle compositional guarantees across multiple blocks and complex cross-block strategies, which remain a vector for MEV. The practical application is the design of next-generation DeFi protocols that are intrinsically MEV-resistant, leading to more equitable and stable financial primitives that can operate securely without reliance on external, centralized sequencing services.
