Mechanism Design Eliminates MEV by Defining Strategy Proof Automated Market Makers → Research

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Briefing

The core problem of Maximal Extractable Value (MEV) extraction in decentralized finance, particularly within Automated Market Makers (AMMs), is addressed by proposing a foundational shift in mechanism design. The breakthrough introduces a new AMM structure that processes all transactions within a block as a batch, adhering to pre-defined rules that ensure a constant potential function is maintained across the batch state transition. This application-layer mechanism achieves provable strategy proofness, eliminating the arbitrage opportunities that constitute harmful MEV and consequently reversing the current trend toward centralized, off-chain transaction ordering ecosystems.

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Context

Prior to this research, MEV was understood as an inherent challenge of public transaction ordering, often framed as a consensus-layer problem solvable only through complex protocol augmentations like encrypted mempools or fair sequencing services. Established theory demonstrated the impossibility of fully eliminating MEV at the consensus level without sacrificing decentralization or introducing latency. The prevailing model of AMMs, combined with block producer control over transaction sequencing, created a competitive environment among searchers, resulting in a prisoner’s dilemma where rational extraction harmed overall system welfare.

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Analysis

The paper’s core idea is to move the guarantee of fairness from the consensus layer to the application logic of the AMM itself. The new mechanism defines a state update function that is path-independent across all transactions in a block, meaning the final state of the AMM is the same regardless of the transaction order within that block. By enforcing a constant potential function → a mathematical invariant → the mechanism ensures that no block producer can gain an advantage by reordering or inserting transactions, thereby removing the fundamental profit motive for arbitrage-based MEV extraction. This fundamentally differs from previous approaches that merely tried to hide information or auction off priority.

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Parameters

Strategy Proofness Guarantee → The mechanism satisfies two tiers of formal, provable security guarantees against rational actors.
Equilibrium Model → The analysis derives the Perfect Bayesian Nash Equilibria for primary MEV attack vectors.
Mitigation Scope → The design eliminates MEV opportunities created by transaction sequencing and insertion.

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Outlook

This research opens a new, highly promising avenue for mechanism design where applications, not the underlying blockchain protocol, are the primary locus of MEV mitigation. Future work will focus on generalizing this constant potential function approach to other complex DeFi primitives, such as lending protocols and derivatives markets. In 3-5 years, this foundational theory could lead to a new generation of DeFi protocols that are inherently MEV-resistant, shifting the competitive landscape from speed-based arbitrage to pure protocol efficiency and user experience.

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Verdict

The introduction of an application-layer constant potential function for AMMs establishes a new, provably strategy-proof paradigm for foundational decentralized finance mechanism design.

Mechanism design, Automated market maker, Maximal extractable value, Strategy proofness, Constant potential function, Transaction sequencing, Application layer security, Decentralized finance, Game theory, Arbitrage elimination, Protocol efficiency, Block producer incentives, Consensus layer, Off-chain ecosystem Signal Acquired from → dagstuhl.de