Briefing
The persistent challenge of Miner Extractable Value (MEV) in Automated Market Makers (AMMs) encourages centralization and harms users by creating risk-free arbitrage opportunities for block producers. This research introduces a novel AMM mechanism that fundamentally addresses this problem by processing all transactions within a block as a batch, rigorously enforcing the maintenance of a constant potential function across the pool state. This application-layer design achieves provable arbitrage resilience for single-miner chains and the stronger property of strategy proofness for sequencing-fair protocols, establishing a new paradigm for decentralized finance (DeFi) security that does not rely on consensus-level changes.
Context
The prevailing theoretical limitation in mitigating MEV centered on the impossibility of achieving full strategy proofness solely at the consensus layer, leading to the verifier’s dilemma where block producers are incentivized to extract value through front-running and transaction reordering. Prior solutions often involved complex cryptographic abstractions or relied on the block proposer’s honesty, leaving the core economic incentive for centralization unaddressed within the application logic of the most critical DeFi primitives.
Analysis
The core breakthrough is the shift from a sequential transaction model to a batched, state-enforced model governed by a constant potential function. The mechanism takes all transactions in a block and processes them as a single atomic unit, calculating the pool’s state change. The key logic requires that the value of the pool, defined by the potential function, remains constant after the batch of transactions is executed, thereby eliminating the profit margin for arbitrageurs and block producers who would otherwise manipulate transaction order within the block. This fundamentally differs from previous AMMs where transaction-by-transaction execution allowed for profitable sequencing manipulation.
Parameters
- Arbitrage Resilience ∞ The mechanism guarantees a block producer cannot gain risk-free profit by manipulating transaction order within the block.
- Strategy Proofness ∞ The mechanism guarantees an individual user’s best response is to follow the honest strategy, eliminating incentives for harmful behavior in fair sequencing environments.
Outlook
This research opens a crucial new avenue for mechanism design, suggesting that economic security and fairness can be embedded directly into application logic rather than relying solely on the underlying protocol. The immediate next step is the formal deployment and stress-testing of this potential function-based AMM, potentially leading to a new generation of DeFi primitives that are provably immune to a major class of MEV attacks. In the next 3-5 years, this principle could be generalized to create a standard for “MEV-resistant” smart contract design across all decentralized applications.
Verdict
This mechanism design represents a foundational shift, proving that application-layer economic principles can mathematically eliminate the primary centralizing force of Miner Extractable Value.
