New AMM Mechanism Design Achieves Arbitrage Resilience and Incentive Compatibility ∞ Research

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Briefing

The core research problem of Maximal Extractable Value (MEV) in Automated Market Makers (AMMs) is addressed by shifting the mitigation focus from the consensus layer to the application layer. The foundational breakthrough is a novel AMM mechanism, implemented as a smart contract, that processes all transactions within a block as a single batch, maintaining a constant potential function across the batch. This mechanism fundamentally removes the opportunity for block producers to extract risk-free profit through transaction reordering. The most important implication is the establishment of a new paradigm for decentralized finance (DeFi) security, demonstrating that application-layer mechanism design can achieve provable guarantees of arbitrage resilience and incentive compatibility , creating a fairer, more stable on-chain economic environment.

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Context

Before this work, the prevailing theoretical limitation was the inherent difficulty ∞ and in some cases, proven impossibility ∞ of eliminating MEV entirely at the blockchain’s consensus layer. The traditional AMM model, while efficient, created a deterministic, exploitable arbitrage opportunity visible in the mempool. This dynamic incentivized block producers to engage in front-running and back-running, fostering a centralized off-chain ecosystem that undermines the core decentralization axiom of the blockchain infrastructure. This theoretical challenge required a new approach to secure the economic layer of the system.

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Analysis

The mechanism’s core idea is to treat the block’s transactions not as a sequence but as a single, indivisible set of state changes. The new primitive is the constant potential function that the AMM must satisfy after the batch of trades is executed. Unlike traditional AMMs where trades are executed sequentially and the price path is determined by order, this mechanism calculates the resulting state as if all trades occurred simultaneously and then applies a pricing rule that ensures the constant potential is maintained. This approach removes the ability for a block producer to profit by strategically ordering transactions within the block, fundamentally differing from previous approaches that relied on private order flow or complex auction designs.

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Parameters

Arbitrage Resilience ∞ Miner risk-free profit is zero, proved for legacy blockchain environments with a single block proposer.
Incentive Compatibility ∞ A user’s optimal strategy is the honest one, proved for sequencing-fair, decentralized block proposal processes.
Mechanism Layer ∞ Application layer (smart contract), demonstrating that economic security can be enforced above the consensus layer.

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Outlook

This theoretical framework opens new avenues for mechanism design research, moving beyond consensus-level fixes to application-specific economic security. The immediate real-world application is the creation of a new generation of DeFi protocols, specifically AMMs, that are MEV-proof by construction. In 3-5 years, this principle of application-layer incentive compatibility could extend to other complex on-chain mechanisms like lending protocols and decentralized autonomous organizations (DAOs), ensuring all foundational financial primitives operate with provable fairness and economic stability, shifting the MEV problem from an infrastructural flaw to a solved application-layer design challenge.

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Verdict

The introduction of application-layer mechanism design with a constant potential function provides a decisive, provable solution to the economic instability caused by Maximal Extractable Value in Decentralized Finance.

Automated Market Makers, Maximal Extractable Value, Mechanism Design, Arbitrage Resilience, Incentive Compatibility, Constant Potential Function, Application Layer MEV, Decentralized Finance, Transaction Sequencing, Block Producer Incentives, Smart Contract Logic, Batch Processing, Risk-Free Profit, Economic Security, On-Chain Fairness Signal Acquired from ∞ arxiv.org