Briefing
The core research problem is the systemic value leakage in Automated Market Makers (AMMs) caused by Maximal Extractable Value (MEV), which manifests as Loss-Versus-Rebalancing (LVR) for liquidity providers and poor execution for users. The foundational breakthrough is the introduction of RediSwap , a novel AMM architecture that internalizes the arbitrage process through a specialized MEV-redistribution mechanism. This mechanism is proven to be incentive-compatible and Sybil-proof, structurally redefining the maximal MEV as the sum of LVR and individual user losses, which it then transparently captures. The single most important implication is that this application-layer mechanism design shifts the paradigm from external MEV mitigation to internal value capture, establishing a template for more economically stable and equitable decentralized exchange primitives.
Context
The established theory of Constant Function Market Makers (CFMMs), while providing continuous on-chain liquidity, is fundamentally susceptible to arbitrageurs who extract value from the pool by rebalancing prices to external markets. This extraction is formalized as MEV, with LVR representing the majority of the cost borne by Liquidity Providers (LPs). Prior to this research, the prevailing challenge was how to mitigate this value leakage without sacrificing decentralization or introducing complex off-chain sequencing, often resulting in solutions that merely shifted the MEV from users to block producers, or required fundamental, disruptive changes to the consensus layer. The academic challenge centered on designing an incentive-compatible mechanism that could neutralize the arbitrage opportunity at the application layer itself.
Analysis
The RediSwap mechanism operates by intercepting user trades before they hit the CFMM pool and integrating them with arbitrage transactions in a controlled, application-layer process. The mechanism internalizes the complexity of computing optimal arbitrage into a formal, ex-post auction. This auction is governed by three core functions ∞ a Bundle Generation Rule that constructs the transaction sequence for maximal arbitrage profit, a Payment Rule that captures a portion of this profit from the arbitrageur, and a Refund Rule that rebates the captured value to the original users and LPs. The mechanism fundamentally differs from previous approaches by having full, centralized control over transaction ordering within the pool’s execution context , which enables transparent value capture and redistribution, effectively turning the economic threat of arbitrage into a protocol-controlled revenue stream for its participants.
Parameters
- Execution Improvement ∞ Better execution than UniswapX in 89% of trades.
- LVR Reduction for LPs ∞ Reduces LPs’ loss to under 0.5% of the original LVR in most cases.
- Mechanism Property 1 ∞ Incentive-compatible (rational actors follow the rules).
- Mechanism Property 2 ∞ Sybil-proof (prevents manipulation via multiple identities).
Outlook
This research opens a new avenue for mechanism design in Decentralized Finance, suggesting that the most effective way to combat harmful MEV is not to eliminate it entirely, but to structurally internalize and redistribute it. In the next three to five years, this approach is projected to catalyze the development of a new generation of DeFi primitives ∞ including lending protocols and options markets ∞ where value extraction is a feature of the protocol, not an external attack vector. This will lead to demonstrably fairer and more capital-efficient decentralized exchanges, potentially restoring the original economic stability promised by AMMs and reducing the systemic risk of LVR on overall DeFi architecture.
