Briefing
The foundational problem of Miner Extractable Value (MEV) in Automated Market Makers (AMMs) is addressed by proposing a novel, application-layer mechanism that fundamentally alters transaction processing. This breakthrough mechanism batches all transactions within a block and processes them according to pre-defined rules designed to maintain a constant potential function, a mathematical invariant that prevents value extraction. The result is a system that achieves provable arbitrage resilience on legacy blockchains, ensuring miners cannot secure risk-free profit, and a stronger incentive compatibility on sequencing-fair chains, guaranteeing that a user’s best response is to follow the honest trading strategy. This work shifts the MEV mitigation paradigm from heuristic consensus-level fixes to mathematically formal, strategy-proof mechanism design.
Context
The prevailing challenge in decentralized finance is the structural vulnerability of AMMs to MEV, a direct consequence of the single-leader block production model. Prior to this work, the established theoretical limitation was that a block producer ∞ whether a miner or validator ∞ possessed unilateral control over the inclusion and ordering of transactions. This control enabled risk-free profit extraction via front-running and back-running user trades, effectively centralizing the block proposal process and imposing a hidden cost on all network participants. The problem was generally framed as a consensus-level issue requiring sequencing augmentation, a heuristic approach that lacked formal economic guarantees.
Analysis
The paper’s core mechanism re-engineers the AMM exchange logic by implementing a batch-clearing process. Instead of executing transactions sequentially as they are ordered by the block producer, the mechanism collects all trades intended for a block and processes them as a single, simultaneous batch. The key conceptual innovation is the enforcement of a constant potential function across the entire batch execution. This function is a mathematical property of the AMM pool that must remain constant after the batch is processed.
By imposing this invariant, the mechanism eliminates the sequential price movement that arbitrageurs exploit. The batch processing ensures arbitrage resilience , meaning no combination of trades within the block can result in a net, risk-free profit for the block producer, fundamentally removing the economic incentive for manipulative ordering.
Parameters
- Arbitrage Resilience – Core Guarantee ∞ The formal proof that a block producer cannot gain risk-free profit by manipulating transaction ordering within a block.
- Incentive Compatibility – Stronger Guarantee ∞ The property proven for sequencing-fair blockchains, where the honest strategy is mathematically guaranteed to be the user’s best response.
- Constant Potential Function – Mathematical Invariant ∞ The pool property that the new mechanism maintains after batch processing, which conceptually eliminates sequential arbitrage opportunities.
Outlook
This research opens a critical new avenue for decentralized exchange architecture, positioning mechanism design at the application layer as the most robust defense against MEV. Over the next three to five years, this work is likely to drive the development of a new generation of AMM protocols that are provably fair and arbitrage-resilient by default. The formal proof of incentive compatibility suggests a clear roadmap for protocols built atop sequencing-fair consensus layers, enabling a truly strategy-proof DeFi ecosystem. Future research will focus on extending these formal guarantees to compositional settings, addressing cross-block strategies and multi-asset trading to secure the entire on-chain financial landscape.
Verdict
This mechanism design provides a foundational, mathematically formal solution to the systemic MEV problem, proving that economic fairness can be guaranteed at the application layer through rigorous protocol engineering.
