A theory of Automated Market Makers in DeFi

Bartoletti, Massimo; Chiang, James Hsin-yu; Lafuente, Alberto Lluch

doi:10.46298/lmcs-18(4:12)2022

Cited by 10 publications

(7 citation statements)

References 18 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…From Fig. 4b, the users' payoff is high under complete information scenario contract followed by incomplete information scenario contract and uniform contract 14 . This trend's deduction can be attributed to the suitable contract design for each user type under the complete information scenario to produce maximal utility and vice versa.…”

Section: Discussion On Implementation 1) Contract Analysismentioning

confidence: 96%

“…Fees-optimizationbased techniques, such as [12] and [13], regulated transaction fees to lower user expenses. In [12] and [14], the authors presented an automated market maker (AMM) to reduce users' costs by leveraging smart contracts (SCs) to alter gas fees upon incoming transaction requests autonomously. The authors of [13] introduced an automated arbitrage market maker (A2MM) that selects the best-effort two-point arbitrage among various AMMs based on transaction costs.…”

Section: A Background and Motivationsmentioning

confidence: 99%

“…The authors of [13] introduced an automated arbitrage market maker (A2MM) that selects the best-effort two-point arbitrage among various AMMs based on transaction costs. Generally, in fees-optimization-based systems, fees cannot be forecasted with 100% accuracy before submitting an order since requests may be executed on bridge reserves with higher fees without the user's knowledge [14].…”

Section: A Background and Motivationsmentioning

confidence: 99%

“…Due to lack of space on the figures, we show complete information contracts as complete contracts and incomplete information contracts as incomplete contracts 14. Please refer to the Appendix F for the uniform contract solution.…”

mentioning

confidence: 99%

See 3 more Smart Citations

Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges

Doe

Niyato

et al. 2023

IEEE Access

View full text Add to dashboard Cite

Decentralized exchanges (DEXes) provide effective price discovery and fair trading while dealing with the drawbacks of centralized exchanges, e.g., lack of transaction transparency and exclusive control of user assets and transaction fees. However, many DEXes suffer from frontrunning and transaction reordering, which fundamentally flaw their design. In this paper, we present a novel incentive mechanism design for mitigating frontrunning and transaction reordering even if frontrunners pay high transaction fees in DEXes. We utilize a weighted counting sort algorithm to order transactions based on the users' multi-dimensional private information (e.g., transaction delay and confidentiality). To elicit users' private information, we consider a multi-dimensional contract-theoretic design based on the users' willingness to share their private information. We show that the miner can always maximize its utility under the complete and incomplete information scenarios. We implement solutions to our multi-dimensional contract and sorting algorithm on a decentralized oracle network to create a decentralized system and design a web application to extensively evaluate the performance of our proposed incentive mechanism. We further show that ordering transactions based on users' private information increases the miner's utility by 78.42% − 84.57% and reduces the users' cost by 64.47% compared with the state-of-the-art fair sequencing services, automated arbitrage market maker, and miner extractable value auctions.INDEX TERMS Blockchain, decentralized exchanges, incentive mechanism, multi-dimensional contract, transaction ordering.

show abstract

Section: Discussion On Implementation 1) Contract Analysismentioning

confidence: 96%

Section: A Background and Motivationsmentioning

confidence: 99%

Section: A Background and Motivationsmentioning

confidence: 99%

mentioning

confidence: 99%

See 2 more Smart Citations

Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges

Doe

Niyato

et al. 2023

IEEE Access

View full text Add to dashboard Cite

show abstract

“…We now formally prove the well-known fact that constantproduct Automated Market Makers [23]- [25], a wide class of decentralized exchanges including mainstream platforms like Uniswap, Curve and Balancer [26]- [28], are not MEV-free.…”

Section: Mev-freedommentioning

confidence: 99%

A theoretical basis for Blockchain Extractable Value

Bartoletti¹,

Zunino²

2023

Preprint

View full text Add to dashboard Cite

Extractable Value refers to a wide class of economic attacks to public blockchains, where adversaries with the power to reorder, drop or insert transactions in a block can "extract" value from user transactions. Empirical research has shown that mainstream protocols, like e.g. decentralized exchanges, are massively targeted by these attacks, with detrimental effects on their users and on the blockchain network. Despite the growing impact of these attacks in the real world, theoretical foundations are still missing. In this paper we propose a formal theory of Extractable Value, based on a general, abstract model of blockchains and smart contracts. Our theory is the basis for formal proofs of security against Extractable Value attacks.

show abstract