A2MM: Mitigating Frontrunning, Transaction Reordering and Consensus Instability in Decentralized Exchanges
This addresses security and efficiency problems for users and developers in blockchain-based decentralized exchanges, offering a novel design to mitigate risks like MEV exploitation and reduce transaction costs.
The paper tackles the inefficiencies and security risks in decentralized exchanges (DEX) caused by multiple Automated Market Makers (AMMs) competing on the same blockchain, leading to issues like frontrunning and consensus instability. It introduces A2MM, an Automated Arbitrage Market Maker, which unites multiple AMMs to reduce overhead and improve security, with evaluations showing it frees up 32.8% of block-space and reduces swap fees by 90% in expectation.
The asset trading volume on blockchain-based exchanges (DEX) increased substantially since the advent of Automated Market Makers (AMM). Yet, AMMs and their forks compete on the same blockchain, incurring unnecessary network and block-space overhead, by attracting sandwich attackers and arbitrage competitions. Moreover, conceptually speaking, a blockchain is one database, and we find little reason to partition this database into multiple competing exchanges, which then necessarily require price synchronization through arbitrage. This paper shows that DEX arbitrage and trade routing among similar AMMs can be performed efficiently and atomically on-chain within smart contracts. These insights lead us to create a new AMM design, an Automated Arbitrage Market Maker, short A2MM DEX. A2MM aims to unite multiple AMMs to reduce overheads, costs and increase blockchain security. With respect to Miner Extractable Value (MEV), A2MM serves as a decentralized design for users to atomically collect MEV, mitigating the dangers of centralized MEV relay services. We show that A2MM offers essential security benefits. First, A2MM strengthens the blockchain consensus security by mitigating the competitive exploitation of MEV, therefore reducing the risks of consensus forks. A2MM reduces the network layer overhead of competitive transactions, improves network propagation, leading to less stale blocks and better blockchain security. Through trade routing, A2MM reduces the predatory risks of sandwich attacks by taking advantage of the minimum profitable victim input. A2MM also offers financial benefits to traders. Failed swap transactions from competitive trading occupy valuable block space, implying an upward pressure on transaction fees. Our evaluations shows that A2MM frees up 32.8% block-space of AMM-related transactions. In expectation, A2MM's revenue allows to reduce swap fees by 90%.