Credible Decentralized Exchange Design via Verifiable Sequencing Rules
Matheus V. X. Ferreira, David C. Parkes
Abstract
Trading on decentralized exchanges has been one of the primary use cases for permissionless blockchains with daily trading volume exceeding billions of U.S. dollars. In the status quo, users broadcast transactions they wish to execute in the exchange and miners are responsible for composing a block of transactions and picking an execution ordering — the order in which transactions execute in the exchange. Due to the lack of a regulatory framework, it is common to observe miners exploiting their privileged position by front-running transactions and obtaining risk-fee profits. Indeed, the Flashbots service institutionalizes this exploit, with miners auctioning the right to front-run transactions. In this work, we propose to modify the interaction between miners and users and initiate the study of verifiable sequencing rules. As in the status quo, miners can determine the content of a block; however, they commit to respecting a sequencing rule that constrains the execution ordering and is verifiable (there is a polynomial time algorithm that can verify if the execution ordering satisfies such constraints). Thus in the event a miner deviates from the sequencing rule, anyone can generate a proof of non-compliance.