[Paper Review] A2MM: Mitigating Frontrunning, Transaction Reordering and Consensus Instability in Decentralized Exchanges

Liyi Zhou, Kaihua Qin+1 more|arXiv (Cornell University)|Jun 14, 2021

Blockchain Technology Applications and Security37 references26 citations

TL;DR

A2MM proposes an Automated Arbitrage Market Maker that atomically routes trades and performs two-point arbitrage among peered AMMs on the same blockchain to curb MEV, front-running, and consensus instability.

ABSTRACT

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%.

Motivation & Objective

• Motivate reducing overhead and security risks caused by multiple competing DEXes on the same blockchain.
• Propose a new AMM design (A2MM) that atomically routes swaps and performs on-chain arbitrage among peered AMMs.
• Demonstrate security and economic benefits, including reduced MEV exposure and lower transaction costs.
• Show empirical benefits such as reduced block-space usage and swap fees when routing among peered AMMs.

Proposed method

• Introduce the A2MM design that atomically routes swaps and executes best-effort two-point arbitrage among N peered AMMs.
• Define AMM state transitions for two-asset pools and formalize the pricing function with liquidity sensitivity properties.
• Prove routing optimization is greedy and minimizes price divergence across AMMs (Theorem 1).
• Formalize arbitrage profit maximization across multiple AMMs (Equation 9).
• Show swap compression by batching routing/arbitrage transactions into at most N swaps (Theorem 2).
• Evaluate A2MM by replaying past blockchain data with two AMMs (Uniswap and Sushiswap) and quantify reductions in fees and block-space.

Experimental results

Research questions

• RQ1 How can on-chain routing and arbitrage among multiple AMMs reduce MEV-related risks?
• RQ2 What are the security and efficiency gains from a single-AMM-on-chain approach vs. multiple competing DEXes?
• RQ3 Can optimal routing among peered AMMs level prices and minimize adversarial opportunities like sandwich attacks?
• RQ4 What is the potential impact on block-space usage and swap fees when adopting A2MM?

Key findings

• A2MM reduces consumed transaction fees for swaps by 90% on average compared to a standard AMM swap.
• A2MM reduces consumed block-space by 32.8% in expectation.
• Routing among peered AMMs greedily routes volume to the best price, leveling asset prices across AMMs (Theorem 1).
• A2MM’s on-chain routing and arbitrage mitigate two-point arbitrage MEV and sandwich attacks, improving blockchain security.
• Swaps can be compressed into at most N swaps without changing final states (Theorem 2).
• Industrial evaluation using Uni- and SushiSwap demonstrates meaningful efficiency and security benefits when routing among peered AMMs.