Constant Function Market Making, Social Welfare and Maximal Extractable Value

TL;DR

This paper analyzes how constant function market makers (CFMMs) can maximize social welfare under high liquidity and explores how block proposers can extract additional value when blockspace is limited.

Contribution

It provides a theoretical framework linking CFMM liquidity, social welfare optimization, and maximal extractable value in blockchain systems.

Findings

CFMMs can approximate optimal social welfare with sufficient liquidity

Block proposers can gain higher utility when blockspace is scarce

A lower bound on maximal extractable value is established under scarcity

Abstract

We consider the social welfare that can be facilitated by a constant function market maker (CFMM). When there is sufficient liquidity available to the CFMM, it can approximate the optimal social welfare when all users transactions are executed. When one of the agent has the role of proposing the block, and blockspace is scarce, they can obtain higher expected utility than otherwise identical agents. This gives a lower bound on the maximal extractable value exposed when blockspace is scarce.