An AMM minimizing user-level extractable value and loss-versus-rebalancing

TL;DR

V0LVER is an innovative AMM protocol that minimizes user MEV and loss-versus-rebalancing by leveraging encrypted mempool transactions and incentivizing block producers to align pool prices with external market prices.

Contribution

It introduces V0LVER, a novel AMM protocol that resolves an incentivization trilemma using encrypted mempool technology and external market price alignment.

Findings

V0LVER reduces or eliminates user MEV and loss-versus-rebalancing.

Incentivizes block producers to match pool prices with external markets.

Approaches zero fees under competition, maintaining AMM guarantees.

Abstract

We present V0LVER, an AMM protocol which solves an incentivization trilemma between users, passive liquidity providers, and block producers. V0LVER enables users and passive liquidity providers to interact without paying MEV or incurring uncontrolled loss-versus-rebalancing to the block producer. V0LVER is an AMM protocol built on an encrypted transaction mempool, where transactions are decrypted after being allocated liquidity by the AMM. V0LVER ensures this liquidity, given some external market price, is provided at that price in expectancy. This is done by incentivizing the block producer to move the pool price to the external market price. With this, users transact in expectancy at the external market price in exchange for a fee, with AMMs providing liquidity in expectancy at the external market price. Under block producer and liquidity provider competition, all of the fees in V0LVER approach zero. Without block producer arbitrage, V0LVER guarantees fall back to those of an AMM, albeit free from loss-versus-rebalancing and user-level MEV.