Towards Optimal Prior-Free Permissionless Rebate Mechanisms, with applications to Automated Market Makers & Combinatorial Orderflow Auctions

TL;DR

This paper proposes a formal framework for fair compensation of users affected by MEV in blockchain systems, utilizing rebate mechanisms and auctions to reduce block producer influence, with applications to AMMs and orderflow auctions.

Contribution

It introduces a novel, prior-free, permissionless rebate mechanism framework for MEV compensation, applicable to automated market makers and combinatorial orderflow auctions.

Findings

Shapley value offers a fair solution for MEV compensation

Rebate mechanisms can mitigate MEV extraction

Applications to AMMs and orderflow auctions demonstrate effectiveness

Abstract

Maximal Extractable Value (MEV) has become a critical issue for blockchain ecosystems, as it enables validators or block proposers to extract value by ordering, including or censoring users' transactions. This paper aims to present a formal approach for determining the appropriate compensation for users whose transactions are executed in bundles, as opposed to individually. We explore the impact of MEV on users, discuss the Shapley value as a solution for fair compensation, and delve into the mechanisms of MEV rebates and auctions as a means to undermine the power of the block producer.