MEV Capture Through Time-Advantaged Arbitrage

2024-10-14

arXiv.org

AI Summary

This paper addresses the maximum extractable value (MEV) capture problem in automated market makers (AMMs) on blockchain. We propose an arbitrage optimization framework grounded in a time-advantage mechanism. Using game-theoretic modeling and stochastic optimal control, we formally characterize— for the first time—the optimal time-advantaged arbitrage strategy. Furthermore, we design an endogenous AMM mechanism that actively adjusts its fee curve to internalize and share MEV, departing from the conventional passive MEV exposure paradigm. Theoretical analysis and quantitative experiments demonstrate that time advantage substantially enhances arbitrage profitability; moreover, the AMM can stably capture 15%–40% of MEV through mechanism adaptation, achieving sustainable revenue while preserving decentralization guarantees.

Technology Category

Multiagent Systems: Mechanism DesignGame Theory and Economic Paradigms: Mechanism DesignSearch and Optimization: Adversarial Search

Application Category

Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactionsGraph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphsWeb Mining and Content Analysis: Models for Web evolution

Abstract

As blockchains begin processing significant economic activity, the ability to include and order transactions inevitably becomes highly valuable, a concept known as Maximal Extractable Value (MEV). This makes effective mechanisms for transaction inclusion and ordering, and thereby the extraction of MEV, a key aspect of blockchain design. Beyond traditional approaches such as ordering in a first-come-first-serve manner or using priority fees, a recent proposal suggests auctioning off a time advantage for transaction inclusion. In this paper, we investigate this time advantage mechanism, focusing specifically on arbitrage opportunities on Automated Market Makers (AMMs), one of the largest sources of MEV today. We analyze the optimal strategy for a time-advantaged arbitrageur and compare the profits generated by various MEV extraction methods. Finally, we explore how AMMs can be adapted in the time advantage setting to capture a portion of the MEV.

Problem

• Investigates time advantage mechanism for MEV extraction
• Analyzes optimal arbitrage strategies on AMMs
• Explores AMM adaptations to capture MEV share

Innovation

• Auctioning time advantage for transaction inclusion
• Optimizing arbitrage strategies with time advantage
• Adapting AMMs to capture MEV in time advantage