Master's Thesis Dias Alymbekov

Exploring the Effects of Transaction Sequencing Rules in EVM Blockchains

Abstract

Decentralized exchanges (DEXs) have emerged as pivotal components of the digital economy, offering users autonomy and flexibility in trading digital assets on permissionless blockchains. Transaction execution ordering on DEXs, determined by miners or validators, introduces complexities and challenges due to the lack of standardized sequencing mechanisms. This thesis explores the impact of different transaction sequencing mechanisms. We introduce a taxonomy of transaction sequencing mechanisms, categorizing existing approaches based on their principles, execution mechanisms, and implications for DEX trades. The taxonomy provides a structured framework for understanding the diversity of sequencing rules and their specific applications in blockchains. We investigate the impact of transaction ordering on trade execution in decentralized exchanges. Through simulations using historical transaction data, we analyze the effects of selected ordering mechanisms. Our findings demonstrate that while transaction ordering often has a limited impact on independent trades, it can significantly benefit users targeted by MEV searchers, particularly in sandwich attacks. We further examine the Verifiable Sequencing Rule, a prominent MEV mitigation proposal, and identify challenges in its practical implementation due to the Condorcet Paradox. This study underscores the importance of robust transaction ordering mechanisms in decentralized exchanges and highlights the need for further research into alternative approaches for mitigating MEV and ensuring fair trade execution.

References

[1] Matheus V. X. Ferreira, David C. Parkes, Credible Decentralized Exchange Design via Verifiable Sequencing Rules. https://arxiv.org/pdf/2209.15569.pdf Accessed: 2023-10-23. 2023.
[2] Defi pulse - the decentralized finance leaderboard. https://www.defipulse.com/ Accessed: 2023-10-23. 2023.
[3] Flashbots. https://docs.flashbots.net/ Accessed: 2023-10-23. 2023.
[4] Mazorra, B., Reynolds, M., & Daza, V. Price of MEV: Towards a game Theoretical approach to MEV. https://arxiv.org/pdf/2208.13464 Accessed: 2023-10-23. 2023.
[5] Hosch, W. L. (2024, May 31). P versus NP problem | Complexity Theory & Algorithmic Solutions. Encyclopedia Britannica. https://www.britannica.com/science/P-versus-NP-problem. Accessed: 2024-04-20.

[6] Kelkar, M., Deb, S., & Kannan, S. (2021, February 10). Order-Fair consensus in the permissionless setting. IACR Cryptology ePrint Archive. https://eprint.iacr.org/2021/139 Accessed: 2024-04-20.
[7] Proof-of-work (POW) | Ethereum.org. ethereum.org. https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/ 2024-05-05.
[8] Ethereum’s Supply Chain, Part 1. (2023, September 21). https://www.umbraresearch.xyz/writings/ethereum-supply-chain-part-1 Accessed: 2024-05-05
[9] Proof-of-stake (POS) | Ethereum.org. ethereum.org. https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/ Accessed: 2024-05-05
[10] MEV and me. (2021, February 5). Paradigm. https://www.paradigm.xyz/2021/02/mev-and-me Accessed: 2023-10-23
[11] Flashbots. Flashbots. https://www.flashbots.net/ Accessed: 2023-10-23
[12] What is the Mempool? - How Blockchain Transactions Work. https://www.blocknative.com/blog/mempool-intro Accessed: 2024-05-05
[13] How does MEV supply-chain work in PBS structure? | Chainbase blog. Chainbase. https://chainbase.com/blog/article/how-does-mev-supply-chain-work-in-pbs-structure Accessed: 2024-05-05
[14] Gas and fees | ethereum.org. ethereum.org. https://ethereum.org/en/developers/docs/gas/ Accessed: 2024-05-05
[15] What is Proposer / Builder Separation (PBS)? . Alchemy. https://www.alchemy.com/overviews/proposer-builder-separation Accessed: 2024-05-05
[16] Block Proposers | Flashbots Docs. (2024, May 3). https://docs.flashbots.net/flashbots-mev-boost/block-proposers Accessed: 2024-05-05
[17] Block Builders | Flashbots Docs. (2024, June 11). https://docs.flashbots.net/flashbots-mev-boost/block-builders Accessed: 2024-05-05
[18] Block scoring for mev-boost relays. (2022, September 1). The Flashbots Collective. https://collective.flashbots.net/t/block-scoring-for-mev-boost-relays/202 Accessed: 2024-05-05

[19] Relay Fundamentals | Flashbots Docs. (2024, May 3). https://docs.flashbots.net/flashbots-mev-boost/relay Accessed: 2024-05-05
[20] Smart contracts | ethereum.org. ethereum.org. https://ethereum.org/en/smart-contracts/ Accessed: 2024-05-05
[21] Introduction to dapps | ethereum.org. ethereum.org. https://ethereum.org/en/developers/docs/dapps/ Accessed: 2024-05-05
[22] David Gogel, Teana Baker-Taylor, Ann S. Cloots, Brendan Forster, Jordan L. Gustave, Fabian Schar, Lex Sokolin, DeFi Beyond Hype: The Emerging World of Decentralized Finance. \textit{https://wifpr.wharton.upenn.edu/wp-content/uploads/2021/05/DeFi-Beyond-the-Hype.pdf}
Accessed: 2024-05-05
[23] Batch auctions | CoW Protocol Documentation. https://docs.cow.fi/cow-protocol/concepts/introduction/batch-auctions Accessed: 2024-05-05
[24] Alex Nezlobin, A few thoughts on the optimal extraction of stat arb MEV. https://twitter.com/0x94305/status/1618744497864851459 Accessed: 2023-10-23.
[25] FRP-10: Distributed Blockbuilding networks via secure knapsack auctions. (2023, July 4). The Flashbots Collective. https://collective.flashbots.net/t/frp-10-distributed-blockbuilding-networks-via-secure-knapsack-auctions/1955. Accessed: 2023-10-23
[26] Quintus Kilbourn,  A Transaction Ordering Rules Taxonomy. https://collective.flashbots.net/t/a-transaction-ordering-rules-taxonomy/1082/1 Accessed: 2023-10-23. 2023.
[27] Kelkar, M., Zhang, F., Goldfeder, S., & Juels, A. (2020, August 9). Order-Fairness for Byzantine consensus. IACR Cryptology ePrint Archive. https://eprint.iacr.org/2020/269. Accessed: 2023-10-23.
[28] Mohammad A. Vafadar , Majid Khabbazian. Condorcet Attack Against Fair Transaction Ordering. https://ar5iv.labs.arxiv.org/html/2306.15743. Accessed: 2023-10-23.
[29] Kelkar, M., Deb, S., Long, S., Juels, A., & Kannan, S. (2022, November 29). Themis: fast, strong Order-Fairness in Byzantine consensus. IACR Cryptology ePrint Archive. https://eprint.iacr.org/2021/1465 Accessed: 2023-10-23.
[30] Cachin, C., Mićić, J., Steinhauer, N., & Zanolini, L. (2021, December 13). Quick order Fairness. arXiv.org. https://arxiv.org/abs/2112.06615
[31 ]Shashank Motepalli, Luciano Freitas, Benjamin Livshits SoK: Decentralized Sequencers for Rollups. https://arxiv.org/pdf/2310.03616.pdf Accessed: 2023-10-23. 2023.
[32] How Uniswap v4 and UniswapX Create the Best Swapping Experience. (2023, October 4). Uniswap Protocol. https://blog.uniswap.org/how-uniswapv4-uniswapx-work-together.
Accessed: 2024-05-05
[33] Builder, T. (2023, October 5). Titan Tech Teatime #2. Titan’s Substack. https://titanbuilder.substack.com/p/titan-tech-teatime. Accessed: 2023-10-23.
[34] Yang, S., Nayak, K., & Zhang, F. (2024, May 2). Decentralization of Ethereum’s builder market. arXiv.org. https://arxiv.org/abs/2405.01329. Accessed: 2024-05-05
[35] Adams, A., Chan, B. Y., Markovich, S., & Wan, X. (2023, September 24). Don’t let MEV slip: The costs of swapping on the Uniswap protocol. arXiv.org. https://arxiv.org/abs/2309.13648. Accessed: 2024-05-05
[36] Adams, A., Moallemi, C. C., Reynolds, S., & Robinson, D. (2024, March 5). AM-AMM: an Auction-Managed automated market maker. arXiv.org. https://arxiv.org/abs/2403.03367. Accessed: 2024-05-05

[37] EIP-1559 Gas Fees: Base fee, priority fee, & Max fee. https://www.blocknative.com/blog/eip-1559-fees. Accessed: 2024-05-05
[38] Welcome - Dune Docs. Dune Docs. https://docs.dune.com/home. Accessed: 2024-05-05
[39] Paradigm). GitHub - paradigm.xyz/cryo: cryo is the easiest way to extract blockchain data to parquet, csv, json, or python dataframes. GitHub. https://github.com/paradigmxyz/cryo. Accessed: 2024-05-05.
[40] Uniswap. GitHub - Uniswap/v3-polars. GitHub. https://github.com/Uniswap/v3-polars. Accessed: 2024-05-05.
[41] Dune Analytics. GitHub - duneanalytics/spellbook: SQL views for Dune. GitHub. https://github.com/duneanalytics/spellbook. Accessed: 2024-05-05.
[42] Flashbots. GitHub - flashbots/mempool-dumpster: Dump all the mempool transactions (in Parquet + CSV). GitHub. https://github.com/flashbots/mempool-dumpster. Accessed: 2024-05-05.
[43] Foundry-Rs. GitHub - foundry-rs/foundry: Foundry is a blazing fast, portable and modular toolkit for Ethereum application development written in Rust. GitHub. https://github.com/foundry-rs/foundry. Accessed: 2024-05-05.
[45] Foundry book. https://book.getfoundry.sh/. Accessed: 2024-05-05.
[46] Bluealloy. GitHub - bluealloy/revm: Ethereum Virtual Machine written in rust that is fast and simple to use. GitHub. https://github.com/bluealloy/revm. Accessed: 2024-05-05.