Master's Thesis Dias Alymbekov

Exploring the Effects of Transaction Sequencing Rules in EVM Blockchains

[WIP] Abstract

In recent years, the digital world has witnessed a surge in the prominence of decentralized exchanges (DEXs). Unlike their centralized counterparts, DEXs operate without intermediaries and are built on permissionless blockchains, offering users greater autonomy and flexibility in trading digital assets. With daily trading volumes reaching astronomical figures \cite{Defipulse 23}, DEXs are rapidly establishing themselves as pivotal players in the world of cryptocurrency and blockchain technology. \cite{Ferreira Parkes 23} \\

A fundamental aspect of trading on DEXs is the transaction execution ordering. In the current system, miners or validators, who are entrusted with compiling a block of transactions, also have the responsibility to determine the sequence in which these transactions get executed. [Verifiable rules quote] This becomes problematic in the absence of well-defined sequencing rules. Validators, capitalizing on their pivotal role, can front-run transactions. A simple example is a situation where Trader A sends a transaction to buy desirable Asset A for a price below the market. Trader B, monitoring the pending transactions, sees this and quickly sends a transaction with a higher gas price to buy the same Asset before Trader A's transaction is processed. Since miners are economically rational, Trader B's transaction is confirmed first, and Trader A's transaction fails or is left waiting. In this case, the transaction ordering mechanism can influence the market dynamics, and decide who gets the best trades. Entities like Flashbots accentuated the gravity of the situation by building tools for validators to auction front-running rights. [Flashbots quote]\\

Flashbots auctions and other tools provide an opportunity to consider various ordering mechanisms to extract "MEV". "Maximal (also miner) extractable value, or MEV,usually refers to the value that privileged players can
extract by strategically ordering, censoring, and placing transactions in a blockchain." [price of MEV] \\

"MEV" extraction is a very broad topic. The choice of techniques to extract "MEV" depends on a choice of blockchain and blockchain's consensus, ordering, and block-creation mechanisms. [price of mev]. MEV can lead to both positive and negative externalities. Competition for high-value opportunities among market participants increases market efficiency and maximum value extracted by miners. On the other hand, uninformed blockchain users who do not fully understand blockchain dynamics might fall prey to MEV extractors (searchers). The choice of ordering mechanisms can increase miner profit by prioritizing the transactions with a higher gas cost. Ferreira and Parkes also demonstrate in their paper how certain groups of sequencing rules can provide minumum guarantees on trade execution. The dynamics of positive and negative externalities depend on the choice of sequencing rules, which increases the importance of this research topic.

Research Questions

RQ1: What research exists in the literature concerning the impact of ordering mechanisms on transaction throughput and network congestion in Blockchains, Approaches used in the industry

RQ2: What ordering techniques do we currently observe getting adopted by block builder entities or specific applications' contracts or sequencers?

RQ3: How can a comprehensive classification taxonomy be constructed for sequencing rules in the context of blockchain transaction ordering?

RQ4: How can a simulation model be created to apply transaction sequencing rules with varying objective criteria to historical data?

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] Alex Nezlobin, A few thoughts on the optimal extraction of stat arb MEV. https://twitter.com/0x94305/status/1618744497864851459 Accessed: 2023-10-23. 2023.

[3] Quintus Kilbourn, A Transaction Ordering Rules Taxonomy. https://collective.flashbots.net/t/a-transaction-ordering-rules-taxonomy/1082/1 Accessed: 2023-10-23. 2023.

[4] Bruno Mazorra, Michael Reynolds, Vanesa Daza, Price of MEV: Towards a Game Theoretical Approach to MEV. https://arxiv.org/pdf/2208.13464.pdf Accessed: 2023-10-23. 2023.

[5] Shashank Motepalli, Luciano Freitas, Benjamin LivshitsSoK: Decentralized Sequencers for Rollups. https://arxiv.org/pdf/2310.03616.pdf Accessed: 2023-10-23. 2023.

[6] AkakiMamageishvili, an Christoph Schlegel, Shared Sequencing and Latency Competition as a Noisy Contest. https://arxiv.org/abs/2310.02390 Accessed: 2023-10-23. 2023.

[7] Defi pulse - the decentralized finance leaderboard. https://www.defipulse.com/ Accessed: 2023-10-23. 2023.

[8] Flashbots. https://docs.flashbots.net/ Accessed: 2023-10-23. 202