Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges
Decentralized exchanges (DEXes) provide effective price discovery and fair trading while dealing with the drawbacks of centralized exchanges, e.g., lack of transaction transparency and exclusive control of user assets and transaction fees. However, many DEXes suffer from frontrunning and transaction...
| Main Authors: | , , , , |
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| Format: | Article |
| Language: | English |
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IEEE
2023-01-01
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| Series: | IEEE Access |
| Subjects: | |
| Online Access: | https://ieeexplore.ieee.org/document/10016729/ |
| _version_ | 1797688546902933504 |
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| author | Daniel Mawunyo Doe Jing Li Niyato Dusit Li Wang Zhu Han |
| author_facet | Daniel Mawunyo Doe Jing Li Niyato Dusit Li Wang Zhu Han |
| author_sort | Daniel Mawunyo Doe |
| collection | DOAJ |
| description | Decentralized exchanges (DEXes) provide effective price discovery and fair trading while dealing with the drawbacks of centralized exchanges, e.g., lack of transaction transparency and exclusive control of user assets and transaction fees. However, many DEXes suffer from frontrunning and transaction reordering, which fundamentally flaw their design. In this paper, we present a novel incentive mechanism design for mitigating frontrunning and transaction reordering even if frontrunners pay high transaction fees in DEXes. We utilize a weighted counting sort algorithm to order transactions based on the users’ multi-dimensional private information (e.g., transaction delay and confidentiality). To elicit users’ private information, we consider a multi-dimensional contract-theoretic design based on the users’ willingness to share their private information. We show that the miner can always maximize its utility under the complete and incomplete information scenarios. We implement solutions to our multi-dimensional contract and sorting algorithm on a decentralized oracle network to create a decentralized system and design a web application to extensively evaluate the performance of our proposed incentive mechanism. We further show that ordering transactions based on users’ private information increases the miner’s utility by <inline-formula> <tex-math notation="LaTeX">$78.42\%-84.57\%$ </tex-math></inline-formula> and reduces the users’ cost by 64.47% compared with the state-of-the-art fair sequencing services, automated arbitrage market maker, and miner extractable value auctions. |
| first_indexed | 2024-03-12T01:32:28Z |
| format | Article |
| id | doaj.art-a25ce93e009d4f71be17afa62c40dcd7 |
| institution | Directory Open Access Journal |
| issn | 2169-3536 |
| language | English |
| last_indexed | 2024-03-12T01:32:28Z |
| publishDate | 2023-01-01 |
| publisher | IEEE |
| record_format | Article |
| series | IEEE Access |
| spelling | doaj.art-a25ce93e009d4f71be17afa62c40dcd72023-09-11T23:00:52ZengIEEEIEEE Access2169-35362023-01-0111960149602810.1109/ACCESS.2023.323689110016729Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized ExchangesDaniel Mawunyo Doe0https://orcid.org/0000-0002-7350-3990Jing Li1https://orcid.org/0000-0002-0075-9573Niyato Dusit2https://orcid.org/0000-0002-7442-7416Li Wang3https://orcid.org/0000-0002-0973-1614Zhu Han4https://orcid.org/0000-0002-6606-5822Department of Electrical and Computer Engineering, University of Houston, Houston, TX, USADepartment of Electrical and Computer Engineering, University of Houston, Houston, TX, USAComputer Science and Engineering, Nanyang Technological University, Jurong West, SingaporeSchool of Computer Science, Beijing University of Posts and Telecommunications, Beijing, ChinaDepartment of Electrical and Computer Engineering, University of Houston, Houston, TX, USADecentralized exchanges (DEXes) provide effective price discovery and fair trading while dealing with the drawbacks of centralized exchanges, e.g., lack of transaction transparency and exclusive control of user assets and transaction fees. However, many DEXes suffer from frontrunning and transaction reordering, which fundamentally flaw their design. In this paper, we present a novel incentive mechanism design for mitigating frontrunning and transaction reordering even if frontrunners pay high transaction fees in DEXes. We utilize a weighted counting sort algorithm to order transactions based on the users’ multi-dimensional private information (e.g., transaction delay and confidentiality). To elicit users’ private information, we consider a multi-dimensional contract-theoretic design based on the users’ willingness to share their private information. We show that the miner can always maximize its utility under the complete and incomplete information scenarios. We implement solutions to our multi-dimensional contract and sorting algorithm on a decentralized oracle network to create a decentralized system and design a web application to extensively evaluate the performance of our proposed incentive mechanism. We further show that ordering transactions based on users’ private information increases the miner’s utility by <inline-formula> <tex-math notation="LaTeX">$78.42\%-84.57\%$ </tex-math></inline-formula> and reduces the users’ cost by 64.47% compared with the state-of-the-art fair sequencing services, automated arbitrage market maker, and miner extractable value auctions.https://ieeexplore.ieee.org/document/10016729/Blockchaindecentralized exchangesincentive mechanismmulti-dimensional contracttransaction ordering |
| spellingShingle | Daniel Mawunyo Doe Jing Li Niyato Dusit Li Wang Zhu Han Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges IEEE Access Blockchain decentralized exchanges incentive mechanism multi-dimensional contract transaction ordering |
| title | Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges |
| title_full | Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges |
| title_fullStr | Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges |
| title_full_unstemmed | Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges |
| title_short | Incentive Mechanism Design for Mitigating Frontrunning and Transaction Reordering in Decentralized Exchanges |
| title_sort | incentive mechanism design for mitigating frontrunning and transaction reordering in decentralized exchanges |
| topic | Blockchain decentralized exchanges incentive mechanism multi-dimensional contract transaction ordering |
| url | https://ieeexplore.ieee.org/document/10016729/ |
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