papers/lightspeed-dex/sections/03-mev-resistance.tex

\section{MEV Resistance}


\subsection{The MEV Problem}

\textbf{Maximal Extractable Value (MEV)}: Profit extracted by reordering/censoring transactions.

\textbf{Common attacks}:
\begin{enumerate}
    \item \textbf{Frontrunning}: See large buy, place order ahead
    \item \textbf{Sandwich attack}: Place orders before and after victim
    \item \textbf{Just-in-time liquidity}: Add liquidity right before large trade
\end{enumerate}

\textbf{Cost to users}: \$1.2B in 2023 \cite{flashbots2024}.

\subsection{Lux Protection Mechanisms}

\subsubsection{Threshold Encryption}

Orders are encrypted until block finalization:

\begin{equation}
\text{Encrypted}(order) = \text{ThresholdEncrypt}(order, \{pk_1, \ldots, pk_n\})
\end{equation}

\textbf{Decryption}: Requires $t$ of $n$ validators to cooperate (e.g., $t = 2n/3$).

\textbf{Timeline}:
\begin{itemize}
    \item $t=0$: Trader submits encrypted order
    \item $t=10$ms: Block finalized via GPU BLS (order revealed)
    \item $t=11$ms: Matching executed
\end{itemize}

\textbf{Result}: No one can see order contents before finalization --- no frontrunning.

\subsubsection{Fair Ordering}

We enforce \textbf{price-time priority} with cryptographic timestamps:

\begin{equation}
\text{Priority}(order) = (price, \text{GPS-timestamp})
\end{equation}

\textbf{GPS synchronization}: Validators use atomic clocks ($\pm$1$\mu$s accuracy).

\textbf{Verification}: Validators provide zk-SNARK proof of correct ordering:

\begin{equation}
\pi_{\text{order}} = \text{zk-SNARK}(\text{orders sorted by (price, time)})
\end{equation}

\textbf{Fraud detection}: If validator deviates, proof fails --- slashed stake.

\subsubsection{Batch Auctions}

Instead of continuous matching, we use \textbf{frequent batch auctions} (FBA):

\begin{enumerate}
    \item Collect orders for 10ms (GPU BLS finality window)
    \item Match all orders simultaneously at uniform clearing price
    \item Settle atomically
\end{enumerate}

\textbf{Advantages}:
\begin{itemize}
    \item No timing games (all orders in batch treated equally)
    \item Better price discovery
    \item Eliminates latency arbitrage
\end{itemize}