PROF: Protected Order Flow in a Profit-Seeking World (2408.02303v1)

Abstract: Users of decentralized finance (DeFi) applications face significant risks from adversarial actions that manipulate the order of transactions to extract value from users. Such actions -- an adversarial form of what is called maximal-extractable value (MEV) -- impact both individual outcomes and the stability of the DeFi ecosystem. MEV exploitation, moreover, is being institutionalized through an architectural paradigm known Proposer-Builder Separation (PBS). This work introduces a system called PROF (PRotected Order Flow) that is designed to limit harmful forms of MEV in existing PBS systems. PROF aims at this goal using two ideas. First, PROF imposes an ordering on a set ("bundle") of privately input transactions and enforces that ordering all the way through to block production -- preventing transaction-order manipulation. Second, PROF creates bundles whose inclusion is profitable to block producers, thereby ensuring that bundles see timely inclusion in blocks. PROF is backward-compatible, meaning that it works with existing and future PBS designs. PROF is also compatible with any desired algorithm for ordering transactions within a PROF bundle (e.g., first-come, first-serve, fee-based, etc.). It executes efficiently, i.e., with low latency, and requires no additional trust assumptions among PBS entities. We quantitatively and qualitatively analyze incentive structure of PROF, and its utility to users compared with existing solutions. We also report on inclusion likelihood of PROF transactions, and concrete latency numbers through our end-to-end implementation.

• The paper introduces PROF, a novel system that bundles and preserves transaction order to shield users from harmful MEV extraction.
• The method integrates trusted execution environments to ensure transaction privacy while maintaining compatibility with existing PBS systems.
• Empirical benchmarks show that PROF achieves minimal latency and enhances validator incentives through increased transaction fee revenue.

PROF: Protected Order Flow in a Profit-Seeking World

The paper "PROF: Protected Order Flow in a Profit-Seeking World" introduces a system designed to mitigate harmful forms of Maximal Extractable Value (MEV) within the existing infrastructure of Proposer-Builder Separation (PBS). This system, named PROF, addresses major challenges in the decentralized finance (DeFi) ecosystem, particularly focusing on preventing transaction-order manipulation and ensuring user transactions are included efficiently.

Key Contributions

The primary contributions of this work can be summarized as follows:

1. Introduction of PROF: A novel mechanism to protect user transactions from MEV by creating bundles of transactions that are ordered and preserved until committed by proposers.
2. Compatibility: PROF is designed to be backward-compatible with existing and future PBS systems while enforcing privacy and protection for user transactions.
3. Incentive Structure: The paper provides a comprehensive analysis of the incentive structure, ensuring that validators (proposers) are economically motivated to include PROF bundles due to incremental revenue from transaction fees.
4. Latency and Performance: The authors present detailed benchmarks of the implementation, showing that PROF incurs minimal additional latency, which is manageable within the existing transaction inclusion timelines.

Overview of PROF

Problem Space

In DeFi, the order in which transactions are executed critically impacts users' outcomes. Adversaries or even profit-seeking entities can manipulate transaction orders to their advantage, extracting significant MEV at the expense of regular users. Estimates of MEV extracted on Ethereum exceed $500 million over two years. The existing PBS infrastructure aims to distribute MEV opportunities among block producers but has not successfully protected user transactions from harmful MEV extraction.

Design and Implementation

PROF Mechanism: The core idea is to sequence user transactions into a "bundle" using an ordering rule that is agnostic to the content of the transactions. This bundle is then added to the block produced by the builders, ensuring that the transaction order within the bundle is preserved until the block is committed by the proposer. PROF utilizes trusted execution environments (TEEs) to ensure the integrity and privacy of the bundling process.

Bundle Merger: Hosted at the PBS relay, the bundle merger combines PROF bundles with the winning PBS blocks. This design choice ensures that the final block maximizes the proposer’s revenue while maintaining transaction privacy until inclusion. Benchmark results show that the core simulation latency introduced by PROF is minimal.

Inclusion and Incentive Compatibility: One of the significant advantages of PROF is its incentive compatibility for rational validators seeking to maximize their revenue. By appending PROF bundles to already most-profitable builder blocks, validators are economically motivated to choose the PROF-enriched blocks. The authors perform an in-depth empirical paper using historical bid data to quantify the probability of inclusion of PROF transactions, which shows high inclusion likelihood with nominal transaction fee overheads.

Analytical Insights

The authors provide a rigorous analytical framework comparing the utility of PROF, PROF-Share, and MEV-Share. Notably, PROF-Share is an enhanced version of PROF, where arbitrage transactions are appended to the PROF bundle, and profits from these transactions are redistributed among users. PROF was found to consistently provide the highest average utility to users under specific market conditions, notably outperforming MEV-Share in scenarios with lower net demand relative to trade variability.

Practical Implications and Future Directions

Economic Understanding: The insights from PROF's design can influence the strategies of validators and builders within the PBS system. By demonstrating that PROF bundles provide higher utility without introducing additional trust assumptions, the paper sets a foundation for improving fairness in transaction ordering.

Broad Applicability: While the focus is on Ethereum, the PROF design principles can be adapted to other blockchain systems and layer-2 solutions facing similar MEV challenges.

Future Considerations: The tension between maintaining low latency and preserving privacy in transaction ordering mechanisms presents areas for further research. Additionally, the integration of PROF with aspiring decentralized relaying systems (like optimistic relays) opens avenues for optimizing relay-trust models and reducing centralization risks.

Conclusion

The paper "PROF: Protected Order Flow in a Profit-Seeking World" significantly advances our understanding of MEV protection mechanisms within PBS. By addressing critical concerns around transaction privacy, ordering integrity, and economic incentive compatibility, PROF offers a viable path forward for enhancing user protection in DeFi transactions. The paper's thorough empirical and theoretical analyses underscore the practicality and robustness of PROF, setting a precedent for future research and development in blockchain transaction ordering frameworks.