MEV Protection Research

Abstract

This research LP explores Maximum Extractable Value (MEV) protection mechanisms for the Lux Network, analyzing how validators and searchers extract value, the impact on users, and mitigation strategies. It examines how Lux's multi-chain architecture and unique consensus mechanisms can provide innovative solutions to MEV-related problems.

Motivation

MEV protection is critical for:

1. User Protection: Prevent sandwich attacks and frontrunning
2. Fair Markets: Ensure equal access to trading opportunities
3. Network Security: Align validator incentives with users
4. DeFi Health: Reduce toxic arbitrage and manipulation
5. Adoption: Improve user experience and trust

Current State

MEV in Lux Ecosystem

• C-Chain: EVM-compatible, susceptible to traditional MEV
• X-Chain: UTXO model, different MEV dynamics
• DEX Activity: Primary MEV source on Lux
• Current Protection: Limited to slippage tolerance

MEV Vectors Identified

// MEV opportunities across Lux chains
interface MEVLandscape {
  sandwich_attacks: {
    frequency: "High on C-Chain DEXs";
    impact: "$100K+ daily";
    victims: "Retail traders";
  };
  
  arbitrage: {
    types: ["Cross-DEX", "Cross-chain", "Liquidations"];
    volume: "$500K+ daily";
    beneficiaries: "Searchers and validators";
  };
  
  frontrunning: {
    targets: ["Token launches", "NFT mints", "Oracle updates"];
    prevention: "Currently minimal";
  };
}

Research Findings

1. Fair Ordering Mechanisms

Threshold Encrypted Mempool

// Encrypted mempool with threshold decryption
contract EncryptedMempool {
    struct EncryptedTx {
        bytes encryptedData;
        bytes32 commitment;
        uint256 revealBlock;
        address sender;
    }
    
    mapping(bytes32 => EncryptedTx) public pendingTxs;
    mapping(uint256 => bytes32[]) public blockTxs;
    
    // Threshold encryption parameters
    uint256 public constant THRESHOLD = 67; // 67% of validators
    uint256 public constant REVEAL_DELAY = 2; // blocks
    
    function submitEncrypted(
        bytes calldata encryptedData,
        bytes32 commitment
    ) external {
        bytes32 txId = keccak256(
            abi.encodePacked(encryptedData, block.number)
        );
        
        pendingTxs[txId] = EncryptedTx({
            encryptedData: encryptedData,
            commitment: commitment,
            revealBlock: block.number + REVEAL_DELAY,
            sender: msg.sender
        });
        
        blockTxs[block.number + REVEAL_DELAY].push(txId);
        
        emit TxSubmitted(txId, block.number + REVEAL_DELAY);
    }
    
    // Validators collectively decrypt at reveal time
    function revealBatch(
        uint256 blockNumber,
        bytes[] calldata decryptionShares
    ) external onlyValidator {
        require(block.number >= blockNumber, "Too early");
        require(
            decryptionShares.length >= (validators.length * THRESHOLD) / 100,
            "Insufficient shares"
        );
        
        bytes32[] memory txIds = blockTxs[blockNumber];
        
        for (uint256 i = 0; i < txIds.length; i++) {
            bytes memory decrypted = thresholdDecrypt(
                pendingTxs[txIds[i]].encryptedData,
                decryptionShares
            );
            
            // Execute transaction
            _executeTx(decrypted);
        }
    }
}

2. Commit-Reveal Auction for Block Space

Priority Gas Auction Alternative

// Sealed bid block space auction
contract BlockSpaceAuction {
    struct Bid {
        bytes32 commitment;
        uint256 amount;
        bool revealed;
        address bidder;
    }
    
    mapping(uint256 => mapping(address => Bid)) public blockBids;
    mapping(uint256 => address[]) public blockWinners;
    
    uint256 public constant COMMIT_DURATION = 10; // blocks
    uint256 public constant REVEAL_DURATION = 5; // blocks
    uint256 public constant SLOTS_PER_BLOCK = 100;
    
    // Commit phase - submit sealed bid
    function commitBid(
        uint256 targetBlock,
        bytes32 commitment
    ) external payable {
        require(
            block.number < targetBlock - REVEAL_DURATION,
            "Commit phase ended"
        );
        
        blockBids[targetBlock][msg.sender] = Bid({
            commitment: commitment,
            amount: msg.value,
            revealed: false,
            bidder: msg.sender
        });
    }
    
    // Reveal phase - reveal bid amount
    function revealBid(
        uint256 targetBlock,
        uint256 bidAmount,
        uint256 nonce
    ) external {
        require(
            block.number >= targetBlock - REVEAL_DURATION &&
            block.number < targetBlock,
            "Not in reveal phase"
        );
        
        Bid storage bid = blockBids[targetBlock][msg.sender];
        require(!bid.revealed, "Already revealed");
        
        // Verify commitment
        bytes32 commitment = keccak256(
            abi.encodePacked(bidAmount, nonce, msg.sender)
        );
        require(commitment == bid.commitment, "Invalid reveal");
        
        bid.amount = bidAmount;
        bid.revealed = true;
    }
    
    // Determine winners based on highest bids
    function finalizeAuction(uint256 targetBlock) external {
        require(block.number >= targetBlock, "Auction not ended");
        
        // Sort bids and select top SLOTS_PER_BLOCK
        address[] memory winners = _selectWinners(targetBlock);
        blockWinners[targetBlock] = winners;
        
        // Refund non-winners
        _processRefunds(targetBlock, winners);
    }
}

3. MEV Redistribution

MEV Smoothing Pool

// Redistribute MEV profits to users
contract MEVRedistribution {
    struct EpochInfo {
        uint256 totalMEV;
        uint256 totalVolume;
        mapping(address => uint256) userVolume;
        mapping(address => bool) claimed;
    }
    
    mapping(uint256 => EpochInfo) public epochs;
    uint256 public currentEpoch;
    
    // Validators/searchers contribute MEV profits
    function contributeMEV() external payable {
        epochs[currentEpoch].totalMEV += msg.value;
        emit MEVContributed(msg.sender, msg.value, currentEpoch);
    }
    
    // Track user trading volume
    function recordVolume(address user, uint256 volume) external onlyDEX {
        epochs[currentEpoch].userVolume[user] += volume;
        epochs[currentEpoch].totalVolume += volume;
    }
    
    // Users claim MEV rebates proportional to volume
    function claimMEVRebate(uint256 epoch) external {
        require(epoch < currentEpoch, "Epoch not finalized");
        require(!epochs[epoch].claimed[msg.sender], "Already claimed");
        
        uint256 userVolume = epochs[epoch].userVolume[msg.sender];
        uint256 totalVolume = epochs[epoch].totalVolume;
        uint256 totalMEV = epochs[epoch].totalMEV;
        
        uint256 rebate = (userVolume * totalMEV) / totalVolume;
        
        epochs[epoch].claimed[msg.sender] = true;
        payable(msg.sender).transfer(rebate);
        
        emit MEVRebateClaimed(msg.sender, rebate, epoch);
    }
}

4. Application-Specific MEV Protection

DEX-Level Protection

// MEV-resistant AMM design
contract MEVResistantAMM {
    uint256 private constant PRICE_IMPACT_THRESHOLD = 100; // 1%
    uint256 private constant TIME_WEIGHTED_WINDOW = 600; // 10 minutes
    
    struct PricePoint {
        uint256 price;
        uint256 timestamp;
    }
    
    PricePoint[] public priceHistory;
    
    // Use time-weighted average price
    function getTWAP() public view returns (uint256) {
        uint256 weightedSum = 0;
        uint256 totalWeight = 0;
        uint256 cutoff = block.timestamp - TIME_WEIGHTED_WINDOW;
        
        for (uint256 i = priceHistory.length - 1; i >= 0; i--) {
            if (priceHistory[i].timestamp < cutoff) break;
            
            uint256 weight = block.timestamp - priceHistory[i].timestamp;
            weightedSum += priceHistory[i].price * weight;
            totalWeight += weight;
        }
        
        return weightedSum / totalWeight;
    }
    
    // Protect against sandwich attacks
    function swap(
        address tokenIn,
        address tokenOut,
        uint256 amountIn,
        uint256 minAmountOut
    ) external returns (uint256 amountOut) {
        uint256 twap = getTWAP();
        uint256 spotPrice = getSpotPrice(tokenIn, tokenOut);
        
        // Reject if price deviates too much from TWAP
        uint256 priceImpact = ((spotPrice > twap ? spotPrice - twap : twap - spotPrice) * 10000) / twap;
        require(
            priceImpact <= PRICE_IMPACT_THRESHOLD,
            "Price impact too high"
        );
        
        // Execute swap
        amountOut = _executeSwap(tokenIn, tokenOut, amountIn);
        require(amountOut >= minAmountOut, "Slippage");
        
        // Update price history
        priceHistory.push(PricePoint({
            price: getSpotPrice(tokenIn, tokenOut),
            timestamp: block.timestamp
        }));
        
        return amountOut;
    }
}

5. Cross-Chain MEV Mitigation

Synchronized Cross-Chain Execution

// Prevent cross-chain MEV extraction
contract CrossChainMEVProtection {
    struct CrossChainTx {
        uint256 sourceChain;
        uint256 targetChain;
        bytes payload;
        uint256 executeAfter;
        bytes32 merkleProof;
    }
    
    mapping(bytes32 => CrossChainTx) public pendingCrossChainTxs;
    mapping(uint256 => uint256) public chainSyncBlocks;
    
    // Synchronize execution across chains
    function submitCrossChainTx(
        uint256 targetChain,
        bytes calldata payload
    ) external returns (bytes32 txId) {
        // Calculate synchronized execution time
        uint256 sourceSync = chainSyncBlocks[block.chainid];
        uint256 targetSync = chainSyncBlocks[targetChain];
        uint256 executeAfter = Math.max(sourceSync, targetSync) + SYNC_DELAY;
        
        txId = keccak256(
            abi.encodePacked(
                block.chainid,
                targetChain,
                payload,
                block.timestamp
            )
        );
        
        pendingCrossChainTxs[txId] = CrossChainTx({
            sourceChain: block.chainid,
            targetChain: targetChain,
            payload: payload,
            executeAfter: executeAfter,
            merkleProof: bytes32(0)
        });
        
        emit CrossChainTxQueued(txId, targetChain, executeAfter);
    }
    
    // Execute only after synchronization point
    function executeCrossChainTx(bytes32 txId) external {
        CrossChainTx memory tx = pendingCrossChainTxs[txId];
        require(block.number >= tx.executeAfter, "Too early");
        require(tx.merkleProof != bytes32(0), "Not verified");
        
        // Execute payload
        _execute(tx.payload);
        
        delete pendingCrossChainTxs[txId];
    }
}

Recommendations

1. MEV Protection Architecture

recommended_architecture:
  network_level:
    mempool: "Threshold encrypted"
    ordering: "Fair sequencing service"
    consensus: "MEV-aware block production"
  
  protocol_level:
    dex_protection:
      - "TWAP oracles"
      - "Commit-reveal swaps"
      - "Dynamic fees based on volatility"
    
    lending_protection:
      - "Gradual liquidations"
      - "Dutch auction liquidations"
      - "MEV rebates to borrowers"
  
  user_level:
    tools:
      - "MEV protection aggregator"
      - "Private transaction relayer"
      - "MEV rebate tracker"

2. Implementation Strategy

1. Phase 1: Basic protection (private mempools)
2. Phase 2: Fair ordering (threshold encryption)
3. Phase 3: MEV redistribution (smoothing pools)
4. Phase 4: Advanced features (cross-chain sync)

3. Ecosystem Incentives

1. Validator Rewards: Extra rewards for MEV protection compliance
2. User Rebates: Share MEV profits with affected users
3. Builder Competition: Encourage ethical block building
4. Protocol Revenue: Capture MEV for protocol development

Implementation Roadmap

Phase 1: Basic Protection (Q1 2025)

• Private mempool implementation
• Basic frontrun protection
• MEV monitoring dashboard

Phase 2: Fair Ordering (Q2 2025)

• Threshold encrypted mempool
• Commit-reveal for sensitive txs
• Fair sequencing rules

Phase 3: MEV Redistribution (Q3 2025)

• MEV smoothing pools
• User rebate system
• Cross-chain MEV tracking

Related Repositories

• MEV Protection: https://github.com/luxfi/mev-protection
• Fair Sequencer: https://github.com/luxfi/sequencer
• MEV Dashboard: https://github.com/luxfi/mev-dashboard
• Flashbots Integration: https://github.com/luxfi/flashbots

Open Questions

1. Validator Incentives: How to ensure validators adopt MEV protection?
2. Cross-Chain Coordination: How to prevent cross-chain MEV?
3. Privacy Trade-offs: Balance between privacy and transparency?
4. Regulatory Concerns: Is MEV manipulation market manipulation?

Conclusion

MEV protection is crucial for Lux Network's success as a fair and efficient DeFi platform. By leveraging multi-chain architecture, threshold encryption, and innovative redistribution mechanisms, Lux can provide best-in-class MEV protection while maintaining decentralization and performance.

References

• Flashbots
• Fair Sequencing Services
• Threshold Encryption
• MEV Wiki

Copyright

Copyright and related rights waived via CC0.

Specification

Normative sections define the processes, data formats, and constants required for interoperability.

Rationale

The approach optimizes for clarity and resilience consistent with Lux’s architecture.

Backwards Compatibility

Additive; no breaking changes to current APIs or formats.

Security Considerations

Validate untrusted inputs, secure key material, and mitigate replay/DoS per recommendations.