Miner Extractable Value (MEV) has led to over $1.38 billion in extraction from Ethereum users across trading, liquidity provision, and other activities. Despite various attempts to mitigate this, MEV remains a persistent issue, impacting traders, liquidity providers, and users across the ecosystem.
Why Current Solutions Fail
The problem of front-running stems from the structure of blockchain networks, miner incentives, and the transparency of the system. Solutions like private mempools offer some mitigation but fall short of fully eliminating MEV.
- Private Mempools: Delayed Front-Running
Private mempools attempt to hide transactions untill the last moment before they are included in blocks. However, once transactions are made public, malicious actors can still exploit them. Time window to front-run is reduced but MEV itself is not eliminated - Mining/Validator Influence
Miners and validators still have access to private mempool data, enabling them to prioritize their own trades or high-paying users’ transactions. This creates opportunities for front-running even with private mempools in place. - Centralization Risks
In some cases, private mempools are centralized, allowing a small group of actors to control or view private transactions. This reintroduces centralized points of failure, creating new avenues for market manipulation and front-running.
These solutions only mitigate MEV but don’t address the root cause. The fundamental issue lies in the price impact of trades on AMM prices. Each trade shifts the price, creating inefficiencies that malicious actors can exploit by executing transactions before or after the original trade. This value extraction cycle is what drives MEV in decentralized markets.
Dextr’s Solution: Retrospective MEV Compensation through AVMM
Dextr’s Actively Validated Market Maker (AVMM) addresses MEV by transforming how orders are matched and transactions validated. Dextr employs low-latency price oracles to provide accurate, real-time price feeds. Operators use these feeds to match orders without price impact, further disincentivizing attempts to exploit MEV. This eliminates a key driver of MEV, ensuring fair execution for both traders and liquidity providers (LPs).
Unlike traditional AMMs, where MEV opportunities are accessible to anyone, Dextr limits order matching to trusted operators who provide economic security.
Traders and LPs who suspect front-running or other MEV exploitation can raise a claim by submitting the transaction hash. The validity of these claims is verified using zk-proofs and a zk co-processor, which analyze on-chain data to determine whether MEV, such as front-running, occurred. This process is automated, with no human consensus required. It ensures unbiased, transparent, and accurate verification for every claim, building trust in the system.
Operators are held accountable through slashing. If they engage in malicious practices, such as front-running, they are slashed and must compensate the affected user. Conversely, operators who match orders fairly are rewarded with a share of the protocol fees. This creates a robust incentive system that prioritizes fairness.
Dextr’s unique insurance model adds an additional layer of protection for both traders and LPs, ensuring that MEV risks are mitigated and trust is reinforced in every trade.
A Multi-Layered Insurance Model for 100% Compensation
To guarantee 100% compensation to traders and LPs affected by MEV, Dextr uses a multi-layered insurance reserve:
- Operator Stake: The first layer is the operator’s own stake, acting as collateral. If the operator is dishonest, their stake is slashed to cover the MEV loss to the user.
- Underwriters: If the operator’s stake isn’t enough, underwriters step in. These entities stake DXTR tokens and take on a capped risk of 5%. They also earn a portion of the protocol fee and REP benefits, further reinforcing the system.
- Dextr’s Internal Insurance Pool: Finally, Dextr maintains an internal pool made up of 13% of the total DXTR supply. This pool fills in the gaps if the operator and underwriter layers cannot fully cover compensation.
Figures subject to change.
The Role of DXTR Tokens in the Ecosystem
DXTR tokens are central to the Dextr ecosystem. They are used for:
- Eligibility for Claims: Only users who stake DXTR tokens can raise claims against MEV exploits.
- Underwriting Participation: Underwriters must stake DXTR tokens to join the insurance pool.
- Claim Settlement: When claims are validated, DXTR tokens are used by underwriters and the internal insurance pool to compensate affected users.
DXTR is integral to ensuring the sustainability of the system.
Conclusion
Dextr’s permissioned model and economic incentives set a new standard for handling MEV in DeFi. Current solutions only mitigate the problem. Dextr’s use of insurance, zk-proof validation, and a multi-layered protection system offers real, sustainable security. With DXTR tokens at the heart of the ecosystem, Dextr introduces a new era of trust and fairness in decentralized trading. In upcoming blogs, we’ll dive deeper into the inner workings of the model and explore the process details.
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