Research combing of the world's top conferences on computer security: DeFi and security

Written by: 0xLaughing, Rhythm BlockBeats

ACM CSS is known as one of the top four computer security conferences. The theme of ACM CSS 2022 "DeFi and Security"  Workshop A total of 10 papers have been included, which are roughly divided into three themes: MEV, DeFi game theory and mechanism design, and AMM. Most of the authors are from Columbia University, Cornell University, Zurich Federal Institute of Technology, and Stanford University , Bell Labs, Jump, a16z and other top universities and institutions, among which the authors include "Top European Scientists" and so on.

1. Theme: MEV

1. Redistribution via MEV Improving PoS Economic Security

Author:

Tarun Chitra (Founder & CEO Gauntlet< /a>)

Kshitij Kulkarni (PhD UC Berkeley EECS, Researcher Gauntlet)

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Summary:

Maximum extractable value (MEV) is generally regarded as a negative factor parasitic on-chain transactions, which will increase transaction costs for users. However recent research work has shown that MEV is not always bad for encrypted networks.

This paper demonstrates that if rational validators in a PoS protocol can earn part of the MEV revenue, then they will not be incentivized to unstake, thereby reducing the economic security of the system.

The author built a joint Staking-Lending dynamic system, in which a part of MEV revenue is used to increase Staking return. The paper demonstrates that this "MEV redistribution" avoids a "bad competitive balance" between staking and lending (meaning no users are staking under benign conditions on the protocol's reward inflation schedule), and conducts numerical simulations to demonstrate this . This points to another potential positive externality of MEV, provided that the "MEV redistribution" mechanism is well designed.

2. Strategic Peer Selection Using Transaction Value and Latency

Author:

Kushal Babel (PhD Cornell University, Researcher jump_crypto)

Lucas Baker (Researcher jump_crypto)

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Summary:

Many blockchains utilize a public peer-to-peer network for transactional communication. With increased activity in blockchain-based DeFi protocols, there has been a dramatic increase in the strategic behavior of bots and miners, often captured by the concept of maximum extractable value (MEV).

While much work has focused on the MEV generated by the smart contract layer or the consensus layer, in this paper the authors study How strategic agents can maximize achievable MEV through optimal selection of network peers.

Specifically, the authors study how to augment existing latency optimization definitions and algorithms with information from the transaction itself to optimize Peering algorithm. Model this optimization objective for two classes of consensus protocols:

1) Time-based (fair ordering)

2) A protocol based on a single leader

The author proposes an efficient local algorithm to strategically select peers and evaluate the algorithm on real-world data, demonstrating that it outperforms baseline algorithms that randomly select peers or do not utilize blockchain transaction information.

3. MEV Price: A Game Theoretic Approach To MEV

Author:

Bruno Mazorra (Researcher Bell Labs, PhD Universitat Pompeu Fabra - Barcelona)

Michael Reynolds (from University College London)

Vanesa Daza (Associate Professor Universitat Pompeu Fabra - Barcelona)

MEV generally refers to the value that privileged players can extract by strategically sequencing, vetting, and placing transactions on the blockchain. Each blockchain network, which we call a domain, has its own consensus, ordering, and block creation mechanisms, resulting in different optimal strategies for extracting MEV. The strategic behavior of rational players (called searchers) results in an MEV game with different effects and externalities in each domain.

Consider several ordering mechanisms that can determine the inclusion and location of transactions in blocks to construct alternative games , and then organize MEV extraction and minimize negative externalities, including sealed bid auctions, first-in-first-out and private-priority gas auctions, etc. However, so far, no one has made a sufficiently formal and abstract definition of the MEV game.

In this paper, the authors take a step towards formalizing the MEV game and compare different ranking mechanisms and its externalities. In particular, the authors attempt to formalize games arising from ordinary MEV chance, such as arbitrage and sandwich attacks. In defining these games, the authors utilize a theoretical framework that provides the basis for several important roles and concepts such as searcher, sequencer, domain, bundle. The authors also introduce the price of MEV as the price of disorder in the MEV game, providing a metric for formal comparisons between different ranking mechanisms.

Second, Theme: Game Theory and Mechanism Design of DeFi

1. EVM or Not EVM: Blockchain Compatibility and Networking Effect

Author:

Ruizhe Jia (PhD Columbia University)

Steven Yin(Working on Scriptus, PhD Columbia University)

Abstract:

The author studies the competition between blockchains in a multi-chain environment, a dominant EVM-compatible chain (such as Ethereum) Coexist with an alternative EVM-compatible chain (such as Avalanche) and an EVM-incompatible chain (such as Algorand).

While EVM compatibility allows existing Ethereum users and developers to more easily migrate to an alternative L1, the EVM does not Compatibility may allow projects to build a more loyal and "sticky" user base, and in turn a stronger ecosystem.

Therefore, choosing to be compatible with the EVM is not only a technical decision, but also an important strategic one.

In this paper, the authors develop a game-theoretic model to study this competitive dynamic and find that when in equilibrium , new practitioners/developers tend to adopt the dominant blockchain. To avoid losing the competition, alternative blockchains must “directly subsidize new entrants” or “provide better functionality,” which in practice can be achieved through lower transaction costs, faster finality, or greater network effects to form.

The authors find that EVM-compatible blockchains are more likely to attract users through direct subsidies, while EVM-incompatible blockchains It is more effective to provide better features/products to attract users.

2. Single NFT Auction Mechanism Design Framework

Author :

Jason Milionis (PhD Columbia University)

Dean Hirsch (Senior Researcher BigArch, PhD Columbia University)

Andy Arditi (Research and Engineering Scroll, PhD Columbia University)

Summary:

Recently NFT is open to the public Rapid popularity. However, typical NFT auction procedures are conducted in various special ways, while mostly ignoring the environment provided by the blockchain, that is, new possibilities, and also bring new challenges to auction design.

One of the main goals of this paper is to illuminate the currently unexplored design space of NFT auction mechanisms, especially those A fundamentally different aspect of the auction format from the same period. The author focuses on the situation where bidders value the auctioned NFT, that is, the single NFT auction situation.

In this case, the author defines an NFT auction mechanism, giving the ideal properties (broadly referred to as incentive compatibility and collusion resistance) of a perfect mechanism to satisfy, and prove that such a perfect mechanism cannot exist. Although we cannot have such a one-size-fits-all protocol, we can continue to consider loose notions of those properties we might want a protocol to satisfy, as a trade-off between enforceability and economic assurance.

Specifically, the author defines the concept of an equilibrium true auction, as long as the counterparty behaves truthfully, neither the seller nor the bidder can pass inauthentic behavior to increase its utility. The authors also define an asymptotic second-price auction in which the seller does not asymptotically lose any revenue compared to a theoretically optimal (static) second-price sealed-bid auction, in which case the bidder valuation is independently derived from certain distributions. The authors show why these two properties are highly desirable properties for an auction mechanism, and build the first NFT auction mechanism that can prove to have such a formal guarantee.

3. FairTraDEX: A Decentralized Exchange That Prevents Value Extraction

< b>Author:

Conor McMenamin (PhD Universitat Pompeu Fabra - Barcelona, Researcher Bell Labs)

Vanesa Daza (Associate Professor Universitat Pompeu Fabra - Barcelona)

Matthias Fitzi (Researcher IOHK)

Padraic O』Donoghue(Software Engineer, Susquehanna International Group)

Summary :

The author proposes FairTraDEX, a decentralized exchange (DEX) protocol based on Frequent Batch Auctions (FBA), which provides Formal game theory guarantees. FBA, operated by a trusted third party, offers a unique game-theoretic optimal strategy that ensures that the price shown to players is equal to the fair price of the liquidity provider, excluding explicit, pre-determined fees.

FairTraDEX replicates the key functionality of FBA, using a zero-knowledge protocol for collective membership and an escrow-enforced commit-reveal protocol combinations to provide these game-theoretic guarantees. Extend FBA results to deal with monopolies and/or malicious liquidity providers.

The authors provide real-world examples demonstrating that the cost of executing orders in existing academic and industry standard protocols increases with the order This becomes prohibitively large as the scale increases, which is the maximum extractable value that is popularized due to basic value extraction techniques.

The author further demonstrates that FairTraDEX can prevent these execution costs, guaranteeing a fixed fee model independent of order size, which is the DEX protocol The first guarantee. A detailed Solidity and pseudocode implementation of FairTraDEX is also provided, making FairTraDEX a novel and useful contribution.

3. Theme: AMM

1. Exploring Uniswap V3 price accuracy in times of crisis

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Author:

Lioba Heimbach (PhD ETH Zrich)

Eric Schertenleib (from ETH Zrich)

Roger Wattenhofer (Professor ETH Zrich)

Summary:

Financial markets have evolved over the centuries and exchanges have tended to Market making relies on the order book mechanism. However, latency on the blockchain prevents decentralized exchanges (DEXes) from utilizing the order book mechanism, leading to market designs that are more suitable for the blockchain. While Uniswap V2, the first widely adopted DEX, stood out for its stunning simplicity, the recent design overhaul introduced with Uniswap V3 has increased capital efficiency by adding complexity.

In this paper, the authors empirically study the ability of Unsiwap V3 to handle unexpected price shocks. The research analysis found that the price of Uniswap V3 was inaccurate during the recent sudden price drop of two stablecoins UST and USDT. The author believes that the lack of agility of Unsiwap V3 liquidity providers is the root cause of these worrying price inaccuracies. Additionally, the authors outline that there are too few incentives for liquidity providers to access liquidity pools given the high volatility in such market conditions.

2. Instructions on Borrowing Constant Function Market Maker Stocks

Author:

Tarun Chitra (Founder & CEO Gauntlet)

Guillermo Angeris (Lifer Stanford University, Head of Research Bain Capital Crypto)

Alex Evans (Partner Bain Capital Crypto)< /p>

Summary:

Uniswap, Balancer and Constant Function Market Makers (CFMMs) such as Curve make up some of the largest decentralized exchanges on smart contract platforms such as Ethereum.

As the amount of capital deposited in these agreements grows, improving the capital efficiency of Liquidity Providers (LPs) has become An increasingly important challenge. One way to improve efficiency is to allow LPs to borrow Ether or USD as shares in the CFMM protocol.

In this paper, the authors examine the safety and capital efficiency of allowing such loans. The authors provide sufficient conditions for LP borrowing to be at least as safe and capital efficient as direct borrowing in Aave/Compound. Furthermore, the authors show that the risk taken by CFMM lenders can be replicated through barrier options, which allow hedging of risk. Finally, the authors show that returns on borrowed CFMM LP stock replicate bounded convex payoffs.

Taken together, these results suggest that CFMM lending is a safety mechanism for capital efficiency.

3. Centralized Liquidity Analysis in Uniswap V3

Author:

Saleh Hashemseresht (from)

Mohsen Pourpouneh (from Kbenhavns Uni)

No paper links found, but the second author Mohsen Pourpouneh has a lot of Crypto aspectsResearch can be used for reference.

4. Automated market making, losses vs rebalancing

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Author:

Jason Milionis (PhD Columbia University)

Ciamac C. Moallemi (Professor Columbia University)

Tim Roughgarden (Head of Research a16z, Professor Columbia University< /a>)

Anthony Lee Zhang (Assistant Professor Chicago Booth)

Summary:

The authors consider the market microstructure of automated market makers, in particular constant-function market makers (CFMMs), from the economics of passive liquidity providers (LPs). In a frictionless, continuous-time Black-Scholes setting, where no trading In the case of fees, the author decomposes the return of LP into an instantaneous market risk component and a non-negative, non-decreasing and predictable component, which the author calls Loss-Versus-Rebalancing (LVR).

Market risk can be fully hedged, but once eliminated, LVR remains an operating cost that must be offset by transaction fee income, In order to make liquidity provision profitable.

The author shows how to interpret LVR in several ways:

2. As the time value of giving up future optionality;

3. As a compensator in the Doob-Meyer decomposition;

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4. As a form of profit, arbitrageurs trade pools for adverse selection costs, and as information costs, because liquidity pools cannot obtain accurate market prices.

LVR is distinct from the more common "impermanence loss" or "divergence loss" metrics; the latter metric is more fundamentally described as " Loss-Versus-Holding (Loss-Versus-Holding) is not really a running cost.

The author simply expresses LVR in closed form: instantaneous, it is the variance of the price and the marginal liquidity available in the liquidity pool The scaling product, or LVR, is the floating leg of the generalized variance interchange.

Therefore, LVR is easy Calibration based on market data and specific CFMM structure. LVR provides tradable decision-making key points for ex-ante and ex-post evaluation of CFMM LP investment decisions, and can also inform the design of CFMM protocols.

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