Order but Not Execute in Order
Tiantian Gong, Aniket Kate
We explore combining batch order-fair atomic broadcast (of-ABC) and frequent batch auction (FBA) as a defense against general order manipulations in blockchain-based decentralized exchanges (DEX). To justify FBA, we compare the welfare loss of decentralized exchanges under two market designs: continuous limit order book (CLOB), where transactions are processed sequentially, and FBA, where transactions are arranged into batches and a uniform price double auction decides execution order. We model three types of players, common investors, privately informed traders, and arbitrageurs who can provide liquidity and front-run, along with a decentralized exchange. Assuming that the exchange is realized over an of-ABC protocol, we find that FBA can achieve better social welfare compared to CLOB when (1) public information affecting the fundamental value of an asset is revealed more frequently, or (2) the block generation interval is sufficiently large, or (3) the priority fees are small compared to the asset price changes, or (4) fewer privately informed parties exist. Intrinsic reasons are that first, blockchains already treat time as discrete and ensuring order fairness there is non-trivial, allowing even more room for latency arbitrage rents under CLOB; second, sufficiently large block creation interval allows for information dispersion; third, higher priority fees discourage front-running under CLOB; additionally, FBA prioritizes price in deciding execution order and fewer informed traders mean less adverse price impact.