FairTraDEX: A Decentralised Exchange Preventing Value Extraction

We present FairTraDEX, a decentralized exchange (DEX) protocol based on frequent batch auctions (FBAs), which provides formal game-theoretic guarantees against extractable value. FBAs, when run by a trusted third-party, ensure that the unique game-theoretic optimal strategy for all players is to trade at the true market-implied price of the underlying token swap, excluding explicit, pre-determined fees. FairTraDEX replicates the key features of an FBA that provide these game-theoretic guarantees using a combination of set-membership in zero-knowledge protocols and an escrow-enforced commit-reveal mechanism. We extend the results of FBAs to handle monopolistic and/or malicious liquidity providers. We provide real-world examples that demonstrate that the costs of executing orders in existing academic and industry-standard protocols become prohibitive as order size increases due to basic value extraction techniques, popularized as maximal extractable value. We further demonstrate that FairTraDEX protects against these execution costs, guaranteeing a fixed fee model independent of order size, the first guarantee of it's kind for a DEX protocol. We also provide detailed Solidity and pseudo-code implementations of FairTraDEX, making FairTraDEX a novel and practical contribution.