Order but Not Execute in Order

This work aims to address the general order manipulation issue in blockchain-based decentralized exchanges (DEX) by exploring the benefits of employing differentially order-fair atomic broadcast (of-ABC) mechanisms for transaction ordering and frequent batch auction (FBA) for execution. In the suggested of-ABC approach, transactions submitted to a sufficient number of blockchain validators are ordered before or along with later transactions. FBA then executes transactions with a uniform price double auction that prioritizes price instead of transaction order within the same committed batch. To demonstrate the effectiveness of our order-but-not-execute-in-order design, we compare the welfare loss and liquidity provision in DEX under FBA and its continuous counterpart, Central Limit Order Book (CLOB). Assuming that the exchange is realized over an of-ABC protocol, we find that FBA achieves better social welfare compared to CLOB when (1) public information affecting the fundamental value of an asset is revealed more frequently than private information, or (2) the block generation interval is sufficiently large, or (3) the priority fees attached to submitted transactions are small compared to the asset price changes. Further, our findings also indicate that (4) liquidity provision is better under FBA when the market is not thin, meaning that a higher number of transactions are submitted by investors and traders in a block, or (5) when fewer privately informed traders are present. Overall, in the settings mentioned above, the adoption of FBA and of-ABC mechanisms in DEX demonstrates improved performance in terms of social welfare and liquidity provision compared to the continuous CLOB model.