LayerZero has introduced Otter, a new automated market maker design that aims to curb MEV exploitation and redirect value to liquidity providers. The design, built on auction theory, is meant to make trading fairer, but its success hinges on censorship resistance.
The MEV Problem
MEV, or maximal extractable value, is the profit that can be captured by reordering transactions within a block. Otter's design targets this practice, aiming to reduce the exploitation that has long plagued decentralized exchanges. By shifting value back to liquidity providers, the AMM hopes to create a more equitable trading environment.
Auction Theory at the Core
Otter is built on auction theory, a framework for allocating resources through competitive bidding. The idea is to use auctions to determine trade execution, which can make it harder for bots to front-run trades. The specifics of how the auction works haven't been fully detailed, but the theory suggests a mechanism where participants bid for the right to execute trades, potentially reducing the information advantage that MEV extractors rely on.
The Censorship Resistance Catch
The design's success is contingent on censorship resistance, as stated in the introduction. That means the auction mechanism only works if the underlying network can't be censored. If a validator or sequencer can block transactions, the auction could be gamed, undermining the fairness Otter aims to achieve. This is a significant constraint, as many networks have some form of censorship risk.
Whether Otter can deliver on that promise will depend on the network's ability to resist censorship, a test that has yet to come. The design is out, but the real-world deployment will be the proof.
