LayerZero's Otter Tackles MEV with Auction Theory

LayerZero has unveiled Otter, an automated market maker mechanism designed to combat MEV (miner extractable value) exploitation. The new design uses auction theory and borrows from the Vickrey-Clarke-Groves mechanism, which ensures that trade execution outcomes are determined by the collective pool of bids submitted during a batch window rather than the precise timing of individual trades.

The Otter system is designed to make honesty the dominant strategy for both traders and block builders. By removing the sequencing advantage, MEV exploitation collapses, and surplus value can be redirected locally within the liquidity pool to reward liquidity providers, subsidize fees, and support ecosystem participants.

However, LayerZero notes that Otter's guarantees only hold up if the underlying consensus layer is censorship-resistant. Without this property, block builders can exclude bids they don't like, undermining the batch auction's fairness guarantees.