  The transaction ordering dependency of the smart contracts building
decentralized exchanges (DEXes) allow for predatory trading strategies. In
particular, front-running attacks present a constant risk for traders on DEXes.
Whereas legal regulation outlaws most front-running practices in traditional
finance, such measures are ineffective in preventing front-running on DEXes due
to the absence of a central authority. While novel market designs hindering
front-running may emerge, it remains unclear whether the market's participants,
in particular liquidity providers, would be willing to adopt these new designs.
A misalignment of the participant's private incentives and the market's social
incentives can hinder the market from adopting an effective prevention
mechanism.
  We present a game-theoretic model to study the behavior of traders and
liquidity providers in DEXes. Our work finds that in most market
configurations, the private interests of traders and liquidity providers align
with the market's social incentives - eliminating front-running attacks.
However, even though liquidity providers generally benefit from embracing the
market that prevents front-running, the benefit is often small and may not
suffice to entice them to change strategy in reality. Thus, we find that inert
liquidity providers might require additional incentives to adopt innovative
market designs and permit the market's successful self-regulation.

Computer Science and Game Theory