Core concepts
MEV Module
Overview
A set of advanced permissioned engines that capture and redistribute MEV value back to protocol participants, ensuring there is no value leak to outside extractors, bringing capital efficiency to the next level.
MEV Solutions
| Solution | Status | Description |
|---|---|---|
| x33 AMO | LIVE | Arbitrages the redeem floor and gives back to voters ensuring all value is kept inside the protocol instead of going to outside arbitragers. |
| Backrun Arbitrage | COMING SOON | Frontruns every arbitrage and returns value to users, protecting LPers from LVR and adverse costs from toxic MEV bots. |
| Cross-chain Arbitrage | COMING SOON | Capture price discrepancies across Sonic, Ethereum, Arbitrum, and other L1/L2s. |
| Lending Arbitrage | COMING SOON | Supply → borrow → swap → repay cycles leveraging oracle heartbeats. |
Automated Market Operations (AMO)
Shadow's AMO system is designed to optimize protocol efficiency and maximize value for all participants through systematic arbitrage when the x33 redeem floor triggers.
| Performance | Distribution |
|---|---|
| $151,236.52 captured so far | 100% of proceeds distributed to voters |
The AMO system executes a systematic arbitrage process:
- Target liquidity pool identification
- Fee privilege utilization for optimal execution
- SHADOW → x33 conversion
- x33 → xSHADOW redemption
- Instant exit: xSHADOW → SHADOW
- Profit distribution to x33
| Revenue Stream | Allocation |
|---|---|
| Exit Proceeds | 50% → Voter rebase (deflationary; not distributed) |
| Arbitrage Earnings | 100% → x33 compounding |
Market inefficiencies are captured by the AMO bot, ensuring value stays within SHADOW through systematic arbitrage and optimal execution.
Security Framework
MEV executor authorization required (permissioned)
Atomic transaction execution
Complete on-chain verification
MEV Infrastructure
Shadow's MEV infrastructure represents a comprehensive arbitrage system designed to capture inefficiencies across chains, venues, and protocols—converting leaked value into sustainable revenue for the exchange and its participants.
Multi-Venue Arbitrage
| Dimension | Capability |
|---|---|
| Cross-chain arbitrage | Capture discrepancies between Sonic, Ethereum, Arbitrum, and other L1/L2s |
| DEX-DEX arbitrage | Trade across major DEXs to eliminate cross-venue inefficiencies |
| CEX-DEX arbitrage | Bridge centralized and decentralized venues for optimal price discovery |
Privileged Atomic Execution
| Feature | Benefit |
|---|---|
| Zero-fee swaps | Execute arbitrage on Shadow pools at 0% fee |
| Atomic multi-protocol arbitrage | Supply → borrow → swap → repay cycles against lending protocols during oracle heartbeat delays |
| Sub-block execution | Capture opportunities that exist only within block construction |
| Example: Cross-protocol arbitrage | Flow |
|---|---|
| Chainlink >0.5% update threshold can create 0–0.8% mispricings | 0%-fee swap → supply to lending market → borrow → swap back → repay (single atomic tx) |
Dynamic Fee Integration
The MEV infrastructure works seamlessly with Shadow's dynamic fee algorithm, which monitors both DEX and CEX volumes to optimize fee levels in real-time. This creates a feedback loop where:
Dynamic fees protect LPs during volatile periods
MEV bots capture arbitrage opportunities that would otherwise extract value from LPs
Arbitrage profits flow to the protocol and ultimately to xSHADOW holders
LPs are shielded from toxic flow while xSHADOW holders capture MEV value
Revenue Generation
The MEV infrastructure is designed to generate significant protocol revenue from cross-chain, cross-venue, and cross-protocol arbitrage, all distributed to xSHADOW holders through the x(3,3) model.
Stopping Exploitative Liquidity
What Is Exploitative Liquidity (JIT)?
Some liquidity providers (LPs) exploit decentralized exchanges (DEXs) by adding tight, one-tick liquidity positions to maximize token rewards, which are streamed per second to in-range liquidity. Using mempool access, they withdraw liquidity when a large swap is detected, avoiding impermanent loss while claiming rewards without supporting trades.
How It Works
Tight Position: LPs add liquidity in a narrow, one-tick range to earn maximum rewards per unit of capital.
Mempool Watch: They monitor the mempool for incoming swaps that could shift prices and cause losses.
Quick Exit: Before the swap hits, they remove liquidity, dodging impermanent loss.
Reward Grab: They still collect rewards for the brief time their liquidity was active.
This undermines genuine LPs who maintain stable liquidity and bear market risks.
Why DEXs Are Vulnerable
DEXs often fall prey to this exploit because:
Instant Reward Streaming: Rewards are paid per second and don't have proper mechanisms which require sustained liquidity.
No Holding Period: LPs can withdraw instantly, avoiding losses from swaps.
Shadow Exchange tackles these issues head-on with targeted solutions.
Solutions
| Solution | Status | Description |
|---|---|---|
| Abuse Prevention Module | LIVE | Using quantitative subgraph data and external monitoring, the protocol utilizes this module to prevent abuse from unproductive liquidity. |
| Delayed Rewards | LIVE | Requires LPs to hold liquidity for a minimum time before claiming rewards. |
| Fee Growth | LIVE | Links rewards to swap fees earned, rewarding actual trading support. |
Shadow Exchange's innovative solution stops exploitative one-tick liquidity strategies by rewarding only LPs who provide sustained trade-supporting liquidity.