Background

As you might already know, the Cardano blockchain is based on the eUTXO model. This means that, unlike account-based blockchains such as Ethereum, there’s no shared global state, and all transactions occur in parallel to each other (concurrently). While this design choice brings a wide array of benefits, such as determinism, lower transaction fees and less MEV/front-running, it has also brought its fair share of difficulties to dApps that need access to a global state (such as DEXs).

As such, Cardano DEXs like Minswap or Sundaeswap have resorted to “batching” — a solution where one or a series of off-chain sequencers are in charge of aggregating (or batching) a number of UTXOs, before they are submitted on chain and executed. This off-chain batching model presents a series of outsized problems for a DeFi dApp, namely:

• Centralization: this batching model means that batchers can decide to stop processing orders and can stop the trading or the adding/withdrawing of liquidity on the DeFi dApp at any time, which is antithetical to the spirit of decentralization.

• Custodiality: related to the former, since batchers can stop the withdrawal of liquidity, this also means they have control over your funds (whether or not to let you withdraw it) once you have provided them to the DeFi protocol.

• Batcher Extractable Value (BEV): batchers can constantly sandwich attack users because they can reorder the transactions freely. They can extract BEV for free, and with no repercussions (as batchers have no competition).

For example, let’s say an order comes in to buy 1,000 $ADA of Token A with 1% slippage set, meaning it turns into a limit order for buying 990 $ADA of Token A. A batcher could use this to profit themselves by buying Token A on the market such that the price moves and the order gets executed to buy 990 $ADA of Token A. Then, after the user has bought at a markup, the batcher could sell Token A for a profit. So the batcher would buy first, move the price up, execute the order, and then sell for a profit.

In essence, the eUTXO is a novel model with plenty of advantages and caveats. While some simple solutions have been designed to deal with some of its pain points (such as concurrency) it is high time new solutions were created that allow the entire Cardano DeFi space to move forward to a more optimal, fair and decentralized state. That is precisely the aim of Transaction Chaining.