Paper: arXiv 2603.26290

Authors: Yixin Cao, Xianfeng Cheng, Yijie Liu

Abstract

Transfer-based anti-money laundering (AML) systems monitor token flows through transaction-graph abstractions, implicitly assuming that economically meaningful value migration is sufficiently encoded in transfer-layer connectivity. In this paper, we demonstrate that this assumption, the bedrock of current industrial forensics, fundamentally collapses in composable smart-contract ecosystems. We formalize two structural mechanisms that undermine the completeness of transfer-layer attribution. First, we introduce Principal-Execution-Beneficiary (PEB) separation, where intent originators, transaction executors (e.g., MEV searchers), and ultimate beneficiaries are functionally decoupled. Second, we formalize state-mediated value migration, where economic coupling is enforced through invariant-driven contract state transitions (e.g., AMM reserve rebalancing) rather than explicit transfer continuity. Through a real-world case study of role-separated limit order execution and a constructive cross-pool arbitrage model, we prove that these mechanisms render transfer-layer observation neither attribution-complete nor causally closed. We further argue that simply expanding transfer-layer tracing capabilities fails to resolve the underlying attribution ambiguity inherent in structurally decoupled execution. Under modular composition and open participation markets, these mechanisms are structurally generative, implying that heuristic-based flow tracing has reached a formal observational boundary. We advocate for a paradigm shift toward AML based on execution semantics, focusing on the restitution of economic causality from atomic execution logic and state invariants rather than static graph connectivity.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 4.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a highly novel conceptual framework for understanding the limitations of graph-based AML in DeFi, introducing formal mechanisms like PEB separation and state-mediated migration. While the theoretical modeling and formalization of contract state transitions are mathematically solid, empirical validation relies heavily on qualitative case studies rather than extensive backtests or statistical datasets.

Research Flowchart

  flowchart TD
    A["<b>Research Goal:</b><br>Evaluate transfer-based AML effectiveness in composable DeFi ecosystems"] --> B["<b>Formalization:</b><br>Define PEB Separation & State-Mediated Value Migration"]
    
    B --> C["<b>Data & Inputs:</b><br>DeFi state invariants, AMM reserve mechanics & MEV execution logs"]
    
    C --> D["<b>Empirical & Constructive Modeling:</b><br>Role-separated limit orders & cross-pool arbitrage analysis"]
    
    D --> E["<b>Key Finding 1:</b><br>Transfer graphs are neither attribution-complete nor causally closed"]
    
    D --> F["<b>Key Finding 2:</b><br>Heuristic flow tracing hits a formal observational boundary"]
    
    E & F --> G["<b>Outcome / Paradigm Shift:</b><br>Advocate for AML based on atomic execution semantics & state invariants"]

Cited References (33)

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and 25 more
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1 of 33 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.