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PEB Separation and State Migration: Unmasking the New Frontiers of DeFi AML Evasion

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.

PEB Separation and State Migration: Unmasking the New Frontiers of DeFi AML Evasion

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.

Paper Structure

This paper contains 48 sections, 3 theorems, 3 equations, 3 figures, 1 table.

Table of Contents

  1. Introduction
  2. Transfer-Based AML as a Dominant Abstraction
  3. A Real Case that Violates the Abstraction: Intent-Centric Execution
  4. From Case to Structural Question
  5. Contributions
  6. Paper Overview
  7. Related Work
  8. Industrial Graph-Based AML Systems
  9. Regulatory Frameworks
  10. Academic Transfer-Graph Learning
  11. Execution-Trace-Based Analysis
  12. Limit-Order-Mediated Execution Structures
  13. Limit-Order-Mediated Value Migration Under Role Separation
  14. Role Identification: Principal, Executor, Beneficiary
  15. Structural Role Separation
  16. ...and 33 more sections

Key Result

proposition 1

Under PEB separation, transfer-layer observation may fail to uniquely attribute beneficiary realization to the principal, even when economically enforced migration occurs.

Figures (3)

  • Figure 1: Token flow of the USDC-to-DAI conversion via limit-order-mediated MEV execution. Stolen USDC is committed by the phishing-labeled address through a 1inch limit order and filled by an independent MEV bot, resulting in AMM-settled conversion into DAI delivered to a distinct EOA. No direct token transfer occurs between the maker and the receiver addresses, and no transfer-layer structure uniquely encodes their economic coupling.
  • Figure 2: Variant using AMM flash swap instead of external flash loan. The MEV filler sources DAI directly from the AMM via flash swap, fills the 1inch limit order, and repays the pool within the callback. The net state transition is equivalent to the Aave-based execution, demonstrating that external lending is not structurally required.
  • Figure 3: Token flow illustration of constructed transactions

Theorems & Definitions (5)

  • definition 1: Economic Migration
  • definition 2: Transfer-Layer Recoverability
  • proposition 1: Role-Mediated Indeterminacy
  • proposition 2: State-Mediated Non-Closure
  • theorem 1: Transfer-Layer Incompleteness, Informal