Briefing
The core research problem addresses the systemic instability and user harm caused by Maximal Extractable Value (MEV), which arises from the block proposer’s arbitrary power to order transactions. The foundational breakthrough is the formalization of the entire MEV supply chain ∞ involving searchers, builders, and validators ∞ as a three-stage game of incomplete information, leading to the derivation of the Perfect Bayesian Nash Equilibria. This formal model demonstrates that the competitive extraction of MEV operates as a Bertrand-style competition, compelling rational actors toward a Prisoner’s Dilemma-like outcome that maximizes individual profit while reducing overall system welfare. The single most important implication is that MEV’s negative externalities are a mathematically provable consequence of the current architecture, establishing that mechanism design solutions like commit-reveal schemes and threshold encryption are necessary to enforce a system-wide equilibrium that aligns individual incentives with collective security.
Context
The prevailing theoretical challenge in decentralized systems is the unconstrained power of block producers over transaction ordering, which has led to the emergence of Maximal Extractable Value. Prior to this work, MEV was largely quantified empirically or analyzed through isolated strategies, lacking a comprehensive, formal model that characterized the strategic interdependencies of the entire supply chain. This gap meant that proposed mitigation strategies were often heuristic, failing to prove that they could fundamentally shift the equilibrium behavior of all rational, self-interested network participants away from welfare-reducing extraction. The absence of a unified game-theoretic framework prevented the rigorous quantification of the true systemic cost of MEV.
Analysis
The paper’s core mechanism is the three-stage game of incomplete information, which models the strategic interaction between searchers (identifying opportunities), builders (aggregating bundles), and validators (proposing the final block). This model fundamentally differs from prior approaches by integrating the entire economic and technical supply chain into a single formal proof system. The logic reveals that the competition among searchers to capture value drives their bids down to a near-zero profit margin ∞ a characteristic of Bertrand competition ∞ but the resulting transaction ordering is still detrimental to users and network health.
The breakthrough is the formal proof that this highly competitive environment paradoxically creates a system-wide Prisoner’s Dilemma, where the Nash Equilibrium is suboptimal for the collective. Mitigation is then framed as a mechanism design problem ∞ introducing cryptographic primitives such as threshold encryption or commit-reveal schemes alters the game’s information structure, which forces the new equilibrium to be strategy-proof and welfare-enhancing.
Parameters
- Game-Theoretic Model ∞ Three-stage game of incomplete information.
- Competitive Dynamic ∞ Bertrand-style competition among MEV searchers.
- Systemic Outcome ∞ Prisoner’s Dilemma-like equilibrium for overall system welfare.
- Empirical Scale ∞ Over $1.2 billion extracted so far from DeFi protocols.
Outlook
This foundational analysis opens new avenues of research by establishing a rigorous, quantifiable framework for evaluating all future MEV mitigation techniques. In the next three to five years, this theory will directly inform the design of transaction ordering protocols in modular and Layer 2 architectures, moving beyond heuristic solutions to cryptoeconomically proven ones. Potential real-world applications include the widespread adoption of encrypted mempools and shared sequencing layers that are provably resistant to front-running and sandwich attacks, thereby creating a truly fair and equitable environment for decentralized finance users. The work suggests that the next generation of blockchain architecture will be defined by its ability to enforce a strategy-proof transaction ordering mechanism.
