Briefing
The core research problem centers on the systemic instability and user harm caused by Maximal Extractable Value (MEV) in decentralized finance, a challenge rooted in the strategic interactions of the transaction supply chain. This paper introduces a foundational three-stage game of incomplete information to model the competitive dynamics between searchers, builders, and validators, formally proving that the current MEV market is characterized by a Bertrand-style competition that drives the system toward a suboptimal Prisoner’s Dilemma equilibrium. The breakthrough proposes that a fundamental shift in transaction flow via mechanism design, specifically through the integration of commit-reveal schemes and threshold encryption, can dismantle the informational asymmetry exploited by MEV actors, thereby quantifying the potential for these primitives to mitigate harmful extraction and stabilize the consensus protocol.
Context
Prior to this research, MEV was understood primarily as an economic phenomenon where validators and block producers extract value by manipulating transaction order, insertion, or omission. The prevailing theoretical limitation was the lack of a rigorous, generalizable game-theoretic model that could formally characterize the strategic interactions of all participants ∞ searchers, builders, and proposers ∞ and derive the resulting equilibrium. This absence prevented the formal evaluation of mitigation strategies against a proven, rational actor model, leaving the community with empirical observations rather than a foundational understanding of the competitive forces that reduce overall network efficiency and fairness.
Analysis
The paper’s core mechanism is the application of a three-stage game of incomplete information to the MEV supply chain, which yields the Perfect Bayesian Nash Equilibria for common attack vectors like sandwiching. This model reveals that the competitive bidding among searchers to secure transaction priority functions as a Bertrand-style competition , where the incentive for rational actors is to continually undercut each other until the profit is nearly zero, a dynamic that ultimately reduces overall system welfare. The proposed solution is to implement mechanism design primitives at the transaction layer.
Commit-reveal schemes decouple the transaction submission from its content, ensuring the transaction’s position in the block is fixed before its value is revealed. Threshold encryption ensures transactions are unreadable until a majority of the block proposers agree on the ordering, eliminating the public mempool’s informational advantage and restoring transaction fairness.
Parameters
- Competition Model ∞ Bertrand-style competition (The game-theoretic model characterizing searcher bidding behavior).
- Equilibrium State ∞ Perfect Bayesian Nash Equilibria (The formal mathematical derivation of rational actor strategies in the three-stage game).
- Mitigation Primitives ∞ Commit-reveal and Threshold Encryption (The two mechanism design solutions quantified for their effectiveness in reducing harmful MEV).
- System Impact ∞ Prisoner’s Dilemma outcome (The proven state where individual rational extraction leads to collectively suboptimal system welfare).
Outlook
This research establishes the essential formal framework for all future MEV mitigation research, shifting the focus from ad-hoc solutions to provably secure mechanism design. In the next three to five years, this work will likely unlock a new generation of DeFi protocols that natively integrate commit-reveal or threshold encryption at the base layer to guarantee transaction fairness. It opens new avenues of research in designing incentive-compatible transaction ordering protocols that are provably resistant to information-based attacks, moving the industry closer to a truly equitable and stable on-chain financial system.
Verdict
The rigorous game-theoretic formalization of MEV as a systemic competition is a foundational contribution, mandating mechanism design as the primary cryptographic defense for decentralized system fairness.
