Briefing
The core research problem is the systemic threat Maximal Extractable Value (MEV) poses to the fairness and efficiency of decentralized finance, driven by the rational manipulation of transaction ordering by network participants. This paper establishes a formal theory of MEV by modeling the supply chain as a three-stage game of incomplete information, which rigorously proves that the competitive dynamics result in a Prisoner’s Dilemma-like outcome that reduces overall system welfare. The foundational breakthrough is the proposal and validation of mechanism design solutions, specifically commit-reveal schemes and threshold encryption, which cryptographically secure the transaction ordering process. The most important implication is that achieving fair, efficient, and welfare-maximizing decentralized systems requires a shift from purely economic incentive alignment to a hybrid architecture secured by cryptographic primitives that enforce information symmetry.
Context
Before this work, the MEV phenomenon was primarily understood through empirical observation and ad-hoc mitigation attempts, lacking a unified, foundational theoretical model. The prevailing challenge was the inability to formally characterize the strategic interactions between searchers, block builders, and validators in a way that could predict equilibrium behavior and rigorously prove the welfare loss. This absence of a formal game-theoretic basis hindered the development of provably secure and incentive-compatible mitigation strategies.
Analysis
The core idea is to translate the MEV supply chain into a formal, solvable economic model. The paper defines a three-stage game where players (searchers, builders, validators) act sequentially under incomplete information, a structure that accurately captures the timing and information asymmetry inherent in transaction propagation. The analysis identifies the Perfect Bayesian Nash Equilibria for common MEV attacks, demonstrating that the competitive nature of the market is best described as Bertrand-style competition, which drives profits to zero while maximizing the extraction from users.
The mechanism design solutions proposed ∞ threshold encryption and commit-reveal schemes ∞ fundamentally differ from previous approaches by addressing the root cause, which is the pre-block information leakage. They use cryptography to delay the revelation of sensitive transaction details until after the ordering decision is finalized, thereby eliminating the searcher’s advantage.
Parameters
- Three-stage game ∞ The formal model used to analyze the MEV supply chain interactions.
- Bertrand-style competition ∞ Characterizes the competitive dynamics in the current MEV market.
- Perfect Bayesian Nash Equilibria ∞ The solution concept derived for primary MEV attack vectors.
- Commit-reveal schemes ∞ A proposed mechanism to mitigate front-running by delaying transaction visibility.
Outlook
The immediate next steps involve the formal specification and standardization of the proposed cryptographic ordering mechanisms for deployment in shared sequencer networks and Layer 2 rollups. This research opens new avenues for mechanism design, shifting the focus from simply redistributing MEV to its fundamental elimination through information-theoretic constraints. The potential real-world application in 3-5 years is the creation of a provably fair transaction environment across all major decentralized exchanges and lending protocols, fundamentally securing the financial layer of the internet.
