Briefing
This foundational research addresses the systemic inefficiencies of Maximal Extractable Value (MEV) in decentralized finance through a rigorous, multi-stage game-theoretic model. It formally characterizes the strategic interactions between searchers, builders, and validators, demonstrating that intense Bertrand-style competition leads to a prisoner’s dilemma-like outcome, significantly reducing social welfare. The paper proposes and quantifies the effectiveness of mechanism design solutions, such as commit-reveal schemes and threshold encryption, in mitigating harmful MEV. This theoretical framework provides critical insights for designing more equitable and efficient blockchain architectures by reducing transaction predictability and its exploitative consequences.
Context
Before this research, the pervasive problem of MEV was largely understood through empirical observation and isolated analyses of specific attack vectors. A critical gap existed in a formal, system-wide model that characterized the strategic interdependencies across the entire MEV supply chain and quantified its cumulative welfare implications. The prevailing theoretical limitation centered on understanding how individually rational actions of market participants collectively lead to significant deadweight loss and centralization risks within blockchain ecosystems.
Analysis
The paper introduces a three-stage sequential game of incomplete information involving searchers, builders, and validators. This model reveals that multi-searcher competition operates as a Bertrand-style game, driving searcher profits to near-zero while concentrating power among builders. It mathematically proves that MEV-induced slippage causes deadweight loss proportional to the square of the extracted value, functioning as a regressive tax on users.
The core breakthrough lies in formally analyzing mitigation strategies ∞ commit-reveal schemes reduce latency-based MEV exponentially by introducing a reveal delay, and threshold encryption eliminates front-running by obscuring transaction content until inclusion. These mechanisms fundamentally alter the information asymmetry that MEV exploits.
- Core Concept ∞ Game-Theoretic MEV Model
- New Mechanisms ∞ Commit-Reveal Schemes, Threshold Encryption
- Equilibrium Characterization ∞ Perfect Bayesian Nash Equilibrium (PBNE)
- Competition Model ∞ Bertrand-style Competition
- Welfare Loss Metric ∞ Quadratic with Extracted MEV
- Key Authors ∞ Appiah, B. et al.
- Validation Data ∞ Ethereum On-Chain Data (Jan-Jun 2024)
Outlook
This research provides a robust framework for designing future blockchain protocols that inherently resist MEV extraction, offering a clear path toward more equitable transaction ordering. The quantification of mitigation strategies allows protocol designers to make informed trade-offs between security and user experience, particularly for Layer-2 rollups. Future research avenues include modeling heterogeneous agents, cross-chain MEV dynamics, and integrating privacy-preserving technologies directly into auction mechanisms to unlock new categories of decentralized applications.
Signal Acquired from ∞ mdpi.com/analytics