Game Theory Models MEV Dynamics and Mitigation Strategies ∞ Research

A close-up view presents a sophisticated metallic device, predominantly silver and blue, revealing intricate internal gears and components, some featuring striking red details, all situated on a deep blue backdrop. A central, brushed metal plate with a bright blue circular ring is partially lifted, exposing the complex mechanical workings beneath

The image displays abstract, fluid shapes in various shades of blue and reflective silver, showcasing a dynamic interplay of textures and light. On the left, translucent, frosted blue forms appear soft and ethereal, while the right features highly polished, metallic dark blue and silver surfaces with intricate patterns

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.

The image displays a highly detailed, abstract geometric form with a white polygonal mesh overlaying deep blue facets. This structure is partially encircled by thick, dark blue cables, suggesting a physical connection to a digital construct

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.

$A visually striking scene depicts two spherical, metallic structures against a deep gray backdrop. The foreground sphere is dramatically fracturing, emitting a luminous blue explosion of geometric fragments, while a smaller, ringed sphere floats calmly in the distance$

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)

A striking, clear, interwoven structure, reminiscent of a complex lattice, takes center stage against a soft, blurred blue and grey background. This transparent form appears to flow and connect, hinting at underlying digital processes and data streams

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.

This paper fundamentally shifts the understanding of MEV from an empirical observation to a rigorously modeled economic phenomenon, providing essential tools for designing resilient decentralized systems.

Signal Acquired from ∞ mdpi.com/analytics