Game Theory Models MEV, Mitigates Extraction with Mechanism Design ∞ Research

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Briefing

This paper rigorously addresses the pervasive challenge of Maximal Extractable Value (MEV) within decentralized finance by constructing a comprehensive three-stage game-theoretic model. It formally characterizes the strategic interactions between searchers, builders, and validators, revealing that intense Bertrand-style competition among searchers leads to a prisoner’s dilemma-like outcome, diminishing individual profits while simultaneously imposing significant welfare losses on users. The research quantifies the economic impact of MEV and evaluates mechanism design solutions, such as commit-reveal schemes and threshold encryption, demonstrating their potential to exponentially reduce extractable value. This theoretical framework provides a crucial foundation for designing more equitable and robust blockchain architectures, fostering long-term system stability and user trust.

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Context

Prior to this research, empirical studies had quantified MEV’s scale, describing the problem’s scope, yet a formal model elucidating the underlying strategic incentives across the entire MEV supply chain remained largely unaddressed. The prevailing theoretical limitation involved a fragmented understanding of how distinct actors’ rational, profit-maximizing behaviors collectively generate systemic inefficiencies and centralization risks. This paper directly addresses the need for a unified game-theoretic framework to explain the emergence of these observed outcomes and to rigorously evaluate potential mitigation strategies.

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Analysis

The paper introduces a three-stage sequential game of incomplete information to model MEV extraction. This model precisely defines the strategic choices and payoffs for searchers, who identify opportunities; builders, who construct blocks; and validators, who select blocks for consensus. The core mechanism demonstrates that multi-searcher competition functions as a Bertrand-style auction, driving individual searcher profits toward zero even as overall MEV extraction remains substantial.

The paper quantifies deadweight loss from MEV-induced slippage, establishing a quadratic relationship with the extracted value. Proposed mechanism design solutions, commit-reveal schemes and threshold encryption, fundamentally alter the information structure to disrupt latency-based attacks, providing a direct counter to existing predatory strategies.

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Parameters

Core Concept ∞ Maximal Extractable Value (MEV)
Modeling Framework ∞ Three-Stage Game-Theoretic Model
Solution Concept ∞ Perfect Bayesian Nash Equilibrium (PBNE)
Competitive Dynamic ∞ Bertrand-style Competition
Primary Mitigation Mechanisms ∞ Commit-Reveal Schemes, Threshold Encryption
Quantified Impact ∞ Quadratic Welfare Loss from Slippage
Empirical Validation Period ∞ 1 January 2024 to 1 June 2024
Inferred Competitor Count ∞ n ≈ 9 effective searchers
Key Authors ∞ Appiah, B. et al.
Publication Venue ∞ Analytics 2025, MDPI

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Outlook

This research opens new avenues for protocol designers to implement MEV mitigation strategies with a quantified understanding of their impact on system welfare and user experience. The exponential reduction in latency-based MEV achievable through commit-reveal schemes suggests a pathway to fairer transaction ordering in the next 3-5 years. Future research should extend these models to cross-chain MEV dynamics and explore heterogeneous agent behaviors, advancing the design of more robust and decentralized block-building solutions like SUAVE.

This game-theoretic analysis provides a foundational understanding of MEV, offering mathematically sound mechanisms to reclaim fairness and efficiency for decentralized systems.

Signal Acquired from ∞ mdpi.com