Game Theory Quantifies MEV Harm, Proposes Mitigation Strategies → Research

The image displays an abstract, interconnected arrangement featuring multiple white spheres, thin connecting lines, and a central cluster of clear crystalline and dynamic blue fluid structures. A prominent white ring partially encircles this core, all set against a gradient grey-blue background

A metallic, toroidal winding, composed of multiple polished loops, rests precisely on a circular, radial fin array. The symmetrical arrangement of both components, rendered in cool blue-grey tones, highlights their structured and interconnected nature

Briefing

The paper rigorously models Maximal Extractable Value (MEV) extraction within decentralized finance as a three-stage game involving searchers, builders, and validators. It establishes that the competitive dynamics of MEV lead to significant deadweight losses for users and identifies a prisoner’s dilemma-like outcome for searchers, where individually rational bidding erodes profits. The research proposes and quantifies the effectiveness of mechanism design solutions, such as commit-reveal schemes and threshold encryption, to mitigate harmful MEV, fundamentally reshaping how transaction ordering can be secured. This theoretical framework provides a critical lens for understanding and addressing the economic inefficiencies inherent in current blockchain transaction processing.

The image presents a close-up, angled view of a polished metallic cylindrical component, intricately encased within a shimmering, translucent blue fluid. This fluid exhibits undulating forms and bright reflections, creating a sense of dynamic motion around the static, segmented core

Context

Prior to this research, MEV was understood empirically, with studies quantifying its scale and analyzing isolated strategies. A formal, comprehensive model characterizing the strategic interdependencies across the entire MEV supply chain remained a critical gap. The prevailing theoretical limitation centered on understanding the underlying economic incentives driving MEV and developing theoretically sound countermeasures that address systemic inefficiencies beyond mere wealth transfer.

A sleek, rectangular device, crafted from polished silver-toned metal and dark accents, features a transparent upper surface revealing an intricate internal mechanism glowing with electric blue light. Visible gears and precise components suggest advanced engineering within this high-tech enclosure

Analysis

The core idea involves a three-stage sequential game of incomplete information. Searchers bid for transaction bundles, builders aggregate these into blocks, and validators select blocks. The model proves that intense competition among searchers, akin to Bertrand competition, drives their individual profits toward zero, while the system still incurs substantial welfare losses due to MEV-induced slippage.

Solutions like commit-reveal schemes introduce a delay that exponentially reduces latency-based MEV, making front-running unprofitable by increasing the risk of opportunity invalidation. Threshold encryption, by encrypting transaction content until inclusion, directly thwarts information-based attacks.

A sophisticated mechanical device features a textured, light-colored outer shell with organic openings revealing complex blue internal components. These internal structures glow with a bright electric blue light, highlighting gears and intricate metallic elements against a soft gray background

Parameters

Core Concept → Game-Theoretic MEV Model
New Mechanism → Commit-Reveal Transaction Ordering
Cryptographic Primitive → Threshold Encryption
Key Authors → Benjamin Appiah, Daniel Commey, Winful Bagyl-Bac, Laurene Adjei, Ebenezer Owusu
Empirical Validation → Ethereum On-Chain Data (Jan-Jun 2024)
Competition Model → Bertrand Competition
Welfare Loss Metric → Quadratic with MEV extracted

A vibrant blue, textured, and porous material forms the base, housing several intricate metallic electronic components. These components are precisely integrated into the organic-like structure, highlighting a blend of natural and technological elements

Outlook

This research opens new avenues for protocol designers to integrate robust mechanism design into blockchain architectures, particularly for Layer 2 rollups, enabling more equitable transaction ordering. Future work will explore cross-chain MEV dynamics and the integration of privacy-preserving technologies with auction mechanisms. The findings lay a groundwork for developing systems that balance efficiency with fundamental fairness, fostering a more stable and user-centric decentralized ecosystem.

The image presents a striking abstract visualization of interconnected technological units, dominated by a central, clearly defined structure. This primary unit features two transparent, faceted spheres glowing with blue light and intricate internal patterns, joined by a clean white mechanical connector

Verdict

This research fundamentally reframes Maximal Extractable Value as a quantifiable systemic inefficiency, providing essential theoretical tools and practical cryptographic mechanisms to restore fairness and integrity to decentralized transaction processing.

Signal Acquired from → mdpi.com