Game Theory Quantifies MEV Harm, Proposes Mitigation Strategies → Research

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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.

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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.

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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.

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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

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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.

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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