MEV Mitigation via Game Theory and Mechanism Design ∞ Research

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Briefing

This foundational research addresses Maximal Extractable Value (MEV) as a critical challenge to decentralized finance (DeFi) fairness and efficiency. It introduces a multi-stage game-theoretic model to precisely characterize the strategic interactions among searchers, builders, and validators, proving that competitive MEV extraction results in a prisoner’s dilemma-like outcome and significant welfare losses for users. The paper proposes and formally analyzes mechanism design solutions, specifically commit-reveal schemes and threshold encryption, which directly mitigate harmful MEV by obscuring transaction content. This new theoretical framework and its validated solutions offer crucial insights for designing more robust and equitable blockchain architectures.

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Context

Before this research, empirical studies had quantified the scale of MEV extraction, demonstrating its impact on network congestion and user experience. However, a comprehensive, formal model characterizing the strategic interdependencies across the entire three-stage MEV supply chain was lacking. The prevailing theoretical limitation involved understanding the precise equilibrium behaviors emerging from interactions between searchers, builders, and validators and the system-wide welfare implications of these dynamics.

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Analysis

The paper’s core idea is a three-stage game-theoretic model that maps the strategic interactions within the MEV supply chain. This model establishes that searcher competition, characterized as a Bertrand game, leads to a prisoner’s dilemma-like outcome where individual rationality erodes collective welfare. The research introduces and formally analyzes commit-reveal schemes and threshold encryption as mitigation mechanisms. A commit-reveal scheme introduces a delay between transaction commitment and revelation, exponentially reducing latency-based MEV.

Threshold encryption directly eliminates front-running and sandwich attacks by encrypting transaction contents until block inclusion, provided a sufficient decryption threshold. These mechanisms fundamentally differ from prior approaches by directly targeting the information asymmetry exploited by MEV actors.

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Parameters

Core Concept ∞ Maximal Extractable Value (MEV)
New Mechanism 1 ∞ Commit-Reveal Schemes
New Mechanism 2 ∞ Threshold Encryption
Modeling Framework ∞ Three-stage game of incomplete information
Equilibrium Concept ∞ Perfect Bayesian Nash Equilibrium (PBNE)
Key Finding 1 ∞ Bertrand-style competition leads to prisoner’s dilemma-like outcome
Key Finding 2 ∞ Welfare loss grows quadratically with MEV extracted
MEV Reduction ∞ Commit-reveal schemes reduce MEV exponentially with reveal delay
Authors ∞ Benjamin Appiah, Daniel Commey, Winful Bagyl-Bac, Laurene Adjei, Ebenezer Owusu
Publication Date ∞ 15 September 2025

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Outlook

This research opens avenues for protocol designers to implement more informed sequencing policies, balancing security with user experience. The findings underscore the urgency of developing and deploying decentralized builder solutions to address concentration risks. Future work will extend these models to cross-chain MEV dynamics and explore the integration of privacy-preserving technologies with advanced auction mechanisms, ultimately fostering more equitable and stable decentralized ecosystems.

This research provides a critical theoretical foundation for understanding and mitigating systemic MEV inefficiencies, offering clear pathways to enhance blockchain fairness and security.

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