MEV Mitigation via Game Theory and Novel Mechanism Design ∞ Research

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Briefing

This paper rigorously addresses the pervasive challenge of Maximal Extractable Value (MEV) within decentralized finance by presenting a novel game-theoretic framework. It precisely models the strategic interactions among network participants, revealing how current market structures compel aggressive value extraction. The research proposes and quantifies the efficacy of mechanism design solutions, specifically commit-reveal schemes and threshold encryption, as foundational interventions. This new theory offers a critical roadmap for developing blockchain architectures that promote equitable transaction ordering and robust system welfare.

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Context

Prior to this research, the burgeoning field of decentralized finance grappled with the inherent centralization risks and efficiency losses introduced by MEV. The prevailing theoretical limitation centered on understanding the strategic incentives driving MEV extraction, particularly how rational actors exploit transaction ordering within a block. This academic challenge manifested as issues like sandwich attacks and front-running, which undermine user trust and overall system fairness, creating a prisoner’s dilemma-like outcome where individual rationality degrades collective welfare.

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Analysis

The core mechanism involves a three-stage game of incomplete information, meticulously mapping the strategic interplay between searchers, block builders, and validators in the MEV supply chain. This model derives Perfect Bayesian Nash Equilibria, offering a precise characterization of attacker behaviors, such as those observed in sandwich attacks. The paper identifies the current MEV market as a Bertrand-style competition, driving aggressive extraction.

To counteract this, it introduces and evaluates two primary mechanism design solutions ∞ commit-reveal schemes, which defer transaction content revelation, and threshold encryption, which ensures transactions remain opaque until a collective decryption threshold is met. These solutions fundamentally alter the incentive landscape, fostering more benign outcomes.

Core Problem ∞ Maximal Extractable Value (MEV) in DeFi
New Mechanism ∞ Game-Theoretic MEV Model, Commit-Reveal Schemes, Threshold Encryption
Key Authors ∞ Appiah, B. et al.
Publication Venue ∞ Analytics 2025
Validation Method ∞ On-chain Ethereum data analysis
Competitive Dynamic ∞ Bertrand-style competition

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Outlook

This research opens significant avenues for designing future blockchain protocols that inherently resist harmful MEV extraction. Its insights will inform the development of next-generation transaction mempools and block-building processes, potentially unlocking truly fairer and more efficient decentralized exchanges. The proposed mechanism design solutions offer tangible pathways for real-world applications within the next 3-5 years, enabling a more robust and trustworthy DeFi ecosystem.

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Verdict

This research profoundly advances the understanding of MEV, providing critical game-theoretic foundations and practical mechanism design solutions essential for securing the long-term integrity and fairness of decentralized systems.

Signal Acquired from ∞ mdpi.com