Luis Bezzenberger, Product Manager at Brainbot GmbH, shares why technology is the way to go when combating MEV attacks.
A dark shadow has fallen over the fledgling world of decentralised finance as the challenges posed by
bad actors exploiting Maximal Extractable Value (MEV) threaten to derail DeFi’s growth. MEV is the
maximum amount of value that can be extracted from DeFi transactions and is often exploited by
centralising forces in the transaction supply chain to gain an unfair advantage, often stealing trades from others. The European Union’s Securities and Market Authority’s recommendation to treat MEV as a form of market abuse under the MiCA regulatory framework highlights the growing concern over this issue.
The Future of DeFi Hangs in the Balance
The implications of MEV on market efficiency and fairness are significant. While MEV extraction has
become a fundamental part of proof-of-stake systems, malicious MEV attacks can distort natural price
discovery mechanisms and disadvantage regular traders and investors. As regulators and industry
participants grapple with this issue, a balance must be sought that enhances market integrity without
stifling innovation. This will ultimately determine the future trajectory of DeFi and, more importantly,
whether DeFi can emerge as a viable alternative to the world of traditional finance (TradFi).
MEV attacks, including strategies like sandwich attacks, are not just technical nuisances but represent a
significant breach of ethical standards in financial systems. Front-running attacks are illicit in traditional
finance, and we can expect that related regulations will emerge for crypto. MEV extraction involves
validators, builders and sophisticated searchers using advanced bots to manipulate transaction orders to gain an unfair advantage over regular traders.
While some forms of back-running related MEV can help improve market efficiency by leveraging
arbitrageurs, the truth is, a lot of it is zero-sum. Especially the existence of front-running and malicious
MEV techniques such as sandwich attacks fundamentally undermine the principle of equal opportunity
that decentralised markets aim to uphold, creating an uneven playing field that favors those with access to specialised tools and knowledge.
MEV Attacks – More Than Just Unfair Advantage
The impact of MEV extraction on decentralised markets is multifaceted and deeply concerning. MEV
extraction is not a fair market force; it is a rigged game where some profit through the exploitation of
others.
On the one hand, MEV extraction through benign activities like arbitrage and liquidations can
enhance market efficiency by correcting price discrepancies and providing liquidity. However, the darker side of MEV involves malicious practices such as front-running and sandwich attacks, distorting asset prices, and destroying the fairness and integrity of decentralised markets.
Excessive MEV extraction can also lead to increased transaction costs and network congestion,
ultimately hampering the user experience and the growth of DeFi ecosystems. The increased volatility
caused by these MEV exploitations can also lead to sudden and unpredictable price movements, destabilising the market. This can have a huge impact in dissuading new participants from engaging with DeFi ecosystems.
Collectively, these issues threaten the core principles of fairness, transparency, and stability that are
crucial for a thriving decentralised financial ecosystem. The fact that hundreds of millions of dollars worth of losses yearly through MEV tactics on Ethereum alone highlights our collective failure to address this problem effectively.
Many current methods of ensuring fair and transparent transactions in the crypto space rely on
centralised systems, which inherently clashes with the core principle of decentralisation. This
contradiction presents a crucial challenge: how can we ensure fair and transparent transactions without
undermining the very spirit of decentralisation?
Fighting Decentralised Exploits With Decentralised Solutions
Decentralised problems require solutions that are decentralised in approach. This is demonstrated with
Shutter’s recent integration with Gnosis Chain, which directly implements a threshold-encrypted
mempool.
Unlike traditional mempools, where transactions are visible to everyone and can be
manipulated, a threshold-encrypted mempool conceals transaction details until their order and inclusion are committed to. This prevents these entities from exploiting transaction visibility for their gain, marking a significant advancement in securing the integrity of decentralised transactions.
This shift towards an encrypted mempool is an important step forward for DeFi, where transparency and trust can now be prioritised. By preventing manipulations at the protocol level, these innovations create a more trustworthy and transparent trading environment for all participants. Such advancements are also significant for institutional investors, who will now have the confidence to trade in the space, helping move crypto into the mainstream.
The Looming Threat of MEV: A Call to Protect DeFi’s Integrity
In our haste to innovate and grow, the industry has simply recreated the power structures that blockchain technology sought to dismantle. We now stand at a crucial juncture where collaboration between developers, exchanges, regulators, and other stakeholders across jurisdictions is critical in developing sophisticated protocols and mechanisms that preempt MEV strategies.
Eradicating MEV attacks transcends the goal of preventing financial losses; it is fundamentally about
restoring faith in the crypto market and demonstrating the potential of blockchain technology. Only by
doing so can we ensure that financial systems built on blockchain remain fair and transparent,
encouraging broader participation and trust in the market.
The crypto industry has long prided itself on its capacity to innovate and solve intricate problems. Now,
we confront one of our greatest challenges yet. The eradication of MEV attacks must become our top
priority and it is time to demonstrate that we can construct a financial system that genuinely serves
everyone, not just those with the technical prowess to exploit it.
A rising tide lifts all boats and by rising to this challenge, the industry can prove its resilience and commitment to fairness, setting a powerful example for future endeavors in decentralised finance.
Luis Bezzenberger has been actively involved in the Ethereum Layer 2 and protocol space since 2016. With a background in finance and a strong affinity for technology and crypto, he seamlessly transitioned into the blockchain sector. Since 2021, Luis has been serving as the Product Manager for Shutter Network at Brainbot GmbH, where he leverages his expertise to drive innovation and development.
