The MEV Saga: Can Regulation Illuminate the Dark Forest?

• URL: http://arxiv.org/abs/2305.03718v1
• Date: Tue, 2 May 2023 10:41:08 GMT
• Title: The MEV Saga: Can Regulation Illuminate the Dark Forest?
• Authors: Simona Ramos and Joshua Ellul
• Abstract summary: Maximal Extractable Value or MEV has been one of the major concerns in blockchain designs as it creates a centralizing force which affects user transactions. We explain the concept behind the novel Proposal Builder Separation design as an effort by Flashbots to increase decentralization through modularity. We discuss the shift of trust from validators to builders in PoS blockchains such as, acknowledging the impact that the later ones may have on users' transactions.
• Score: 2.512827436728378
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: In this article, we develop an interdisciplinary analysis of MEV which desires to merge the gap that exists between technical and legal research supporting policymakers in their regulatory decisions concerning blockchains, DeFi and associated risks. Consequently, this article is intended for both technical and legal audiences, and while we abstain from a detailed legal analysis, we aim to open a policy discussion regarding decentralized governance design at the block building layer as the place where MEV occurs. Maximal Extractable Value or MEV has been one of the major concerns in blockchain designs as it creates a centralizing force which ultimately affects user transactions. In this article, we dive into the technicality behind MEV, where we explain the concept behind the novel Proposal Builder Separation design as an effort by Flashbots to increase decentralization through modularity. We underline potential vulnerability factors under the PBS design, which open space for MEV extracting adversarial strategies by inside participants. We discuss the shift of trust from validators to builders in PoS blockchains such as Ethereum, acknowledging the impact that the later ones may have on users' transactions (in terms of front running) and censorship resistance (in terms of transaction inclusion). We recognize that under PBS, centralized (dominant) entities such as builders could potentially harm users by extracting MEV via front running strategies. Finally, we suggest adequate design and policy measures which could potentially mitigate these negative effects while protecting blockchain users.

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