Towards a Theory of Maximal Extractable Value II: Uncertainty

TL;DR

This paper introduces a theoretical framework based on uncertainty principles to analyze and balance the trade-offs in reducing Maximal Extractable Value (MEV) in decentralized systems, emphasizing the need for application-specific sequencing rules.

Contribution

It unifies existing approaches to MEV reduction through a novel uncertainty principle framework, providing a quantitative trade-off analysis for transaction reordering and censorship.

Findings

Trade-off between transaction reordering flexibility and economic payoff complexity.

Sequencing rules in blockchains should be tailored to specific applications.

Neither fair ordering nor economic mechanisms alone can fully mitigate MEV.

Abstract

Maximal Extractable Value (MEV) is value extractable by temporary monopoly power commonly found in decentralized systems. This extraction stems from a lack of user privacy upon transaction submission and the ability of a monopolist validator to reorder, add, and/or censor transactions. There are two main directions to reduce MEV: reduce the flexibility of the miner to reorder transactions by enforcing ordering rules and/or introduce a competitive market for the right to reorder, add, and/or censor transactions. In this work, we unify these approaches via \emph{uncertainty principles}, akin to those found in harmonic analysis and physics. This provides a quantitative trade-off between the freedom to reorder transactions and the complexity of an economic payoff to a user in a decentralized network. This trade off is analogous to the Nyquist-Shannon sampling theorem and demonstrates that sequencing rules in blockchains need to be application specific. Our results suggest that neither so-called fair ordering techniques nor economic mechanisms can individually mitigate MEV for arbitrary payoff functions.