MEV in the Ethereum ecosystem and its implications for crypto venture capital investors

Abstract

MEV presents itself as a particularly stubborn problem that is a unique emergent property introduced by blockchain-based DeFi systems. The semi-fixed block times within these networks generate a novel asynchronous system, which directly impacts the applications built within said system. Combine this with an experimental design philosophy centered around creating robustly decentralized systems that function in absence of controlling centralized actors, and you get a Wild West parallel financial industry where lots of value is at stake and only the software code dictates how this value is interacted with. This unique cocktail of features found in permissionless, decentralized, and importantly valuable blockchains requires a complete rethinking of applied game theory, redesigns of technology, user-technology interactions, and regulatory frameworks. For the Ethereum network in particular, it is clear that under the status quo a significant amount of value in the network is being extracted by sophisticated actors, potentially threatening the decentralization and usability of the network, yet arguably simultaneously and paradoxically strengthening the security of the network.