Why MEV Extraction Prolongs Peg Deviations

MEV creates persistent arbitrage loops. When a stablecoin depegs, searchers race to capture the spread via DEX arbitrage. This competition does not resolve the peg; it monetizes the deviation. The resulting transaction ordering and gas wars extract value from the system without correcting the underlying liquidity imbalance.

The peg is a secondary priority. Protocols like Curve Finance and Uniswap V3 provide the venue, but the proposer-builder separation (PBS) model on Ethereum ensures block builders prioritize fee-paying MEV bundles over peg-stabilizing transactions. The economic logic for builders is clear: profit maximization trumps system health.

Evidence from historical depegs. The March 2023 USDC depeg saw over $3.8M in arbitrage MEV extracted in 48 hours, primarily on Uniswap. The peg recovery lagged the on-chain liquidity replenishment by hours because MEV extraction drained liquidity that was needed for rebalancing.

Arbitrage is not instantaneous. The profitable window for correcting a peg deviation is the time between its discovery and the execution of a corrective trade. MEV searchers exploit this window, inserting their own profitable transactions ahead of the arb, delaying the price correction.

The MEV tax reduces arb profitability. Searchers capture a portion of the arb spread via priority gas auctions (PGAs) or sandwich attacks. This forces arbs to wait for larger deviations to justify the post-MEV profit, letting the peg drift further.

Cross-chain amplifies the problem. Bridges like Across and Stargate introduce finality delays. MEV bots on the destination chain can front-run the settlement transaction, adding a second layer of extraction and friction that stablecoin arbs must overcome.

Evidence: Research from Chainalysis and Flashbots shows MEV reduces arbitrageur profits by 15-30% on average. This measurable 'tax' is the direct economic friction that prolongs every peg deviation across major bridges.

Arbitrageurs create congestion. In theory, they correct price deviations between DEXs like Uniswap and centralized exchanges. In practice, their competing transactions flood the mempool, bidding up gas prices and delaying all other transactions.

High gas delays settlement. The resulting network congestion prevents the very arbitrage trades from settling quickly. This delay means the peg deviation persists longer, creating a larger, more profitable opportunity for the next wave of searchers.

This is a feedback loop. Each cycle of competition increases gas costs and settlement latency. Protocols like Flashbots' MEV-Boost and private RPCs from BloxRoute intensify this by prioritizing searchers, worsening the experience for regular users.

Evidence from L2s. Arbitrum and Optimism experience this during high volatility. Their low nominal fees attract massive arbitrage volume, which then spikes L1 data posting costs and creates a bottleneck, proving the loop is a cross-layer issue.

MEV arbitrage is path-dependent. Searchers profit from price differences, not corrections. Their optimal strategy is to front-run the natural rebalancing flow, capturing value before the peg restores. This creates a tax on convergence that prolongs deviations.

Cross-chain latency creates exploitable windows. Protocols like Across and LayerZero finalize transfers asynchronously. Searchers monitor these pending transactions to execute preemptive arbitrage on the destination chain, draining liquidity before the bridging assets arrive to correct the imbalance.

The result is extractive latency. Unlike traditional FX arbitrage that moves prices toward Purchasing Power Parity, cross-chain MEV often acts as a parasitic layer. Tools like Flashbots SUAVE aim to democratize this process, but the fundamental economic incentive remains to exploit, not resolve, the informational delay.

MEV is a latency tax that directly subsidizes arbitrage delays. Front-running and sandwich attacks on cross-chain swaps create a profitable delay between an asset's price moving on-chain and a bridge's oracle updating its price, which prolongs peg deviations.

Current bridges like Stargate/LayerZero are structurally vulnerable because their economic security depends on external oracles. This creates a predictable latency window where MEV bots extract value, disincentivizing immediate peg correction compared to intent-based systems like UniswapX.

The solution is architectural, not incremental. Mitigations like encrypted mempools (e.g., Shutter Network) or fair ordering (e.g., SUAVE) only hide information; they do not eliminate the economic incentive for delay. New designs must embed the arbitrage function into the bridge's core state machine.

Evidence: Bridges with slow oracle updates (12+ blocks) show peg deviations lasting 5-10x longer than atomic swaps. Protocols like Across using bonded relayers with instant liquidity demonstrate tighter pegs, proving the latency-peg correlation.