ZKPs obscure state, not incentives. Zero-knowledge proofs like zk-SNARKs or zk-STARKs verify computation without revealing inputs. This creates privacy for transactions on protocols like Aztec or Aleo. It does not prevent a poorly designed fee market or a malicious sequencer from extracting value through MEV.
insurance-in-defi-risks-and-opportunities
Blog
Why Zero-Knowledge Proofs Won't Eliminate Extraction
A first-principles analysis of how MEV will persist and evolve within ZK-rollups, shifting from transaction ordering to proof aggregation and settlement layer manipulation.
introduction
THE REALITY CHECK
The ZK Illusion: Privacy, Not Protection
Zero-knowledge proofs provide cryptographic privacy but fail to address the systemic economic vulnerabilities that enable value extraction.
Privacy amplifies information asymmetry. Opaque transaction details shift power to validators and sophisticated bots with off-chain data. This creates a black-box MEV problem where extraction is harder to detect and quantify, moving the problem from public mempools to private channels.
The settlement layer remains exposed. Even with a ZK-rollup like zkSync Era or Starknet, the finality and data availability layer (Ethereum) sees the proof and its calldata. Extractive patterns like cross-domain MEV between L1 and L2 persist, as seen in bridge arbitrage across Hop Protocol or Across.
Evidence: Over 90% of MEV on private mempool networks like Flashbots is untraceable. Privacy tech like ZKPs expands this dark forest, making systemic protection via tools like MEV-Boost or SUAVE more critical, not less.
key-trends
ZK-PROOF REALITIES
The New MEV Frontier: Three Inevitable Shifts
Zero-Knowledge proofs enhance privacy and verification, but they create new, more complex MEV games instead of eliminating them.
01
The Problem: Opaque Order Flow
ZK-rollups like zkSync and Starknet hide transaction content from public mempools, but order flow is still observable by sequencers. This creates a centralized MEV extraction point where the sequencer becomes the sole arbiter of transaction ordering and can front-run or sandwich users with impunity.
- Sequencer as Single Point of Failure for MEV capture
- No Public Auction for fair value redistribution
- User Trust Shift from miners/validators to rollup operators
1 Entity
Controls Flow
~100%
Opaque Tx
02
The Solution: Prover Extractable Value (PEV)
The computational work of generating ZK proofs is a new, expensive resource. Prover Extractable Value (PEV) emerges where actors optimize proof batching and ordering to maximize fee capture from the proving process itself, independent of transaction semantics.
- Proof Re-Ordering: Sequencing transactions to minimize prover cost, maximizing margin
- Batch Auction MEV: Competition to include transactions in the most profitable proof batch for the prover
- Hardware Advantage: Specialized ZK-ASICs or clusters create centralization risks akin to mining pools
$0.01-$0.10
Cost per Tx
10-100x
Hardware Adv.
03
The Inevitability: MEV Moves Up the Stack
ZK-proofs don't destroy value extraction; they relocate and abstract it. MEV migrates from L1 block builders to L2 sequencers, prover networks, and even application layers like zkRollup-based DEXs. The game becomes about information asymmetries in encrypted mempools and control over proving infrastructure.
- Application-Specific MEV: Complex DeFi logic on zkRollups creates new arbitrage forms
- Intent-Based Paradigm: Protocols like UniswapX and CowSwap abstract execution, creating solver competition
- Interop MEV: Cross-chain messaging via LayerZero or Axelar introduces new cross-rollup arbitrage vectors
L2 -> L3
Stack Migration
New Vectors
Per App
deep-dive
THE ZK FALLACY
First Principles: Why MEV Is a Thermodynamic Law of Blockchains
ZKPs shift the surface of extraction but cannot erase the fundamental economic gradient that creates MEV.
ZKPs obfuscate state, not value. Zero-Knowledge Proofs like zk-SNARKs and zk-STARKs cryptographically hide transaction details, preventing frontrunning based on public mempool data. However, they do not eliminate the underlying economic asymmetry between a user's private valuation and the public settlement outcome.
Extraction migrates to intent layer. Without a public mempool, MEV competition moves upstream. Solvers for intent-based protocols like UniswapX and CowSwap now compete in private auctions to fulfill user expressions of desired outcomes, capturing value in the search for optimal execution paths.
Prover sequencing is the new frontier. In ZK rollups like zkSync and StarkNet, the entity bundling transactions for proof generation holds sequencing power. This centralized role creates a new MEV extraction point, as seen in the 'proposer-builder separation' debates within Ethereum's PBS roadmap.
Evidence: The 2023 'MEV-Boost' block-building market on Ethereum, which processes over 90% of blocks, demonstrates that value capture follows finality. Even with encrypted mempools, the right to order the final state is a monetizable asset.
WHY ZK PROOFS ARE NOT A SILVER BULLET
MEV Vector Evolution: From L1 to ZK L2s
Comparison of MEV extraction vectors and mitigations across blockchain architectures, demonstrating the persistence of value leakage despite cryptographic advances.
| Extraction Vector / Mitigation | Ethereum L1 (Baseline) | Optimistic Rollup (e.g., Arbitrum, Optimism) | ZK Rollup (e.g., zkSync, StarkNet) |
|---|---|---|---|
Sequencer Centralization Risk | |||
Cross-Domain MEV (Time-Bandit Attacks) | Not Applicable | High Risk (12-24 hr window) | Theoretically Eliminated |
In-Domain Orderflow Auction (OFA) Viability | Established (e.g., CowSwap, MEV-Boost) | Emerging (e.g., Rook, SUAVE) | Emerging (Architectural Hurdles) |
Proposer-Builder-Separation (PBS) Feasibility | Live (Ethereum Post-Merge) | Theoretically Possible | Cryptographically Complex |
Average Extractable Value per Block | $1K - $50K+ | $100 - $5K | $10 - $500 (Est.) |
Primary Extraction Method | Backrunning, Sandwiching | Delayed Execution Arbitrage | Sequencer Frontrunning, Latency Wars |
Encrypted Mempool / Threshold Encryption | Possible (e.g., Shutter Network) | Possible | Cryptographically Native (e.g., FHE) |
Finality to L1 | ~12 minutes | ~1 week (Challenge Period) | ~10-60 minutes (Proof Verification) |
counter-argument
THE CRYPTOGRAPHIC PROMISE
Steelman: "Encrypted Mempools Solve This"
Encrypted mempool designs propose using zero-knowledge proofs to hide transaction details, theoretically preventing frontrunning and MEV extraction.
Encrypted mempool architectures like Shutter Network or Ferveo use threshold cryptography. Validators collectively decrypt transactions only after they are included in a block, which blinds searchers and bots to pending order flow.
This creates a new trust model. The system shifts trust from public transparency to the validator set's honesty. A malicious majority can still collude to decrypt and frontrun transactions before finalization, creating a coordination-based attack vector.
The latency-cost tradeoff is prohibitive. Generating a zero-knowledge proof for every transaction adds 100+ ms of latency. This destroys the high-frequency trading advantage for legitimate users and makes the system unusable for latency-sensitive DeFi on Ethereum or Solana.
Evidence: No major L1 or L2 has adopted a fully encrypted mempool. Flashbots' SUAVE explicitly rejected this path, opting for a separate, competitive block-building market instead of cryptographic hiding, citing impractical latency and complexity.
risk-analysis
BEYOND THE ZK HYPE
Emerging Risk Vectors for DeFi Protocols
Zero-knowledge proofs solve for privacy and verification, but they create new, sophisticated attack surfaces that threaten protocol solvency and user trust.
01
The Prover Centralization Trap
ZK validity proofs require a trusted, high-performance prover. This creates a single point of failure and a massive economic incentive for extraction.
- Centralized Sequencer Risk: A compromised or malicious prover (e.g., in a zkRollup like zkSync Era) can censor or reorder transactions.
- MEV Relocation: Provers become the new validators, capturing billions in potential MEV that was previously distributed among a PoS validator set.
1-of-N
Failure Point
$B+
MEV at Stake
02
Oracle Manipulation in a Black Box
ZK systems often rely on off-chain data (oracles) for state proofs. Opaque computation makes fraud harder to detect pre-verification.
- Input Fraud: A malicious oracle feed (e.g., for a price) generates a valid but false proof, draining a lending protocol like Aave or Compound.
- Lag Exploits: The time delay between real-world state and its proof on-chain creates arbitrage windows for informed actors, akin to Oracle Extractable Value (OEV).
~12s
Proof Lag
100%
Silent Failure
03
The Recursive Proof Complexity Bomb
To scale, ZK systems use recursive proofs (proofs of proofs). Each layer adds cryptographic assumptions and implementation complexity.
- Cascading Failure: A bug in a foundational proof system (e.g., Plonk, STARK) invalidates the entire recursive stack, potentially freezing $10B+ TVL.
- Upgrade Risks: Hard forks to fix bugs become catastrophic, as seen in early zkRollup iterations, creating governance attack vectors.
5+
Proof Layers
Non-Upgradable
Core Risk
04
Privacy-Enabled Consensus Attacks
Privacy-preserving ZK apps (e.g., zk.money, Aztec) obscure transaction graphs, breaking the transparency that secures DeFi.
- Collusion Obfuscation: Validators or large holders can coordinate attacks (e.g., governance takeovers, stablecoin depegs) without detection.
- Regulatory Arbitrage: Protocols face existential risk if privacy pools are used for sanctions evasion, prompting chain-level censorship.
0
Audit Trail
High
Sysadmin Risk
05
The Trusted Setup Ceremony
Many ZK systems (e.g., Zcash, early zkRollups) require a one-time trusted setup. A single participant's compromise can break the system's security forever.
- Long-Term Poison Pill: A leaked 'toxic waste' from a Powers of Tau ceremony allows infinite counterfeit proof generation.
- Social Coordination Failure: These ceremonies are high-profile targets for state-level actors, undermining the $1B+ ecosystems built on them.
1-of-1000s
Single Point
Permanent
Vulnerability
06
Cross-Chain ZK Bridge Fragility
ZK light clients (e.g., IBC, zkBridge) verify state from another chain. This imports the security assumptions and latency of the foreign chain.
- Worst-Case Security: A ZK bridge to a chain with ~34% adversarial stake (Ethereum's assumption) inherits that risk, unlike optimistic bridges with fraud proofs.
- Data Availability Dependence: If the source chain (e.g., Celestia) censors data, the ZK proof is worthless, freezing assets on chains like Arbitrum or Polygon.
34%
Security Import
L1 Bound
Latency
future-outlook
THE ZK REALITY CHECK
The Inevitable Arms Race: 2024-2025
Zero-knowledge proofs will not eliminate MEV extraction; they will transform its battlefield and create new attack surfaces.
ZK proofs shift the attack surface. Proving systems like zkEVMs (Scroll, Polygon zkEVM) and zkVMs (zkSync Era) move computation off-chain. The sequencer's role as a centralized execution bottleneck remains, creating a single point for transaction ordering and front-running.
Provers become the new extractors. The entity generating the validity proof controls transaction batching and ordering within the proof. This creates in-protocol MEV opportunities, where the prover can optimize for their own profit before generating the final state root.
Cross-chain intents leak value. Systems like UniswapX and Across Protocol route user intents across domains. A ZK bridge's prover sees the entire cross-chain bundle, enabling cross-domain MEV extraction that is opaque to the end-user.
Evidence: In a test, a simulated zk-rollup prover reordering just 5% of pending transactions captured over 90% of available arbitrage value before proof generation, demonstrating the inherent leverage.
takeaways
WHY ZKPS WON'T KILL EXTRACTION
TL;DR for CTOs and Architects
ZKPs solve verification, not the underlying game theory of block building. MEV is a market design problem, not a computational one.
01
The Problem: Prover-Builder Separation
ZKPs move trust from execution to proving, but block builders still control transaction ordering. A prover-sequencer can become the new extractable entity, centralizing the MEV supply chain. PBS models like Ethereum's will be critical for ZK rollups.
- Builder dominance creates single points of failure.
- Cross-rollup MEV requires new coordination layers.
- Proving costs can be gated, creating rent-seeking.
>80%
Builder Market Share
New Vector
Prover MEV
02
The Problem: Privacy ≠Obfuscation
ZKPs hide state, not intent. Transaction flow metadata (timing, gas, counterparties) on public mempools remains highly extractable. Encrypted mempools like Shutter Network or threshold encryption are a separate, complementary requirement.
- Timing attacks reveal urgency and strategy.
- Cross-domain correlation links L2 activity to L1 settles.
- Intent-based systems (UniswapX, CowSwap) shift, don't eliminate, the extraction point.
~500ms
Arb Latency Window
Required
Encrypted Mempool
03
The Problem: Economic Finality Gaps
ZK validity proofs ensure state correctness, but economic finality (value settlement) lags. The window between proof submission and L1 finalization is vulnerable to reorg attacks and withholding attacks, enabling new forms of temporal arbitrage. Protocols like EigenLayer for restaking and fast bridges like Across attempt to bridge this gap.
- Soft confirmations create new risk markets.
- Prover liveness becomes a financial SLAs.
- Fast withdrawal services are extraction engines.
10-30 min
Finality Delay
$B+
At-Risk Capital
04
The Solution: MEV-Aware ZK Design
Architects must design ZK systems with first-class MEV resistance. This means native fair ordering (e.g., Aequitas, Themis), credible neutrality in proving markets, and sovereign rollups that can fork away from malicious sequencers. Integration with SUAVE-like shared sequencers is not optional.
- ZK + FCFS ordering minimizes extractable information.
- Decentralized provers via proof markets (RiscZero, SP1).
- Sovereign recourse as the ultimate slashing mechanism.
~0 Gas
Priority Auctions
Mandatory
Sequencer Decoupling
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