How to Reduce MEV Externalities

Maximal Extractable Value (MEV) refers to the profit that validators or sophisticated actors can extract by reordering, censoring, or inserting transactions within a block. While MEV is an inherent feature of permissionless blockchains, its negative externalities—costs borne by the broader network—are significant. These include network congestion, increased gas fees for all users, and a degraded user experience due to front-running and sandwich attacks. The goal of mitigation is not to eliminate MEV, which is often impossible, but to reduce its harmful side effects and democratize access to value extraction.

For developers building decentralized applications (dApps), architectural choices can minimize MEV leakage. Using commit-reveal schemes for sensitive transactions, like auctions or governance votes, prevents front-running by hiding the transaction's intent until it is finalized. Employing fair ordering protocols such as Flashbots' SUAVE or Chainlink's Fair Sequencing Service (FSS) can help decouple transaction ordering from block production. Furthermore, designing mechanisms with time-weighted average prices (TWAPs) or using liquidity sources resistant to manipulation, like Uniswap v3, can reduce the profitability of sandwich attacks on swaps.

Users can protect themselves by adjusting their transaction strategies. Submitting transactions with a private mempool like Flashbots Protect or the Taichi Network prevents them from being visible in the public mempool, making them immune to front-running. Using gas auction tools that automatically set competitive but non-excessive priority fees can help avoid overpaying during periods of high MEV activity. For large trades, splitting them into multiple smaller transactions over time (batching) or using DEX aggregators with built-in MEV protection, like 1inch or CowSwap, are effective countermeasures.

At the protocol and validator level, solutions are emerging to internalize MEV externalities. Proposer-Builder Separation (PBS), a core feature of Ethereum's roadmap, separates the roles of block building and proposal. This allows for a competitive market of specialized builders who can optimize for MEV, while ensuring its profits are more widely distributed through the auction process. Encrypted mempools and threshold encryption schemes are also in development to keep transaction content private until a block is proposed, fundamentally altering the MEV landscape.

Maximal Extractable Value (MEV) refers to the profit that validators, searchers, or other network participants can extract by reordering, censoring, or inserting transactions within a block. While MEV is a natural byproduct of permissionless block construction, its externalities—the negative impacts on other users—are a critical concern. These include network congestion, increased gas fees for regular users, and transaction censorship. The most common forms of harmful MEV are front-running (executing a transaction ahead of a known pending transaction) and sandwich attacks (placing transactions before and after a victim's trade to manipulate price).

To effectively reduce MEV externalities, you must understand the core actors in the MEV supply chain: Users submit transactions, Searchers run bots to detect profitable opportunities and bundle transactions, Builders construct full blocks from these bundles, and Validators (or proposers) select and attest to the final block. The centralization pressure arises because sophisticated players with better infrastructure can outcompete others, leading to a few entities controlling most block production. This threatens the censorship-resistance and credible neutrality that are foundational to decentralized networks.

A primary technical prerequisite is familiarity with the proposer-builder separation (PBS) design paradigm. PBS formally separates the role of the block proposer (validator) from the block builder. Builders compete in a sealed-bid auction to have their block accepted, which can help democratize access to block construction. On Ethereum, this is implemented via MEV-Boost, an out-of-protocol middleware that allows validators to receive blocks from a competitive marketplace. Understanding how relays and builders operate within this ecosystem is essential for evaluating decentralization and censorship risks.

From an application developer's perspective, reducing MEV starts with smart contract design. Techniques include using commit-reveal schemes for sensitive transactions (like auctions or governance votes), which hide intent until a later reveal phase. Fair sequencing services or threshold encryption can be integrated to order transactions fairly before they are publicly known. For DEXs, implementing liquidity provider (LP) safeguards—such as limiting large, single-block trades or using time-weighted average price (TWAP) oracles—can reduce the profitability of sandwich attacks on their users.

Validators and node operators have a direct role in mitigating externalities. Running MEV-Boost with a diverse set of censorship-resistant relays (like the Ultra Sound Relay or Agnostic Relay) helps distribute power and prevent transaction filtering. Monitoring builder centralization metrics and choosing relays based on their inclusion lists and ethical policies is an operational best practice. Ultimately, the long-term solution relies on in-protocol PBS and crLists (censorship resistance lists), which are active areas of Ethereum protocol development to enshrine these protections at the consensus layer.

MEV externalities are the unintended, often negative, consequences of MEV extraction that affect the broader network, not just the searchers and validators profiting from it. The primary externalities include network congestion, increased transaction costs for regular users, and centralization pressures. For example, during periods of high MEV opportunity, such as a major NFT mint or DeFi liquidation event, searchers flood the network with transactions, bidding up gas prices. This creates a negative-sum game where the profits extracted by a few come at a direct cost to all other users in the form of failed transactions and unpredictable fees.

One of the most critical externalities is the risk of chain reorgs. To capture arbitrage, searchers may incentivize validators to re-mine recent blocks, undermining the blockchain's finality guarantee. This was demonstrated in the August 2022 incident on Ethereum, where a searcher paid a validator to reorg seven blocks to capture a $20M arbitrage opportunity. Such behavior erodes trust in the network's stability. Furthermore, the high profitability of MEV encourages the growth of proposer-builder separation (PBS) and sophisticated infrastructure, which can lead to validator centralization as only large, well-capitalized entities can compete effectively.

These externalities also distort economic incentives and application design. DApps must be engineered defensively against MEV, leading to complexity and gas overhead. Users learn to distrust pending transaction pools, relying on private RPCs like Flashbots Protect. The ecosystem response has been the development of MEV mitigation protocols. Solutions like Cow Swap use batch auctions with uniform clearing prices to eliminate frontrunning. SUAVE (Single Unified Auction for Value Expression) by Flashbots aims to create a neutral, decentralized block building market. Implementing encrypted mempools and commit-reveal schemes are other technical approaches to reduce the surface area for predatory MEV.

For developers and protocol designers, reducing MEV externalities is a security imperative. Key strategies include: using fair ordering mechanisms like first-come-first-served based on commit timestamps, designing systems with minimal state dependencies to reduce arbitrage surface, and leveraging private transaction channels. On Ethereum, adopting EIP-1559 has helped by making base fees more predictable, though priority fees remain a bidding ground. The long-term health of public blockchains depends on continuing to socialize the research and implementation of MEV-aware protocol designs that align extractable value with public good.

Maximal Extractable Value (MEV) refers to profit miners or validators can extract by reordering, censoring, or inserting transactions within a block. While some MEV is inevitable, its negative externalities—like network congestion, failed transactions, and unfair user outcomes—are a major concern for decentralized applications. Smart contract developers can architect their systems to reduce these harms, moving from a passive to an active role in protecting their users and the broader network health.

A primary strategy is to minimize information leakage in transactions. Avoid designs where a user's intent is fully revealed in the public mempool before execution. For example, a simple DEX swap revealing exact slippage parameters is a prime target for front-running. Instead, use commit-reveal schemes or leverage privacy-preserving protocols like Flashbots Protect RPC or Taichi Network. These services allow users to submit transactions directly to builders, bypassing the public mempool and obscuring transaction details from general searchers.

Implementing fair ordering mechanisms within your contract logic can also curb harmful MEV. Techniques include using a first-come-first-served queue based on the block timestamp or a commit-and-execute pattern where users commit to an action in one transaction and execute it in a later, unpredictable block. Projects like Chainlink Fair Sequencing Services (FSS) aim to provide decentralized solutions for transaction ordering, preventing validators from exploiting their position for maximal profit at the expense of fair execution.

For applications involving auctions or batch settlements (like NFT minting or decentralized exchange aggregators), use batch auctions or uniform clearing prices. Instead of executing trades in the order they arrive—which invites gas price wars—collect all orders over a fixed period and clear them at a single price. This design, used by CowSwap and similar DEX aggregators, eliminates the advantage of front-running and back-running individual orders, as all participants in the batch receive the same execution price.

Finally, consider internalizing MEV for protocol benefit through mechanisms like MEV-capturing AMMs or builder auctions. Protocols like Uniswap have proposed directing a portion of arbitrage profits captured by searchers back to the liquidity providers. By designing economic incentives that realign searcher profit with protocol health, you can transform a parasitic externality into a sustainable revenue stream that benefits all stakeholders, reducing the net negative impact on the ecosystem.

MEV externalities are the negative side effects of value extraction on other network participants. These include transaction reordering for arbitrage, frontrunning user trades, and network congestion from spammy bidding wars. While MEV is inherent to permissionless blockchains, its externalities degrade user experience, increase costs, and can threaten protocol security. Application-level strategies focus on designing systems that are inherently more resistant to these exploitative patterns, shifting the burden from users to the protocol logic itself.

A primary defense is to reduce the predictability and profitability of frontrunning. This can be achieved through commit-reveal schemes. In this pattern, users submit a commitment (like a hash of their trade details) in one transaction and reveal the actual data in a later transaction. This prevents searchers from seeing the full transaction intent until it's too late to frontrun. Protocols like Flashbots Protect and CowSwap use variations of this to protect user order flow. Implementing encrypted mempools or using threshold encryption for transaction contents until inclusion are more advanced techniques being explored.

Another effective strategy is to batch and settle transactions in a way that minimizes arbitrage opportunities. Batch auctions, where multiple orders are settled at a single clearing price, eliminate the value of ordering within the batch. DEX aggregators and CoW Protocol use this model. Similarly, time-weighted average price (TWAP) orders break a large trade into many small trades over time, making it less profitable and noticeable for sandwich attackers. Application logic can natively support these order types to provide safer defaults for users.

Protocols can also design economic mechanisms to internalize and redistribute MEV. MEV-capturing AMMs like Uniswap V3 with concentrated liquidity can capture some arbitrage value for liquidity providers. More directly, MEV redistribution or MEV smoothing mechanisms use smart contracts to capture extracted value (e.g., from arbitrage between pools) and distribute it back to a broader set of stakeholders, such as all users in a block or the protocol treasury, rather than letting it accrue solely to searchers.

For applications involving NFTs or token launches, fair ordering mechanisms are critical. Techniques like first-come-first-served (FCFS) with identity proofs (e.g., POAP holding), lotteries, or VRF-based random selection prevent gas wars and bot dominance. The Art Blocks minting contract is a notable example that uses a pseudo-random reveal to separate the commitment and minting phases, reducing the advantage of high-gas bidding.

Finally, developers should integrate with infrastructure that mitigates MEV by default. Using private transaction relays (e.g., Flashbots RPC, BloXroute Private RPC) prevents transactions from being exposed to the public mempool. Submitting transactions through builder APIs that support order flow auctions (OFAs) can ensure fair treatment. The key is to architect the application's transaction lifecycle with MEV resistance in mind from the start, choosing settlement layers and submission paths that align with the protocol's security model.

Maximal Extractable Value (MEV) represents profits validators or searchers can extract by reordering, including, or censoring transactions within a block. While some MEV is economically neutral (e.g., arbitrage), its pursuit creates significant negative externalities. These include network congestion from failed transaction spam, increased gas fees for regular users, and the centralization of block production power. Protocol-level solutions aim to redesign the base layer to internalize these costs and create a fairer, more efficient system for all participants.

One foundational approach is Proposer-Builder Separation (PBS). PBS decouples the roles of block building (selecting and ordering transactions) from block proposal (committing the block to the chain). In an Ethereum-like PBS model, specialized builders compete to create the most profitable block bundles and submit bids to a decentralized set of proposers (validators). The proposer simply selects the highest bid. This design limits a single validator's ability to extract MEV directly, reduces the incentive for centralized mining pools, and can be enforced through in-protocol mechanisms like ePBS (enshrined PBS).

Another critical protocol feature is inclusion lists. These allow users or applications to submit transactions that must be included in the next block, provided they pay a base fee. This prevents censorship by a malicious or profit-maximizing block builder. For example, a user could submit a time-sensitive liquidation transaction via an inclusion list, guaranteeing its execution and protecting them from being frontrun by a searcher who would otherwise profit from their forced exit.

For transaction ordering, protocols can implement fair ordering rules. Instead of a pure highest-bid-wins auction, these rules introduce constraints like first-come-first-served based on a transaction's arrival time at a public mempool. Threshold Encryption is a key enabler, where transactions are encrypted until a voting threshold of validators agrees to reveal and order them simultaneously. This prevents searchers from seeing pending transactions and crafting profitable frontrunning strategies, thereby reducing wasteful gas wars.

Developers can build on chains that implement these features. For instance, when submitting a transaction on a chain with PBS, you might interact with a block builder API like the one offered by Flashbots. Your dApp's backend could use this to send a bundle of transactions directly to builders, ensuring complex multi-step DeFi operations are executed atomically. Code to create a simple bundle using the Flashbots ethers provider demonstrates this direct integration, bypassing the public mempool.

The long-term goal of these protocol upgrades is to create a credibly neutral playing field. By internalizing MEV externalities at the consensus layer—through PBS for separation of power, inclusion lists for censorship resistance, and fair ordering for transaction equity—blockchains can reduce their negative impacts while preserving the economic benefits of efficient market arbitrage. The integration path for developers involves understanding these underlying mechanisms and choosing to build on or contribute to protocols that prioritize these robust, base-layer solutions.

The strategies to mitigate MEV externalities fall into three primary categories: protocol-level solutions, user-level tools, and market-based mechanisms. Protocol-level solutions like encrypted mempools (e.g., Shutter Network) and commit-reveal schemes aim to prevent frontrunning at the source. User-level tools such as MEV-aware wallets (e.g., CowSwap's useCowSwap hook) and transaction simulation (e.g., Tenderly) help individuals protect their trades. Market-based mechanisms, including PBS (Proposer-Builder Separation) and MEV auctions, attempt to democratize and redistribute extracted value. No single solution is a silver bullet; a combination is necessary for robust protection.

For developers and researchers, the next step is to engage with the tools and protocols actively being built. You can start by integrating MEV protection SDKs like Flashbots Protect RPC into your dApp's transaction flow or experimenting with SUAVE (Single Unified Auction for Value Expression), Flashbots' decentralized block building network. Analyzing your transactions with a block explorer like EigenPhi can reveal if your strategies are vulnerable to sandwich attacks. Contributing to or auditing open-source projects in this space, such as the cowprotocol or shutter-network GitHub repos, is another impactful way to advance the field.

The long-term health of decentralized systems depends on managing MEV's externalities. Continued research into cryptographic sequencing, fair ordering protocols, and economic policy is critical. The community must also establish clear social consensus and governance frameworks to decide what constitutes acceptable versus harmful extraction. By combining technical innovation with coordinated social effort, the ecosystem can evolve towards a state where MEV is minimized, transparent, and its benefits are shared more equitably among all network participants.