Exploring Efforts to Combat the Negative Effects of MEV
As MEV grows and becomes a bigger problem, the industry is experimenting with different methods to mitigate its negative effects. A recent report suggests the total MEV extracted by the end of March 2023 was around $43.9 billion. While many MEV activities are useful and beneficial, profits from negative MEVs, such as sandwich attacks, have also increased to over $10 million in Q1 2023. Such a sharp increase in profits, even during a bear market phase, reinforces the importance of finding an effective solution to this problem before the next bull market.
This section will examine four solutions to combat MEV and eliminate its ability to harm DeFi users.
Batch auctions
Batch auctions aim to eliminate the importance of ordering on DeFi by batching different orders off-chain.
Consider the case of CoWSwap, a decentralized exchange (DEX) utilizing batch ordering functionality. This DEX enables users to place gasless orders that get executed over a period. CoWSwap gathers these orders off-chain, pairs different orders to get the best price, and then executes the trade on-chain. For example, let’s say Alice wants to trade ETH for WBTC, Bob wants to trade WBTC for DAI, and Charlie wants to trade DAI for ETH. Batch ordering allows the DEX to match these trades together instead of placing each order separately. This mitigates the risk of sandwich attacks to a large extent.
Flashbot protection through wallets
Some wallet makers like Blockwallet have integrated protection against MEV bots. They achieve this by incorporating zkSnark cryptography to conceal transactions and enabling users to send their orders directly to validators instead of going through the public mempool. Since most MEV bots monitor the mempool, skipping it and moving directly to the validators ensures that MEV searcher bots don't spot the transaction.
Shuffling order of transactions
This method was proposed in a paper titled ‘BlindPerm: Efficient MEV Mitigation with an Encrypted Mempool and Permutation." It suggests shuffling transactions within a block before their execution using random permutations to make Sandwich attacks less attractive.
Consider such a scenario against a user purchasing ETH. The MEV bot will typically structure the order like this: Bot's buy order -> User's buy order -> Bot's sell order. However, with transactions randomly shuffled, there's a chance it could play out as Bot's sell order -> User's buy order -> Bot's buy order, effectively turning the trade into a loss for the MEV bot. The Shuffling of transactions doesn’t eliminate a sandwich attack, but it removes the certainty of profit and makes the process more risky for the attacker.
Decentralized shared sequencers
This concept has emerged recently and is specifically aimed at Layer2s. Instead of a validator having the power to order blocks like in L1s, some projects plan to create a shared sequencer that can arrange blocks from multiple L2s before sending them to L1s for settlement. Such sequencers will also use encryption to hide the exact details of the transactions, making it impossible for bad actors to carry out harmful MEV attacks. Such sequencers will also allow different L2s to interact with each other, creating a more interconnected ecosystem.
Overall, we can confidently say that MEV is a complex and evolving phenomenon. As such, it requires constant research and innovation to keep one step ahead of the problem and ensure it doesn’t negatively affect the DeFi industry.
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