Understanding MEV and Its Threats to Public Blockchain Privacy

6 min readFeb 21, 2024

As decentralized blockchains like Ethereum and Solana onboard more users across finance and Web3, architectural transparency introduces emerging data privacy issues around transaction patterns. Sophisticated blockchain analytics leveraging transparency increasingly deanonymizes activities, identities and intentions on public ledgers.

A ubiquitous threat vector magnifying privacy risks involves Miner Extractable Value (MEV) — blockchain arbitrage bots exploiting transaction order flow for profit. MEV research surfaces disturbing questions about user privacy and platform integrity long term from these blockchain “insider trading” algorithms.

We survey how MEV tools function, associated risks and mitigation approaches protecting privacy in transparent public ledgers. The insights uncover an accelerating crypto surveillance economy necessitating urgent solutions balancing transparency with confidentiality across open finance innovation on blockchains.

What is Miner Extractable Value (MEV)?

To appreciate MEV based privacy threats, we must first understand what MEV comprises in blockchain networks. MEV refers to excess profits earned by miners from reordering pending transactions in mined blocks instead of processing based on arrival sequence from network mempools.

This out-of-turn transaction reordering allows clever arbitrage opportunities like front running to capitalize on price slippages at user expense. For example, if a large buy order enters mempool intending purchasing 1000 ETH, MEV bots can first quickly buy cheaper ETH from exchanges and sell it higher to original trader by prioritizing bot transactions in newly mined blocks.

These strategies deduct value from users to benefit miners. Such miner extracted value persists across proof-of-work chains publicly exposing pending transaction sequences off-chain. Research estimates total MEV captures exceeding over $1.3 billion per year currently that platforms like Ethereum may be losing.

MEV Privacy Risks on Public Chains

Beyond direct value extraction harming user affordability on blockchains, MEV poses additional risks exacerbating privacy challenges on transparent ledgers:

Transaction Linking for Identities

By observing transaction sources and destinations, MEV surveillance tools piece together payment histories to uncover and link pseudonymous user identities across chains violating expectations of public address anonymity.

Tracking for Transaction Denial Exploits

Transaction tracing assists malicious MEV to accomplish denial of service exploits like sandwich attacks that trap assets by setting price slippage traps around intended buyer transactions. This forces failed payments or front run purchases losing users more value through exploited transaction tracking.

Modeling for Behavior Profiling

Thirdly, freely inspecting volumes, frequencies and timestamps of transactions on transparent blockchains fuels analytics identifying user profiles — wallets likely controlled by exchanges, merchants, arbitragers etc through heuristical modeling and clustering. MEV tracking enables such analytics.

The combination of transaction reordering to capture value along with unrestricted analytics around all pending sequences poses alarming ethical dilemmas for public blockchains expected to foster financial inclusion.

Real World MEV Privacy Threats

Let’s survey protocols and platforms already facing integrity questions due to MEV activities suspiciously accumulating extracted value:

Ethereum

As the highest value transparent ledger correlating off-chain identities via analytics, Ethereum ecosystems suffer most from rampant MEV vampirism. Between $400 million to $1.4 billion yearly loses get attributed to Ethereum MEV based on suspect extractions by arbitraging bots.

Flashbot relays now dominate ETH mining coordination by offering MEV profit sharing agreements that prioritize reimbursing bot trades ahead of pending transactions in mined blocks. Such institutionalized value privatization completely countermands blockchain open access tenets.

Solana

Solana’s ultra rapid speeds also invite aggressive MEV seeing extraction businesses like Shoyu Capital raising dedicated funds. Recent research exposes Solana transactions consistently matching arbitrage exchange prices indicative of extensive value extraction washing out average users.

The outcomes pressure Solana’s promises around censorship resistance if big MEV capital consolidates gatekeeper positions by commanding validation due to profit commanding powers. Manipulation risks intensify due to limited transaction approval nodes already raising doubts over Solana’s decentralization claims.

Other PoW Chains

Bitcoin’s UTXO model limits MEV currently but proves theoretically vulnerable still if big mining cartels emerge co-opting transaction sequences eventually. For altcoin proof-of-work networks like Litecoin or Dogecoin with smaller markets, single players can readily dominate reconciliation, sequencing and information access undermining fairness and determinism.

The fundamental transparency of proof-of-work chains leaves them permanently exposed to MEV privacy and integrity concerns without deliberate platform redesign. Advancements protecting user interests grow overdue before mass adoption introduces more unsuspecting participants unaware regarding the extent of public surveillance risks.

Approaches Mitigating Public Chain MEV Privacy Threats

Public blockchain architectures enable truly decentralized participation and innovation impossible in legacy finance. But as surfaces vulnerabilities around intermediaries misusing transparency against participants, responsible mitigation options must deploy maintaining integrity.

MEV-Resistant Validation Rules

Platform consensus rules form the first line of defense preventing MEV by enforcing chronological transaction ordering disregarding miner sequencing discretion. This guarantees first-come, first-serve processing based on timestamps not self-serving sorting.

Ethereum proof-of-stake merges establish such binding ordering mandates for validators. But forcibly overcoming the legacy proof-of-work MEV impulse remains predictably challenging still due to mining establishments enjoying hugely profitable and legalized arbitrage income streams historically.

Encryption and Anonymity Protocols

Zero knowledge proofs (zkSNARK/zkSTARK) allow conducting fully encrypted transactions on blockchains that disclose only desired information to validators rather than entire public visibility. This restricts attack vectors like transaction and behavior tracking exploited in MEV.

Solutions like Aztec and Mysten introduce user experience improvements and scalability solving adoption barriers around encryption. Mass anonymizing transaction mixes further obfuscate on-chain entity identities to diminish surveillance risks.

Confidential Smart Contracts

Beyond payments, concealing details around smart contract computation and state changes using technologies like Intel SGX and AMD SEV curbs MEV opportunities by hiding balances and other intermediate information leaking strategy clues before settlement finality.

Off-chain Trusted Execution Environments (TEEs) like Enigma pioneer approaches allowing encrypted smart contract outputs getting published on public chains. These hide information only revealing minimum essentials for public verifiability.

Incentive Alignment for Privacy

Protocols encouraging voluntary behaviors preserving privacy against user interests can also create network effects refraining exploitation. For example the Zether protocol grants higher rewards for private zero knowledge transactions. Such incentives for confidentiality counterbalance transparent MEV motives indirectly.

Holistic security across protocols, encryption and incentives provide layered defenses keeping public blockchain usage responsible and observable yet protective against pervasive surveillance. Fixing transparency is crucial for sustained adoption over the long term.

The Difficult Road Toward Privacy and Accountability

There exists no perfect solutions yet reconciling blockchain transparency necessary for verifiable trustlessness with transactional privacy essential for preventing usage against vulnerabilities caused by open visibility. Both absolutes of full transparency and full confidentiality harbor downsides around accountability, censorship risks and hidden misconduct respectively.

Perhaps nuanced balancing across both extremes catering to context lies in blockchain privacy maturation pathway ahead. Transactions retain public auditability but rich encrypted metadata for masking unrelated sensitive information to chain integrity may offer ideal middle grounds. Segregated transparency where transaction finality and consensus security relies on communal visibility while supplementary communication details avoid open publishing through cryptography or off chain transfers strikes balanced outcomes allowing innovation in finance and other social domains without misuse risks or surveillance overreach.

Technologies like zero knowledge proofs and trusted execution environments introduce groundbreaking models cryptographically guaranteeing validity of private information without exposing raw contents — exactly the assurance reconciling needs of transparency and confidentiality in decentralized trust systems. Their steady adoption signaling awareness around blockchain privacy risks would hopefully reorient platform architectures toward user centricity against extractive actors seeking asymmetries from transparency to accrue power over individuals.

Time will tell if decentralized technologies elevate empowering opportunities for the many overattention hijacking gimmicks benefitting the few. As digital societies progress, sustained blockchain adoption necessitates privacy more than ever. And pioneering zero knowledge solutions may emerge most decisive curbing surveillance capitalism trends while preventing marginalization of vulnerable populations.

Perhaps user privacy stands ripe to emerge as surprise bedrock ushering the next generation of blockchains transforming finance and technologies made equitable for mass adoption by thoughtfully addressing transparency double edged effects using cryptography securing identities rather than eroding them.