Price of MEV: Towards a Game Theoretical Approach to MEV

Maximal (also miner) extractable value, or MEV, usually refers to the value that privileged players can extract by strategically ordering, censoring, and placing transactions in a blockchain. Each blockchain network, which we refer to as a domain, has its own consensus, ordering, and block-creation mechanisms, which gives rise to different optimal strategies to extract MEV. The strategic behaviour of rational players, known as searchers, lead to MEV games that have different impacts and externalities in each domain. Several ordering mechanisms, which determine the inclusion and position of transactions in a block, have been considered to construct alternative games to organise MEV extraction, and minimize negative externalities; examples include sealed bid auctions, first input first output, and private priority gas auctions. However, to date, no sufficiently formal and abstract definition of MEV games have been made. In this paper, we take a step toward the formalization of MEV games and compare different ordering mechanisms and their externalities. In particular, we attempt to formalize games that arise from common knowledge MEV opportunities, such as arbitrage and sandwich attacks. In defining these games, we utilise a theoretical framework that provides groundwork for several important roles and concepts, such as the searcher, sequencer, domain, and bundle. We also introduce the price of MEV as the price of anarchy of MEV games, a measure that provides formal comparison between different ordering mechanisms.