Maximal extractable value and allocative inefficiencies in public blockchains

Agostino Capponi, Ruizhe Jia and Kanye Ye Wang

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: The blockchain settlement layer facilitates systematic frontrunning, resulting in inefficient block-space allocation. Private transaction pools can reduce these inefficiencies and enhance welfare. However, full adoption is limited by misaligned incentives between users and validators. Validators are reluctant to forgo rents they earn from frontrunning – referred to as maximal extractable value – leading to a partial adoption equilibrium in which frontrunning persists. Our empirical analysis of Ethereum’s Flashbots private pool supports these findings: validators earn higher revenues, users facing greater frontrunning risk are more likely to use the private pool, and attackers’ cost-to-revenue ratios in private pools converge to one.

Keywords: Allocative efficiency; Market design; Blockchain; Maximal extractable value; Private pool (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001400

DOI: 10.1016/j.jfineco.2025.104132

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