What is the concept of Maximum Extractable Value (MEV) manipulation?
What are front-running and sandwich attacks?
An emerging issue: Censorship on the blockchain
Innovative strategies to address MEV
A case study on MEV mitigation
The future of blockchain security
What does Maximum Extractable Value (MEV) manipulation entail?
Blockchain was introduced as a distributed ledger technology (DLT) that focuses on secure, multi-computer transaction recording. While it has the potential to serve as the foundation for a decentralized internet, blockchain faces various challenges such as scalability, energy consumption, regulatory uncertainty, and lack of interoperability. One particular challenge that poses a significant concern is the manipulation of Maximum Extractable Value (MEV). In this scenario, block producers manipulate the order of transactions to maximize their profits, potentially sidelining smaller participants and leading to a more centralized network.
Miners have the ability to prioritize their transactions within a block due to their control over transaction ordering. In response to this challenge, the blockchain community actively seeks innovative solutions to mitigate the adverse effects of MEV. The goal is to promote fairness and transparency within the blockchain ecosystem. Some initiatives focus on safeguarding the blockchain from exploitation and preserving its benefits by leveraging cryptographic techniques, particularly in layer-2 structures.
What are front-running and sandwich attacks?
In the context of blockchain, front-running occurs when actors like miners or validators exploit pending transaction information for their own gain. Front-runners monitor the network for profitable transactions and aim to include their own transactions as soon as they identify an opportunity. For example, in 2023, an MEV bot generated 584 ETH (approximately $1.7 million) through front-running transactions.
On the other hand, sandwich attacks are a unique form of front-running where a trader places orders before and after the target trade. In April 2023, a MEV bot operator seized $950,000 through a sandwich attack.
While front-running focuses on executing trades before others, sandwich attacks manipulate prices strategically to generate profit. Both attack methods exploit the transparency of the blockchain, which is meant to ensure reliability, but is instead used as a tool for manipulation. The visibility of pending transactions in the memory pool allows malicious actors to exploit this information through front-running and sandwich attacks. These exploitative tactics not only lead to significant financial losses for users but also erode trust in the blockchain, deterring potential users and investors.
An emerging concern: Censorship on the blockchain
Miners or validators who employ MEV strategies for personal gain contradict the core principles of fairness and decentralization that underpin blockchain technology. Such practices can privilege certain participants over others and compromise the integrity and trust of the system. These vulnerabilities not only weaken the robustness of blockchain networks but also undermine the fundamental principles of digital ledgers, making the system susceptible to censorship.
The primary issue arising from MEV attacks is the erosion of neutrality, a fundamental principle that ensures equal treatment of all transactions on the blockchain. Participants may bribe validators, who play a crucial role in validating and recording transactions, to prioritize certain transactions over others. This manipulation distorts the fair nature of blockchain operations and increases costs by causing market inefficiencies. As a result of rising costs and the lack of fairness in transaction processes, potential users may become skeptical about joining the Web3 ecosystem and view it as an untrustworthy and manipulated space.
To counteract the adverse effects of MEV, the blockchain community is exploring various solutions. Some proposed mechanisms aim to enhance transaction confidentiality by hiding details until confirmation. There are also suggestions to change consensus mechanisms in order to reduce the advantage of front-runners.
While censorship resistance is one of Ethereum’s core values, there is still a possibility of censorship at the second layer due to the frequent use of centralized sequencers. Additionally, the layer-1 network is not completely immune to censorship, as seen when Ethereum faced significant backlash for being mostly compliant with the standards set by the Office of Foreign Assets Control (OFAC). Therefore, it is essential for the community to examine whether the networks are subject to censorship.
Innovative approaches to mitigating MEV
Beyond proposing fair transaction ordering and adding random transactions, the crypto community has moved beyond the idea stage and has started implementing innovative solutions. One such solution is Shutter, which utilizes unique mempool protection technology. Shutter protects the mempool by encrypting transactions, making them invisible to potential front-runners. This reduces the risk of sandwich attacks and other forms of MEV exploitation.
Teams such as Paradigm and Flashbots are also working towards the same goal. Individual developers like Samczun are actively developing defenses against prominent MEV bots and unethical miners or validators.
A case study in MEV mitigation
Shutter aims to address MEV challenges such as front-running and sandwich attacks through its decentralized, efficient, and practical design. The platform utilizes threshold encryption, which allows multiple key holders to secure a transaction that can only be opened through collaboration between a certain number of key holders.
An illustration of transaction execution in Shutter Network. Source: Shutter Network
Shutter encrypts transactions to protect them from front-runners as they navigate the “dark forest,” a metaphor for a risky digital environment. This ensures that transaction details remain concealed until they are processed. For example, when a trader uses a Shutterized protocol/rollup, the attacker cannot determine whether the transaction is a buy or sell, which tokens are being exchanged, or at what price. While securely revealing information to the chain is not possible as a standard, it is feasible to do so by encrypting the memory pool.
The platform aims to apply its innovative encryption techniques to governance, enhancing blockchain integrity and fairness. For instance, Shutter has developed Shutterized OP Stack technology to enhance the security of the Optimism ecosystem with an encrypted memory pool. In addition to combating MEV malware, it emphasizes real-time censorship resistance and reduces dependence on sequencer trust.
The main goal of decentralization is censorship resistance, and Shutter provides an alternative path to decentralization for many rollups by offering censorship resistance and decentralization through its encrypted memory pool. The network can also be combined with decentralized rollups.
Shutter has also enabled its encrypted memory pool service to enhance front-running and anti-censorship structures on the Gnosis Chain. Startups like Espresso and Eigenlayer also strengthen their systems with encrypted memory pools.
Example of Shutter Governance implementation. Source: Shutter
Users receive a signed key to vote on a proposal using Shutter Governance. The system operator verifies the signature in the registry, and the votes are encrypted. At the end of the voting period, the system decrypts the votes, which were kept encrypted throughout the process, and reveals the results.
Snapshot, a popular off-chain voting platform, also utilizes Shutter’s shielded voting system, which can be easily implemented with minimal changes to both on-chain and off-chain voting systems.
The future of blockchain security
In the face of malicious methods like MEV that pose threats to blockchain security and fairness, Shutter emphasizes the importance of the community’s role in securing blockchain ecosystems. The platform emphasizes that collective efforts in innovation can create more robust defenses against these threats.
Advanced cryptographic solutions, community-driven governance, and a commitment to blockchain’s core principles will pave the way for the future of blockchain security. Collaboration within the blockchain community, as well as contributions from initiatives such as Paradigm and Flashbots, are crucial for creating a secure and fair distributed ledger technology (DLT) environment.
To learn more about Shutter, visit their website.
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Unveiling the Method: Safeguarding Web3 Users' Integrity from Malicious MEV Attacks