Guided Research Jonas Gebele

Analysis of Maximal Extractable Value on the Algorand Blockchain

Abstract

Decentralized blockchain-based systems like Ethereum or Algorand are one of the most promising emerging technologies that become more and more attractive while enabling entirely new types of financial applications, commonly called decentralized finance. In doing so, attempts are being made to replicate existing services from the traditional financial industry with the use of smart contracts on blockchain-based systems like Algorand and thus reshape them in a simpler, more transparent and fairer way. Examples of such services are decentralized exchanges, derivative platforms or lending protocols.
Over the last couple of years, the decentralized finance space has evolved from a small experimental niche technology into a multibillion-dollar ecosystem on a variety of different blockchain networks. A wide range of decentralized finance applications handle assets worth over 53 billion US dollars as of the year 2022.

While the concept of decentralized finance and its applications promise a fair, decentralized, and transparent financial system that accrues value to its users, certain trends threaten this promise. One such trend is called Maximal Extractable Value (MEV), which refers to the maximum value that can be extracted from the block production process in excess of the regular block reward by including, excluding and changing the order of transactions in a given block. The concept of MEV first appeared in a research study called Flash Boys 2.0 by Philip Daian and was initially referred to as Miner Extractable Value. The paper shows how MEV affects the user’s interaction with decentralized finance applications on the Ethereum blockchain and can even destabilize the blockchain consensus itself.

Research Questions

Being a different type of blockchain-based system with technical trade-offs on the consensus level compared to Ethereum and also a rapidly growing decentralized finance ecosystem, Algorand and its users potentially also face the risk of MEV.

In the scope of the guided research, we will shed light on the feasibility of capturing MEV on Algorand and analyze on-chain activity related to MEV on the Algorand blockchain.