Maximal Extractable Value and Allocative Inefficiencies in Public Blockchains

Abstract

The blockchain settlement layer enables systematic frontrunning, leading to inefficient blockspace allocation. We show that private transaction pools can reduce these inefficiencies and enhance welfare. However, despite their social benefits, full adoption of private pools is hindered by misaligned incentives between validators and users. Validators’ reluctance to forgo rents from frontrunning (maximal extractable value) results in partial adoption equilibrium, where frontrunning persists. Our empirical analysis of the Flashbots private pool on Ethereum supports these predictions, demonstrating increased validator revenues, higher private pool usage by

users facing greater potential losses, and convergence of attackers’ cost-to-revenue ratios to one in private pools.

Keywords: Allocative Efficiency; Market Design; Blockchain; Maximal Extractable Value; Private Pool

JEL Classification: C73, G2, D40, G10, G21, L14, O33