MEV institutions have turned away from DeFi due to the competition from MEV-driving institutions; this decision costs users dearly in terms of cryptocurrency execs who need access.
Recent commentary by a senior executive in the crypto space points to MEV as one of two primary culprits behind two key problems within decentralized finance (DeFi). MEV deters institutional entrants into DeFi, while also acting as an unwitting tax on retail users (source). For further reading: (MX.advfn.com).
What Is MEV and Why Does it Matter
MEV stands for Miner, Validator, Block Proposer or Transaction Searcher Earned Value and refers to the profits that actors–miners, validators, block proposers or transaction searchers–can gain by manipulating the ordering, timing or inclusion of transactions in a blockchain network. SpringerLink defines MEV in detail here.
Front-running, sandwich attacks and transaction re-ordering are among the various strategies employed by MEV to steal hundreds of millions of dollars from DeFi users on platforms like Ethereum. A recent literature review conducted by SpringerLink shows these techniques had been employed successfully by them to achieve such massive theft.
Given MEV’s introduction of information asymmetries and “winner takes more” dynamics, it undermines some of the core promises of DeFi: fairness, openness, and predictable access.
Why institutions are abandoning them.
As reported in the recent article, institutions looking at DeFi see MEV as an impediment to participation. According to one crypto executive quoted, their thinking goes like this:
Institutional players require reliable execution with low slippage, clear governance structures and no hidden costs.
MEV introduces unpredictable costs and execution risk for its users; large orders on decentralised exchanges (DEXs) can be subject to manipulation via block ordering, front running or reordering that could ultimately disadvantage users.
Knowing that transactions may be subject to MEV extraction reduces confidence in DeFi protocols as viable institutional infrastructure.
As such, many institutions are opting to remain on the sidelines or choose centralized alternatives where ordering and execution risk can be better managed.
Short of all, DeFi executive claimed MEV is one of the reasons it has failed to grow institutional participation, instead remaining dominated by retail or hedge-fund style investors. Additionally, regular users must bear additional costs associated with MEV usage.
Institutional withdrawal has an indirect but still substantial cost for everyday users, which this article addresses in depth. Key issues addressed include:
“Hidden Tax” Effect: According to MEV’s executive, users may often receive lower execution prices and higher effective fees (due to arbitrage bots, gas auctions and reorderings) than they realize through MEV.
Reduced Fairness: Bots and MEV searchers that pre-empt or manipulate user transactions put smaller users at a distinct disadvantage, research showing how MEV opportunities degrade execution quality and increase effective costs for them. arXiv
Liquidity Impact: Institutions staying away could reduce the amount of deep liquidity, professional market-making services and stabilising players in DeFi – making the market more volatile, difficult to trade and risky overall.
What steps have been taken and what still needs to happen?
MEV extraction is well recognized in academic and technical literature, leading to proposals such as Proposer-Builder Separation (PBS), private ordering or sealing transaction intent aimed at minimizing or eliminating this phenomenon. On Arxiv.
Executives often point out that until these solutions become widely adopted and proven at scale, an institutional “trust gap” remains. DeFi protocols must demonstrate execution quality, cost transparency and fairness that meet institutional-grade levels in order for major capital to flow in.
Conclusion
The message from the cryptocurrency executive was clear: MEV is more than a technical problem; it poses an impediment to DeFi’s maturation as an institution-grade financial system. Institutions are withdrawing due to insecure execution environments, while regular users bear hidden inefficiencies and worse outcomes as a consequence. For DeFi to become institutional-grade in nature and move past its early phase into mainstream acceptance by mainstream users, addressing MEV will be required.
