Exploring MEV and Its Effects on Blockchain Users

Transparency within blockchains, while fundamental, has resulted in an unfortunate capability to extract value by manipulating the ordering and inclusion of transactions—a phenomenon termed maximal extractable value (MEV). This issue predominantly arises from public mempools, where pending transactions are recorded, allowing block producers to front-run transactions for profit.

MEV’s impact is especially pronounced on Ethereum, which repeatedly extracts MEV at a rate approximating 11% of block rewards, with data revealing losses nearing $300,000 from sandwich attacks within September alone. This indicates that MEV is a persistent hidden cost, greatly affecting high-value transactions in fluctuating markets.

Shutter’s Solution to MEV Through Threshold Encryption

Among various methodologies to mitigate MEV, cryptographic approaches such as threshold encryption have emerged. These methods encrypt transactions before entering the mempool, ensuring details remain hidden until transaction sequencing is completed, thus hindering block producers from manipulating MEV extraction.

Shutter has uniquely positioned itself as the first threshold encryption protocol aimed expressly at addressing MEV, becoming the sole threshold-based system actively deployed on the Gnosis Chain.

Threshold encryption involves distributing the decryption key across several keyholders, making it impossible for a single entity to uncover transaction details independently. In compliant architectures, a Distributed Key Generation (DKG) process initially creates a public key alongside private shares for committee members. Users can encrypt their transactions with this public key and submit the encrypted data to the network.

Once block proposers arrange these encrypted transactions into a block, each committee member contributes to the decryption once the block is finalized, relying on valid shares to restore the plaintext data—similar to a multisignature (multisig) configuration.

Shutter

The threshold committee functions as an off-chain service in tandem with the blockchain, enabling use on most networks without altering existing consensus protocols. However, unlike typical validators, the committee is generally a permissioned entity requiring a level of trust. Member selection, referred to as Keypers, is governed by Shutter’s protocol.

The original Shutter model utilized per-epoch encryption, which aimed to enhance efficiency but revealed a major flaw: when the epoch key was recreated, all transactions from that epoch became publicly accessible, exposing potential MEV to certain users. This vulnerability has been rectified in Shutter’s deployment on Gnosis, reverting to per-transaction encryption. The Shutterized Beacon Chain offers an RPC endpoint, encrypting transactions and disseminating ciphertext to the sequencing contract. Transactions undergo decryption and execution post inclusion in a block.

Shutterized Beacon Chain

While it enhances simplicity, per-transaction encryption may increase workload on the committee as transaction volume rises, unlike the more consistent demands of per-epoch systems. Future advancements in mempool threshold encryption are expected to alleviate this balance.

The Shutter team is exploring batched threshold encryption (BTE) to mitigate current design inefficiencies while maintaining transaction privacy.

In addition to the Shutterized Gnosis Chain, the team is also developing an encrypted mempool module for the OP Stack, which is now operational on an Optimism testnet. This module integrates per-epoch encryption and addresses initial Shutter design flaws by tying transactions to specific blocks, enhancing success chances during execution as transactions can revert if they miss their designated block.

While Shutter holds promise for addressing MEV, it currently lacks a fully trustless environment due to reliance on a permissioned keyper framework. High latency in Gnosis deployments also limits Shutter’s capabilities, as its inclusion times trail significantly behind block production rates. The Shutter team is charting a roadmap for a fully encrypted mempool on Ethereum and extensions to other EVM chains, but this will require phased cooperation across wallets, RPCs, and more.

This article does not offer investment advice. Investment decisions warrant thorough research and consideration.

For further updates, readers are encouraged to stay informed and vigilant in their blockchain engagements.