Broadcasting transactions prior to their execution serves as a ‘hidden tax’ on retail cryptocurrency users, while simultaneously deterring financial institutions from engaging in decentralized finance (DeFi). This was asserted by Aditya Palepu, CEO of DEX Labs, a key contributor to the decentralized crypto derivatives platform DerivaDEX.
Palepu indicated that all markets dependent on electronic trading face challenges from maximal extractable value (MEV) or related complexities due to the unfair advantage in transaction ordering.
To resolve this, he suggested that order flow data visibility should be restricted before transactions are finalized, allowing for processing in trusted execution environments. Such environments ensure privacy in transactions:
“What makes them really powerful is that they can process orders privately. So your trading intentions aren’t broadcast to the world before execution. They’re encrypted client-side, and they’re only decrypted inside the secure enclave after they’re sequenced.”
This approach makes front-running transactions impossible, thus, shielding users from techniques such as sandwich attacks—where miners or validators manipulate the market by placing transactions around a user’s order to accrue profits.
MEV’s presence in crypto infrastructure has incited considerable debate among industry leaders regarding its implications for centralization, cost inflation, and hindrances to widespread adoption.
Consequences of Institutional Withdrawal from DeFi
The absence of transaction confidentiality keeps financial institutions at bay as it makes them susceptible to market manipulation and front-running risks. Palepu remarked:
“When institutions can’t participate effectively, everyone suffers, including retail,”
indicating that institutional players are vital for establishing the necessary market structures, akin to highways and roads, for seamless financial trading.
This would create non-extractive arbitrage opportunities that stabilize price disparities across exchanges. Additionally, he noted:
“Exchanges, like any marketplace, need vibrancy and diversity of participation,”
emphasizing that a lack of institutional involvement could exacerbate liquidity issues, increase volatility, escalate manipulation, and drive up transaction costs.
