According to Aditya Palepu, CEO of DEX Labs, a lead contributor to the decentralized cryptocurrency exchange DerivaDEX, maximum extractable value (MEV), the process by which miners or validators reorder transactions in a block to extract profits, is preventing financial institutions from adopting decentralized finance (DeFi), hurting retail users.
Palepu told Cointelegraph that all electronically traded markets suffer from maximum extractable value or similar problems inherent in information asymmetry in structuring trade transaction data.
The solution is to make order flow data unseen before fulfillment by processing transactions in trusted execution environments that handle transactions privately through a funded vault or other mechanism, Palepu said. Added:
“What makes them really powerful is that they can process orders privately. This means your trading intentions are not broadcast to the world before execution. They are encrypted on the client side and decrypted in a secure enclave only after they are sequenced.”
This makes pre-emptive trades “impossible,” he said, protecting users from phenomena such as “sandwich attacks” – a form of market manipulation in which validators or miners place trades before and after a user’s order in order to manipulate the price and make profits.
MEV’s presence as an underlying infrastructure in crypto and DeFi has sparked intense discussion debate among industry executives and protocol developers who are trying to exploit MEV’s potential to raise centralization, raise costs, and stifle mass adoption.
Related: How batch threshold encryption can end extractive MEV and make DeFi fair again
Institutions staying out of the DeFi game are hurting retail users
The lack of transaction privacy prevents financial institutions from adopting DeFi because it exposes them to market manipulation and the immediate risks of broadcasting transactions before they are executed, Palepu told Cointelegraph.
“When institutions cannot participate effectively, everyone suffers, including retail,” Palepu told Cointelegraph, adding that institutions create “highways and roads,” crucial trade infrastructure for financial markets to function efficiently.
These include non-mining arbitrage trading opportunities that dampen price volatility and maintain asset prices at or near parity on all exchanges, he added.
“Exchanges, like any market, need vibrancy and diversity of participation,” Palepu said, adding that a lack of institutional commitment could result in liquidity drying up, volatility soaring, market manipulation increasing and transaction costs soaring.
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