For economists

Some suggestions for economics research projects that would be very helpful (and potentially impactful) for regulation of crypto-finance:

Social welfare analysis of MEV extraction

As suggested here, even if some MEV extraction is - in a relevant sense - harmful to individual market participants, it could be that all-things-considered it is not reducing social welfare (e.g. through increasing market efficiency by a big enough margin). Some arguments that potentially could go in this direction are:

  • “there can be scenarios where sandwich attacks increase efficiency and/or social welfare for users when n trades are routed across a network of CFMMs” (Kulkarni, Diamandis, and Chitra),
  • MEV as a meaningful contribution to Ethereum’s “security budget”,
  • block auctions (to the extent necessarily come with MEV extraction opportunities) as a superior solution to priority gas auctions.

The challenge is to investigate this more rigorously. One reason why this question is important is that it may be key to assessing whether some (any) form of MEV extraction is (or should be) “market manipulation” or “market abuse” e.g. in US commodities law or under EU market abuse rules.

Negative effects of Just-In-Time liquidity provision

It is sometimes suggested that Just-In-Time (JIT) liquidity provision (see e.g. here) significantly adversely affects passive liquidity providers in DeFi (e.g. on Uniswap). How significant is this effect? Is it concerning (e.g. from the perspective of economic sustainability of automated market makers like Uniswap liquidity pools)? If it is concerning, would some form of legal intervention improve the situation?