Maximal Extractable Value (MEV) is emerging as a significant obstacle to the widespread adoption of decentralized finance (DeFi), pushing institutional players away and leaving retail investors to bear the brunt of the consequences. According to Aditya Palepu, CEO of DEX Labs and lead contributor to decentralized derivatives exchange DerivaDEX, unchecked MEV practices are undermining the credibility and security of DeFi ecosystems.
MEV refers to the ability of miners or validators to manipulate the order of transactions within a block to maximize their own profit. This includes practices like front-running and sandwich attacks, where a malicious actor inserts their trades before and after another user’s transaction in order to exploit price movements. While the concept isn’t new—traditional electronic markets have long struggled with similar forms of information asymmetry—its scale and impact in DeFi are becoming increasingly detrimental.
Palepu explains that when transaction data is publicly visible before execution, it creates a structural vulnerability. This transparency allows opportunistic actors to exploit ordinary users by executing trades that alter prices to their advantage. The result is what he refers to as a “hidden tax” on retail participants, who often end up with worse trade execution and higher costs.
Institutional investors, who typically demand higher standards of security, stability, and fairness, are particularly wary of such risks. The presence of MEV and the lack of transaction privacy deter these entities from engaging with DeFi platforms. Without institutions, the market loses a critical source of liquidity and infrastructure, which ultimately disadvantages retail investors as well.
“Institutional players help build the underlying infrastructure—what I call the roads and highways—upon which efficient markets run,” says Palepu. These actors contribute to price stability and create arbitrage opportunities that reduce volatility across exchanges. Their absence leads to fragmented liquidity, increased slippage, and an environment ripe for manipulation.
To address this growing issue, Palepu advocates for the use of Trusted Execution Environments (TEEs) or similar secure processing methods. These technologies allow transactions to be executed in privacy, preventing them from being broadcast ahead of time. By ensuring that order flow remains confidential until execution, front-running and sandwich attacks become virtually impossible.
The broader crypto community has been actively debating MEV’s implications. Critics argue that its unchecked growth not only fuels centralization—since only a few actors can reliably profit from it—but also threatens the egalitarian ethos of DeFi. As MEV becomes more entrenched, the barriers to entry for both retail and institutional users rise, which could stall the sector’s growth and innovation.
Another potential solution lies in encryption-based systems like Batched Threshold Encryption, which could conceal transaction details until a block is finalized. These systems aim to level the playing field, ensuring that no single participant can gain an unfair advantage by previewing or altering the transaction queue.
MEV also impacts user trust, a critical component for DeFi’s continued evolution. As more retail users experience slippage, unexpected fees, and unfavorable trade outcomes, their confidence in decentralized platforms wanes. In contrast, platforms that implement MEV-resistant mechanisms could become more attractive to both institutional and individual investors.
Furthermore, the cost implications are not limited to individual users. Aggregated across millions of transactions, MEV-related inefficiencies can drain significant value from the ecosystem. This inefficiency may deter developers and entrepreneurs from building on DeFi platforms, fearing that their innovations will suffer from unfair market manipulation.
In the long term, solving the MEV dilemma could unlock a new wave of DeFi growth. By fostering a more equitable and secure trading environment, platforms can attract a broader and more diverse user base. Enhanced privacy protections and fairer transaction mechanisms would not only improve user experiences but also bring DeFi closer to achieving its vision of an open, inclusive financial system.
Ultimately, the future of DeFi hinges on its ability to address systemic vulnerabilities like MEV. Without meaningful reforms, the space risks alienating the very participants it seeks to empower. But with the right mix of technology, governance, and community engagement, it is possible to build a DeFi ecosystem where both institutions and individuals can thrive without fear of exploitation.