Blockchains, MEV and the knapsack problem: a primer

Abstract

In this paper, we take a close look at a problem labeled maximal extractable value (MEV), which arises in a blockchain due to the ability of a block producer to manipulate the order of transactions within a block. Indeed, blockchains such as Ethereum have spent considerable resources addressing this issue and have redesigned the block production process to account for MEV. This paper provides an overview of the MEV problem and tracks how Ethereum has adapted to its presence. A vital aspect of the block building exercise is that it is a variant of the knapsack problem. Consequently, this paper highlights the role of designing auctions to fill a knapsack--or knapsack auctions--in alleviating the MEV problem. Overall, this paper presents a survey of the main issues and an accessible primer for researchers and students wishing to explore the economics of block building and MEV further.