Maximal Extractable Value: Governance Risks for Funds

Maximal extractable value (MEV) describes value associated with the inclusion, exclusion or ordering of blockchain transactions. For a digital asset fund, it is an execution and governance issue because the way a trade reaches a blockchain can affect its outcome.

Look beyond the term 'miner'

MEV is not confined to proof-of-work mining. Depending on the network and transaction supply chain, searchers, block builders, validators and other participants can influence transaction ordering. Some activity involves arbitrage or liquidations; other activity, such as sandwich trading, can worsen execution for the affected user.

The relevant questions are which networks and protocols the strategy uses, how orders are submitted and who can observe or influence them. A general statement that blockchain trading is transparent does not answer those questions.

Questions for the investment manager

• How are slippage, price impact and execution quality measured?
• Are transaction routes, private relays or other protections evaluated?
• Who can approve changes to automated execution strategies?
• How are failed trades, unexpected losses and suspected manipulation escalated?
• Does the strategy itself involve MEV, and are its conduct and legal risks understood?

Board oversight

Directors need understandable reporting on material execution risks and the controls used to manage them. They should distinguish the investment manager's trading responsibility from the board's oversight role. Risk disclosures and incident procedures should reflect the strategy actually operated, and specialist technical or legal advice may be needed for particular approaches.

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