Struggling Ethereum Towards “Distributed Encrypted Mempools”

First 2-month of 2025 have brought a year long things in crypto. From politics memes to big dumps, CZ’s dog to North Korean group’s hack on Bybit, huge things has happened. Also, another big topic is Ethereum in terms of its price volatility, uncertainty on its Foundation seats and so on. Additionally, Ethereum remains a focal point not just for its price fluctuations and internal governance uncertainties, but also for its technological struggles. Ethereum is facing increasing pressure to deliver on its promise of decentralization and fairness, particularly regarding transaction security and censorship resistance.

One of the most pressing concerns is MEV (Maximal Extractable Value), which continues to drain users through front-running, sandwich attacks, and malicious transaction ordering. A potential solution is the introduction of Distributed Encrypted Mempools, an initiative proposed by a coalition including Shutter, Chainbound, Nethermind, MEV Blocker, and GnosisDAO. This technology aims to encrypt transactions before inclusion, preventing unfair advantages while maintaining Ethereum’s composability and efficiency.

Recommend my article “Shutterizing Gnosis Chain” on Medium: https://medium.com/@ozek/shutterizing-gnosis-chain-revolutionizing-transaction-security-with-shielded-trading-and-validator-226109959c7d

The Problem: Ethereum’s Public Mempool is Broken

Ethereum’s public mempool was designed to ensure transparency in transaction processing, but in practice, it has become an arena for bots and privileged actors to manipulate transaction execution for profit.

Currently, transactions enter the mempool and remain visible before execution. This transparency enables various predatory behaviors:

• Front-Running: Bots identify high-value transactions and insert their own ahead of them to profit from price movements.
• Sandwich Attacks: Attackers place buy and sell transactions around a user’s trade to extract value.
• Censorship: Certain actors may choose to prioritize, delay, or block specific transactions based on economic or political motivations.

A recent CCN opinion piece described MEV as the greatest barrier to blockchain adoption, estimating that users have lost over $1.8 billion since 2020 due to these exploitative practices. If left unchecked, MEV’s impact could drive users away from Ethereum and towards more private and centralized solutions.

The Solution: Encrypted Mempools & Proposer Commitments

To address these issues, the Ethereum research community has introduced Encrypted Mempools, which protect transaction details until they are committed for execution. The core mechanism relies on Threshold Encryption, a cryptographic approach where transactions remain encrypted until a group of network participants (Keypers) collectively reveal the decryption key.

The proposer commitments model ensures that validators commit to including encrypted transactions before knowing their content. This prevents them from reordering transactions for personal gain and enhances Ethereum’s fairness and decentralization.

How It Works:

1. Users Encrypt Transactions: Before submission, transactions are encrypted using a key shared across multiple independent entities.
2. Validators Commit to Inclusion: Block proposers must commit to executing transactions in a predefined order before they are decrypted.
3. Decryption & Execution: Once the order is finalized, transactions are decrypted and executed fairly.

This model eliminates malicious MEV strategies while maintaining legitimate arbitrage and backrunning opportunities.

Technical Implementation: Shutter’s Role in Threshold Encryption

The Shutter Network is at the forefront of this effort, using threshold encryption to secure Ethereum’s transaction processing. This approach ensures:

• No single entity can decrypt transactions early
• Validators must adhere to commitments
• Transactions remain verifiable while preventing front-running

Ethereum Research highlights that Shutter’s model has already been deployed successfully on Gnosis Chain, proving its feasibility at scale.

Regulatory Perspective: EBA & ESMA’s View on MEV and Crypto Fairness

While technical innovations are crucial, regulatory frameworks must evolve to support these solutions. The EBA & ESMA Joint Report on Crypto Assets (MiCAR Article 142) highlights concerns regarding MEV exploitation, user protection, and market fairness.

• The report identifies MEV as a major risk factor, stating that unfair transaction execution undermines confidence in decentralized finance.
• Regulators emphasize the need for privacy-preserving technologies to prevent harmful MEV extraction.
• The report calls for standardization of encrypted mempool mechanisms to ensure compliance while maintaining Ethereum’s decentralized nature.

These insights support the development of protocol-level encrypted mempools, aligning Ethereum’s technological advancements with regulatory expectations.

Roadmap: Integrating Encrypted Mempools into Ethereum’s Protocol

The roadmap for Ethereum’s transition to an encrypted mempool consists of three phases:

1. Out-of-Protocol Solutions (Short-Term):

• Implementing encrypted transactions at the RPC level (e.g., eth_sendEncryptedTransaction).
• Encouraging adoption through MEV Blocker integrations.

2. Proposer Commitments & Validator Incentives (Mid-Term):

• Enhancing validator commitment models.
• Introducing restaking incentives to ensure compliance.

3. Protocol-Level Integration (Long-Term):

• Embedding threshold encryption directly into Ethereum’s consensus layer.
• Using validator-based keyper sets to ensure a trust-minimized approach.

The Economic Impact: Rethinking MEV Extraction

While encrypted mempools eliminate predatory MEV, they do not remove all MEV opportunities. The proposal differentiates between malicious MEV (e.g., front-running) and legitimate MEV (e.g., arbitrage), ensuring:

• Validators can still profit from honest transaction sequencing.
• Users benefit from a more equitable transaction execution environment.
• Decentralized markets remain efficient and predictable.

This shift would redistribute MEV rewards more fairly, encouraging validators to participate in an ethical and transparent transaction supply chain.

Source: https://ethresear.ch/t/the-road-towards-a-distributed-encrypted-mempool-on-ethereum/21717