Detailed explanation of MEV-Burn: the next major upgrade of Ethereum, the "logical continuation" of EIP-1559

深潮TechFlow

特邀专栏作者

2023-05-09 12:30

This article is about 1376 words, reading the full article takes about 2 minutes

When EIP-1559 is implemented on Ethereum in August 2021, it will mark the beginning of the network burning ETH.

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When EIP-1559 is implemented on Ethereum in August 2021, it will mark the beginning of the network burning ETH.

Compilation of the original text: Deep Tide TechFlow

When EIP-1559 is implemented on Ethereum in August 2021, it will mark the beginning of the network burning ETH. The upgrade redirects and burns some of the fees users previously paid to block validators (called the base fee).

To date, over 3.2 million ETH out of the current circulating supply of 120 million have been burned post-EIP-1559. Ethereum bulls love this move because it makes ETH more scarce and thus more valuable.

But can we burn more ETH?first level title

A quick introduction to MEVs

The original protocol design of Ethereum was naive. It assumes that users only need to send transactions to neutral block validators to build blocks, but in reality, rent-seeking opportunities in block building lead to a exploitable market. This phenomenon is known as MEV, or "Maximum Extractable Value". Fast forward to now, and a total of 566,000 ETH has been withdrawn from regular Ethereum users via MEV.

MEV has some problems.

First, MEV is the monetary value extracted from ordinary users. Second, MEV distorts the incentive mechanism for block validators to act neutrally, leading to blockchain instability. MEV bots conduct competitive attacks such as front-running, DDOS attacks, and chain reorganizations, all with the aim of earning large MEV bounties. Alternatively, ETH stakers on the beacon chain may choose to slash their collateral if the MEV bounty is more profitable than it is. While this doesn't happen often, when it does, it's bad for Ethereum.

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What is MEV-Burn?

MEV-Burn is just one part of the Ethereum roadmap that directly addresses MEV issues. The solution returns MEV to ETH holders by burning the value currently being extracted by MEV participants. This amounts to an indirect redistribution of value to ETH holders, making the asset more scarce and reducing selling pressure on block validators.

A secondary goal of MEV-Burn is to reduce chain instability by equalizing MEV profits for block builders. This is also known as "MEV-smoothing". Ethereum developers want the quest for MEV profits to be predictable and steady, not as is the case today.

Here's where it gets tricky - in order to know how much MEV can be burned, the Ethereum protocol first has to find a way to quantify MEV and pay based on block proposers (aka builders) being "neutral" in a hypothetical efficient market quantity. We don’t know these numbers today because the block building market that currently exists is an opaque off-chain market.

After completing the PBS, block proposers will no longer be able to determine which transactions are more valuable. Proposers have no choice but to submit “neutral” fee bids for block builders for the blocks they assemble. This market process will exist entirely on-chain, rather than the off-chain market powered by Flashbot's third-party MEV-Boost software today.

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Benefits of MEV-Burn

Steady MEV profits also mean getting block validators to redirect capital to staking, especially as issuance rewards increase in a bull market. This expands the economic bandwidth of ETH and preserves capital for dapp collateral such as decentralized stablecoin collateral, lending, other forms of collateral, etc.

Like many Ethereum proposals, MEV-Burn will not be ready anytime soon, but is looking at a 3-5 year timeframe. But if the reward for waiting is finally getting out of the MEV Dark Forest, then it will be worth the wait.

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