Original compilation: Skypiea
Original compilation: Skypiea
Over the past year, the phenomenon of Maximum Extractable Value (MEV; formerly known as Miner Extractable Value) has attracted public attention, partly due to the apparently high level of technical skill required to extract MEV, and partly due to the successful extraction of MEV profitable nature. However, despite MEV's increasing role in the blockchain ecosystem, discussions of MEV are often confusing and imprecise. Since the total amount of MEV extracted could be in the billions (only throughMEV-Explore$600 million in MEV alone is tracked on the Ethereum mainnet), so it’s no surprise that much of the MEV conversation focuses on the profits extracted by MEV; however, the scope, evolution, and governance of MEV are far-reaching topics, from In the long run, it may have an impact on blockchain security.
In this article, we will aim to clarify some important topics surrounding MEV. We will first introduce and illustrate the precise definition of MEV. We then discuss how MEV has evolved over the past year and extrapolate to understand key questions and concerns raised by the continued growth of MEV and the broader crypto economy in the coming years. We will pay particular attention to the incentive structures (existing and new) that motivate the different players in the MEV ecosystem. Finally, we conclude with a brief survey of future research directions.
The roles of block producers, searchers, protocols, and users in the creation and extraction of MEV interact in various dynamic ways, often making discussions of MEV somewhat confusing. Through this article, we analyze MEV from the perspective of how different systems or proposed solutions can benefit and harm different actors in the system. We will see that this is a clear and valid framework through which we can begin to derive the long-term end-state of MEV in different cryptoeconomic systems.
What are MEVs?
Ethereum.org precisely defines MEV as "the maximum value that can be extracted from block production in excess of standard block rewards and gas fees by including, excluding, and changing the order of transactions in a block." At first glance, this seems to be incompatible with MEV So different from the common concept of MEV that it is used almost interchangeably with "running a trading bot" in popular lexicons. However, if we closely examine a few common MEV examples, we can easily understand their relationship to the formal definition.
Recall that MEV was originally defined by Daian et al. "Flash Boys 2.0: Front-running, transaction reordering, and consensus instability in decentralized exchanges(2019) looks first at the "widespread and increasing deployment of arbitrage bots in blockchain systems" and then infers the more general phenomenon of value extraction by prioritizing intra-block and inter-block transactions. Besides arbitrage, another classic example of MEV that many users have experienced first-hand is the sandwich attack phenomenon.
Besides arbitrage and sandwich attacks, many other forms of MEV exist, especially so-called "exotic" or "long-tail" MEVs. For example, generalization preemption is vividly illustrated in the very popular article "Ethereum Is a Dark Forest" by Paradigm's Dan Robinson, while Qin et al.Quantifying Blockchain Extractable Value: How Dark is the Forest?(2021) has conducted a more comprehensive study of it. In this article, we do not seek a comprehensive taxonomy of all forms of MEV; curious readers are referred to the Flashbots Research Vault.
By analyzing arbitrage and sandwich attacks, we can see that both derive value from the ability of block producers to arbitrarily reorder transactions, and thus are properly considered MEV:
arbitrage. An arbitrage opportunity is characterized by a series of trades such that the trader ends the trade sequence with a larger amount of initial equity. This profit is risk-free (net of transaction fees) when executed atomically (i.e. the entire sequence of transactions is contained in a single transaction, with each part executed only if the entire arbitrage succeeds).
Assume that prices on two markets (e.g., including two independent liquidity pools on the same AMM) differ enough for the same asset that profitable arbitrage opportunities exist. This state of "imbalance" must be the end result of the user's transactions with the relevant market. Suppose a user creates an arbitrage opportunity (e.g., makes a very large purchase or sale); then miners can insert their arbitrage transaction immediately after creating it to capture the arbitrage.
In this case, in principle, the arbitrage opportunity could go unclaimed for many blocks. However, block producers are privileged by being able to "support" arbitrage transactions, making their profits essentially risk-free. Instead, a non-block producer entity attempting to exploit an arbitrage opportunity must pay the block producer for the privilege of inserting the arbitrage transaction as soon as it is created, or risk the transaction failing if the arbitrage opportunity disappears before then. So we see that in this common case, even though external (non-block producer) users earn some of the arbitrage profits, they fundamentally rely on the block producers to reorder transactions to ensure risk-free profits. ability.
Sandwich attack. A "sandwich attack" is a phenomenon in which a user's transaction is "sandwiched" between two transactions. Generally, block producers have the ability to monitor pending transactions (those transactions that have not yet been sorted and assembled into a verified block, they are located in a location called a "mempool" (memory pool), which is a "memory pool". Pool”), therefore, inserting your own transactions before some target transactions is called “front-running”. Upon noticing that a user is about to buy a given asset, the sandwicher (1) inserts a large purchase of the same asset immediately before the target transaction (front-running), and (2) before the target transaction (so-called "backtracking"). Since the target transaction is executed between the two, the sale is executed at a better price than the purchase, resulting in a profit for the sandwicher.
We immediately see that ideal execution of a sandwich attack relies on transaction ordering privileges. If transactions cannot be ordered as desired, other transactions may occur between the two halves of the sandwich attack, which may result in a loss for the sandwich attacker. Similar to arbitrage opportunities, many sandwich attacks are carried out by non-block producing entities; however, these entities still rely on the privileges of block producers and compete to capture the value of these privileges by paying block producers fees.
In both examples, it is clear how MEV relies on the ability to reorder transactions, a privilege bestowed on block producers.
The occasional claim that this definition of MEV is "too broad" applies more to the arbitrage example than to the sandwich attack; however, even in the case of arbitrage, the ability to order transactions clearly has non-zero value, so Arbitrage trades are placed directly after trades that create arbitrage opportunities. Thus, we may be able to distinguish two alternative definitions of "MEV opportunity":
Strictly defined. MEV opportunities are characterized by most or all of the value captured through deal sequencing privileges.
Permission Definitions. The MEV opportunity is characterized by at least a fraction of the value captured by transaction ordering privileges.
In both cases, however, at least some value (even if relatively small) is gained through transaction ordering privileges. The failure to distinguish between MEV, strictly defined MEV opportunities, and permissively defined MEV opportunities may be responsible for some confusion about "yes" or "no" MEV.
A more restrictive criterion for MEV is sometimes assumed, where extracted value must be close to risk-free, with minimal risk stored before profits are realized. This definition excludes so-called "probabilistic MEV", where the value of the MEV chance is not fully computable, but is randomly sampled from some distribution. Although readers are free to define MEVs to their liking, we do not believe that an overly strict definition of MEV is actually useful. Ultimately, considerations about the risks and rewards of MEV apply not only to risk-free profits from complex transaction reordering schemes, much of which value is unobtainable without reordering privileges, and accordingly, more Broad, more inclusive definitions proved to be of greatest utility. Whenever users are not completely insensitive to the exact position of their transactions in a given block or even a series of consecutive blocks, their willingness to pay to reduce uncertainty about the relative position of their transactions represents a cryptoeconomically significant MEV. exist.
Beneficiaries of MEV Extraction
As noted above, while MEV is inherently associated with the block production privilege and, correspondingly, the ability to arbitrarily reorder transactions, a complex economy has developed around MEV extraction, so block producers are not MEV extraction sole beneficiary. Due to the complexity of identifying and handling MEV extraction opportunities, the vast majority of MEV is currently extracted by external "seekers" who submit transactions to block producers for inclusion in future blocks. In some (perhaps many) cases, block producers may themselves be searchers. If not, the Seeker typically pays the Block Producer to place their transaction in the desired position within the block (usually at the top), the most common way of payment is through a Priority Gas Auction (PGA) or Sealed Auction OK (for example, via Flashbots).
Beyond block producers and searchers, the broader ecosystem may gain general benefits or suffer various costs from MEV extraction. For example, especially before the implementation of EIP-1559, the PGA often drove the gas price on the Ethereum mainnet to extremely high levels, greatly reducing the network usability for ordinary users due to expensive and unpredictable transaction costs. At the same time, however, efficient arbitrage between AMM pools ensures cross-market asset price consistency and the spread of price discovery. Additionally, some protocols rely on arbitrageurs to function "correctly", such as Balancer, where external arbitrage is the mechanism for rebalancing a user's fixed-weight asset portfolio, or Primitive, where external arbitrage evolves a user's option position into the correct return. Therefore, designing proper MEV extraction to incentivize positive-sum behavior and accrue rewards for the correct participants has profound implications for the long-term health of any given blockchain.
Block producers and searchers
Due to the large number of participants in the MEV ecosystem, it is easiest to start by analyzing the benefits earned by block producers as they play an important role in the functionality of the blockchain. Early blockchains such as Bitcoin and Ethereum relied on proof-of-work (PoW) as a consensus mechanism, where miners were block producers. However, as blockchain architectures have evolved, we have seen the development of proof-of-stake (PoS) blockchains, where validators act as block producers through their staked tokens to incentivize good behavior character of. (The Ethereum mainnet itself is scheduled to transition to proof-of-stake in 2022, an event known as a "merge.") The growing popularity of proof-of-stake blockchains is driving a shift from "miner-extractable value" to "maximum extractable value; "Similarly, considering block producers in general rather than miners individually would expand the applicability of our analysis. As we will see, examining the perspective of block producers will also give us insight into the dynamics that drive searchers, as there are huge advantages to bringing these two roles together.
Block producers benefit in two main ways. First, block producers can extract MEV themselves by running software to search for extraction opportunities as they propose blocks. Second, they may sell searchers the right to reorder transactions. In the first case, they capture all extracted value; it is worth noting that in the second case, when competing searchers submit higher bids, they currently capture an increasing proportion of the extracted value ( That is, competing searchers are willing to accept increasingly lower shares of extracted value for the right to extract any value).
There are many fascinating dynamics here:
Increase network dominance. Independent block producers implementing different MEV search strategies are strongly incentivized to merge and form larger and larger entities. By combining their MEV strategy with a greater ability to invest in searcher R&D, the merger allows both parties to extract more value than they would be able to capture on their own (ie, MEV extraction is subject to economies of scale). In particular, small block producers without sufficient capital to develop a competitive MEV strategy could be acquired by larger groups of integrated searcher block producers, threatening the decentralization of the entire blockchain. While auction mechanisms such as Flashbots auctions mitigate this risk by allowing even small validators to receive a large share of MEV revenue, adding MEV complexity can lead to the difficulty of integrating searcher-block producers (discussed below). This will in time exacerbate centralization risks through block producer mergers and acquisitions.
Additionally, block producers who can more efficiently extract MEV will gain an increasing share of network dominance, all else being equal. In a world without MEV and a fixed set of block producers with a constant hash rate or stake, rewards are roughly proportional and the relative power of different block producers remains constant over time. Therefore, if certain block producers are effectively compensated at a higher rate than others through superior MEV extraction, they will asymptotically dominate the network.
The rewards extracted by MEV can themselves be used to acquire a larger portion of the network; moreover, in proof-of-stake blockchains, they can entice users to delegate tokens to their stake by offering them liquid stake derivatives that It is possible to capture a fraction of the MEV profits generated by delegated staking, such as the recently released Eden Network yyAVAX . Note that MEV extraction itself scales superlinearly with the network advantage, with an immediate linear component coming from the ability to reorder transactions directly with the hash rate or stake share expansion, another component comes from new MEV opportunities created by reordering transactions across multiple consecutive blocks. That being said, these winner-take-all dynamics may take some time to play out, as evidenced by Ethermine’s ban on bundles that include DEX trade front-running, maintaining a significant portion of Ethereum’s total hash rate (currently . 30%)
Taken together, these constitute a centralization risk commonly discussed in MEV. As the degree of centralization increases, the blockchain will face adverse behaviors such as 51% attacks or malicious reorganizations. However, it is worth noting that as the network dominance of any given block producer increases, they are increasingly incentivized to protect the value of the entire network, which may reduce the risk of a truly destructive attack on the chain.
Integration of searchers with block producers. If block producers are not close to maximum capacity in terms of MEV fetches, they have a strong incentive to sell seekers the right to reorder transactions, hence the growing popularity of MEV-Geth, which supports known transaction bundling A closed-bid auction system as Flashbots Auction.
It is conceivable that a competitive market for MEV extraction would lead to the fact that the greatest profit for the vast majority of block producers would come from selling their reorder rights in this market, rather than extracting MEV themselves. Therefore, some hypothesize that Flashbots or Flashbots-like mechanisms will dominate in the coming years, as competition among searchers gradually reduces searcher profit margins to very low levels, and in turn allows block producers to The vast majority of MEV marginal investment is captured in a near-zero manner.
However, as Doug Colkitt points out, this only works when all participants agree on the value of a given transaction reordering. This is currently the case for the vast majority of MEV opportunities; for example, the value of atomic arbitrage is easy to calculate. However, as the complexity of blockchain transactions increases, it is natural to expect that searchers will become increasingly diverse in their ability to assess the total extractable MEV in any given transaction set. In this case, it becomes very beneficial to be a combined searcher-validator rather than a single searcher, because if other searchers value the re-ranking opportunity more than you, they will bid accordingly, You will be able to extract the zero value. Conversely, if you are an integrated searcher-validator (or you have an exclusive private relationship with block producers, etc.), you will be able to act on your private information and capture associated value.
In essence, the above situation is similar to the "winner's curse" in classical auction theory, where participants receive private information about the value of the item being bid on. As noted above, private information, i.e. different valuations of the reordering opportunities for any given transaction, may emerge as the complexity of blockchain transactions increases, where sophisticated searchers will have a significant advantage over naive searchers . However, in addition to the complexity of transactions in any given blockchain, different valuations may also be the result of statistical MEV, where seekers may spread risk across time and/or space (e.g. across multiple blockchains Executing transactions), instead of just focusing on atoms, guarantees profit opportunities. Finally, the growing popularity of low-fee blockchains such as Solana or appchains in the Cosmos ecosystem effectively makes high-complexity, low-margin MEV opportunities increasingly viable, while high-transaction-fee blockchains such as the Ethereum mainnet A higher floor is set for profitability in the number of MEV opportunities, and therefore a lower upper bound on complexity (under reasonable assumptions of the complexity-profit trade-off in the MEV opportunity space). Empirical evidence for this hypothesis comes from Jump Capital’s dominance of Solana validators. They account for roughly 20% of total Solana staking, and they are likely leveraging their high levels of human capital to extract the vast majority of available MEV.
General Security Interests. The presence of MEV incentivizes new network entrants, although the ability of block producers to capture MEV may lead to long-term centralization risks, with dominant producers increasingly capable of launching attacks on the network as described above, This directly counteracts the high capacity centralized risk-searching validators. Furthermore, the financial value gained by the block producers themselves increases the security of the entire network against external attackers who must deploy large amounts of funds to control a majority of the network's computing power or stake.
Therefore, MEV can have both positive and negative impacts on the security of a given chain. The general accrual of MEV to block producers increases network security, while the specific accrual of MEV to specific block producers reduces network security.
Fundamentally, it is very plausible that differences in the ability of block producers to extract MEV would exacerbate as transaction complexity and search power increase over time. Thus, it is conceivable to imagine a world where the most capable searchers are integrated with block producers and end up making up a significant portion of the network's hashrate or staking, along with nearly all other searchers (compared to top searchers with private information Relatively few) Fewer and fewer MEVs are captured through Flashbots-like auction mechanisms. While this may be an acceptable trade-off for improving overall network security, some strategies to further reduce the risk of centralization have been proposed, which we discuss in the next section.
Ordinary blockchain users
In addition to block producers and searchers, ordinary users also benefit from efficient MEV extraction (in addition to the general security benefits discussed earlier):
Price stability across markets. Arbitrage between liquidity pools ensures that asset prices do not vary wildly across different DEXs and blockchains, allowing users to trade freely without having to check prices on dozens of markets beforehand.
Conditional transaction. Some systems depend on certain transactions being executed in a timely manner when certain conditions are met. For example, lending platforms rely on users to liquidate positions below their minimum collateralization ratio. Protocols may also want certain utility functions to run after fixed intervals. In both cases, there is a competition between Seekers to bribe block producers to reorganize blocks in such a way that Seekers are the first users to receive the reward associated with the desired transaction. So these opportunities, while considered by some to be just “on-chain bots,” ultimately do qualify as MEV to some extent.
Of course, users may also suffer negative consequences from the proliferation of MEV:
Transaction costs are high. As mentioned earlier, depending on the structure of transaction fees for a given blockchain, prioritized gas auctions (essentially public auctions where searchers repeatedly submit successively higher bids for the same transaction based on their observations of competing bids) can push regular users up transaction costs. This leads to unpredictable spikes in fees for common transactions, greatly reducing quality of life, and making it impossible for undercapitalized participants to send any transactions at all.
Internet spam. In contrast, if transaction fees are unusually low, scaling may be too slow, or there is no computational complexity at all, then seekers are incentivized to spam the network with large numbers of low-value transactions in order to seize MEV opportunities as soon as they arise . Even if only a fraction of these opportunities materialize for any given searcher, underpricing deals can lead to a net profit. We observe this in practice with multiple blockchains such as Polygon and Solana. Similar to priority gas auctions, this also reduces the quality of life for ordinary users, in addition to facing high transaction fees, non-seekers simply cannot confirm their transactions with any reasonable probability, because they are just flooded with massive amounts of network spam .
Fetch preemptively. In the end, some forms of MEV purely extract value from users and provide zero yield to the wider cryptoeconomy. A simple example is the existence of a sandwich attack, which is a pure transfer of value from users to parties that capture MEV; it should be clear that no entity other than the immediate MEV beneficiaries can benefit from the existence of a sandwich attack. More generally, almost all forms of front-running are purely extractive and reduce end-user quality of life by increasing costs and unpredictability.
Thus, the net effect of MEV on the average user is the sum of a large number of different factors, often unclear whether it is positive or negative. As we will see shortly, different systems have been proposed that attempt to steer this calculation in the direction of the user's net benefit.
Innovations in MEV Management
Over time, blockchain developers have come to realize the complexities of MEV and its integral part of the modern cryptoeconomic system. Accordingly, they attempt to reorganize the blockchain architecture and incentive system to mitigate the negative effects of MEV while retaining or amplifying the positive effects. These attempts fall into two main categories:
Evenly distribute MEV among block producers to avoid centralization risks while gaining the network security benefits of MEV extraction
Mitigate the negative impact of MEV on ordinary users by reducing purely extracted MEV and/or distributing MEV profits to the blockchain ecosystem
These strategies have been tried at the infrastructure layer as well as at the protocol or application layer. For example, the implementation of EIP-1559 was an architectural change designed to mitigate the negative impact of priority gas auctions on ordinary users, but did little to change the distribution of MEV profits among block proposers. In contrast, Flashbots-style transaction ordering privilege auctions allow block producers to exploit a highly competitive search market, providing an effective lower bound on their MEV extraction efficiency, thereby narrowing the gap between the worst and best block producers in terms of MEV extraction. gap, but does nothing to prevent MEV from being extracted. In the following, we'll touch on some of the newer systems or proposed changes and their relative strengths and weaknesses.
fair sort
Naively, the easiest way to eliminate transaction front-running is to implement a first-in-first-out rule for transaction processing. This is easy to achieve if a single centralized party has the right to order all transactions; in this case, there is a clear order of arrival, and front-running is practically impossible as long as the centralized party can be trusted. This is currently the case, for example, with Arbitrum One, an optimistic rollup on top of the Ethereum mainnet, which has a single permissioned full node run by Offchain Labs with total transaction ordering authority. (Note that the use of orderers is an optional part of Arbitrum Rollup technology, which allows for near-instant confirmation of transactions.) However, centralizing transaction ordering to a single orderer naturally exposes all users to malicious actions from that orderer. activity risk, therefore, an eventual shift to a decentralized model is desirable.
However, achieving a precise notion of a fair order of arrival is non-trivial in a decentralized environment where thousands of nodes may receive transactions at different times. Orderly Fairness in Byzantine Consensus by Kelkar et al. (2020) makes some progress in this direction. It proposes a formal definition of "fair ordering" and a set of protocols, called Aequitas, that provide various guarantees of fair ordering. At a very high level, these protocols try to ensure that if many nodes receive transaction A before transaction B, then the resulting ordering should place transaction A before transaction B. Arbitrum One plans to eventually implement such a fair ordering protocol with the assistance of Chainlink's decentralized network of oracles.
In the next few years we will see further development of fair ordering algorithms as plausible, and the practical use of these consensus protocols by blockchains such as Arbitrum One will significantly reduce the severity of extracting transactions in certain venues. However, it's worth noting that relying on the FIFO paradigm is not without its drawbacks:
Latency advantage. Participants with the lowest node latency will be able to withdraw more MEV than those without nodes. This favors well-capitalized entities able to commit resources close to nodes and establish fast network connections. In general, differences in network latency systematically disadvantage less-connected parts of the world, which are the areas most likely to suffer from severe economic resource scarcity.
Internet spam. To increase the likelihood of their transactions being broadcast over the network as quickly as possible, users, especially MEV Seekers, are strongly incentivized to spam the network with the same transactions, repeatedly sending them to many different endpoints, and significantly increasing the average user's single possibility of transaction. Transactions will be dropped or delayed.
An intermediary between users and sequencers. Depending on how users typically send transactions to the orderer (or a decentralized oracle network for fair ordering, etc.), the intermediary itself could be a source of risk. For example, if users send transactions to an Arbitrum-based blockchain via RPCs, these RPCs could in principle reorder transactions and extract MEVs before passing them on to the sequencer.
Ultimately, "fair sequencing" is only fair relative to a particular set of priorities; ultimately, the current proposed implementation can simply be thought of as a set of alternative tradeoffs relative to other MEV economies.
N Block Sorting Rights Auction
Instead of relying on a predetermined set of entities to order transactions (e.g., a decentralized Chainlink network that implements fair ordering), the ability to arbitrarily reorder transactions within consecutive windows of N blocks can be achieved by Block Producer Auction. This mechanism creates a competitive market for MEV withdrawal rights, while ensuring users have the assurance that their transactions will only be delayed by at most ~N blocks. The most famous implementation of this strategy is Optimism (Optimism Rollup on Ethereum Mainnet), which calls these auctions "MEVA" (MEV Auctions), and aims to use MEVA revenue to fund the development of public goods.
It is useful to analyze the impact of MEVA from the perspective of individual beneficiaries:
In principle, block producers should be able to capture most of the value through a bidding process for transaction ordering rights. However, their short-term profits may be reduced because the blockchain needs to divert a small portion of the auction proceeds to public goods funding. This reduction may be partially or fully mitigated by the searcher's ability to capture more total MEV.
The introduction of MEVA will greatly affect Seekers; due to the increased difficulty of extracting multi-block MEV, the total profits of Seekers may increase, but the distribution of these incomes may become very uneven, with the vast majority of income going to the most skilled searchers.
For example, suppose a searcher wins the auction and becomes the orderer of N blocks. Seekers will extract as much MEV as they can based on their expertise; however, it is possible to have MEV remaining in blocks they have not yet extracted. Therefore, they can sell the right to extract the remaining MEV to other Seekers, or expand their capabilities to more fully extract each type of MEV. However, auctioning the right to extract MEV is logically extremely complex when Seekers themselves do not know what MEV is left in the block (because if they knew, they would extract it themselves). Therefore, the introduction of MEVA will accelerate the formation of a small number of monomeric MEV populations that are good at extracting each form of MEV and consistently win N block auctions.
This could be in contrast to the Flashbots sealed envelope auction, which only allows searchers to bid for the right to reorder packages of optional deals. Although bundles could in principle contain unextracted MEVs, the relative targeting of bundle submissions means that there is relatively less incentive for searchers of different types of MEVs to combine into a single entity compared to a setup with multi-block MEVAs.
Ordinary users earn a slight long-term gain from funding the public good that benefits all blockchain users. However, the explicit introduction of a competitive market to extract multi-block MEV and the overall centralization of MEV extraction could lead to higher levels of short-term losses.
Interestingly, due to the "winner's curse" of the auction, where participants have different private signals as described in the previous section, if all transaction ordering permissions had to be obtained through MEVA, the degree of complex MEV extraction could be limited to a relatively low level.
Like fair ordering, MEVA appears to be another trade-off. Blockchain users benefit from the transfer of a portion of MEV revenue to public goods funding; however, this comes at the expense of centralization of MEV withdrawals, resulting in higher levels of overall MEV withdrawals. In addition, there may be a small trade-off in cybersecurity commensurate with the extent of revenues from public goods funding withdrawals, although this may be offset by higher total MEV revenues. Whether the MEVA model of MEV management proves to be more attractive than other models remains to be seen in practice.
Proposer/block builder separation
A natural extension of the optional use of auctions to democratize MEV capture across block producers is between block proposers (the entities that assemble complete blocks) and block builders (that is, attesting to the validity of assembled blocks. Currently , in most blockchains, block proposers are also block builders, which essentially gives them the ability to extract MEV from blocks, even though many may voluntarily choose to do so through auction-based mechanisms such as MEV-Geth Earn MEV revenue.In this proposal scheme called Proposer/Block Builder Split (PBS), block producers (or, block builders or provers) must accept the block builder's highest bid. Builders may attempt to extract MEV themselves; alternatively, they may accept smaller bundles of transactions from Seekers and assemble them into a full block.
At a very high level, one might think of PBS as being roughly akin to requiring all block producers to run (some version of) a Flashbots auction, where they must accept the highest bid, and the bundle contains the entire block's transaction value. Essentially, it's an enhanced version of the Flashbots auction. In this sense, PBS may further democratize MEV extraction, allowing small validators to remain somewhat competitive. However, in the presence of massive economies of scale and complex probabilistic MEV proliferation, the dynamics favoring block producer centralization are only dampened rather than eliminated.
Within the scope of PBS, several different implementations have been proposed, as described in a recent Flashbots article "Why Building the Most Profitable Blocks Matter". Broadly speaking, these implementations take different approaches to the issue of block builder privacy, which is a key obstacle to the successful implementation of PBS. Essentially, if the block producers chosen for a given block are able to observe what block builders submit and submit their own blocks based on that information, they can simply copy the contents of the highest bidder's block, but at will bid. High fees, which capture all MEV in the process, and ultimately inhibit the construction of profitable blocks. Solutions fall into three main categories:
Transaction confusion. Cryptography can be applied to obfuscate the content of proposed blocks from block producers. For example, transactions and bundles can be compiled by block builders within secure enclaves such as Intel SGX. In theory, since the use of secure enclaves can also be cryptographically verified, this would prevent block producers from observing transactions. (However, Intel SGX is known to be particularly vulnerable to several attacks.)
Alternatively, more straightforward encryption schemes can be used to protect the privacy of user transactions, such as timelock encryption (decryption requires the passage of time) or threshold encryption (decryption requires a certain percentage of the block producer's private key). Unfortunately, the former leads to poor composability and user experience, while the latter is vulnerable to collusion by multiple block producers.
A pre-commitment to a proposed block. Instead of cryptographic barriers, block producers can be asked to pre-submit a specific set of block headers (each corresponding to the block builder's proposal) before the block builder is willing to publish the full block content. If block producers prove that a block header is not in the block they previously committed to, they will be subject to the slashing rules. Therefore, block producers cannot observe blocks that have been constructed and then use that information to resubmit bids. Vitalik describes the proposal in more detail in Proposer/Block Builder Separation Friendly Fee Market Design.
While its permissionless nature is elegant, the solution requires careful consideration of its design attributes in order to be effective against attack vectors. For example, a malicious block builder may submit a high-fee bundle to a block producer, but they refuse to publish after committing to it, and if the block producer has any restrictions on the number of blocks they will submit, it may Squeeze out legitimate block proposals. Slashing mechanisms also require careful calculation of potential failure modes; if poorly designed, attack vectors could conceivably remain open to block producers, either individually or in collusion.
Permissioned relay. If people are willing to accept the introduction of trusted parties into the system - which may be an intermediate step in the transition to a fully decentralized PBS - then implementation will be much simpler. Just as Flashbots auctions currently require bundles to be submitted to a trusted relay (assuming users' bundles are not stolen), introducing a trusted relay between block builders and block producers ensures that block builders Proposals are not leaked to block producers. A concrete implementation of PBS in this regard is MEV-Boost from the Flashbots research group.
Beyond the technical details of a particular PBS system, there is one unexpected benefit that deserves special mention. Enforcing PBS at the base layer means that block producers may credibly be able to claim complete neutrality in including user transactions, especially if they do not participate in the open market for MEV extraction. Certain forms of MEV have the potential to be classified as illegal by regulators, much in the same way that broker-dealers are seen as potential breaches of fiduciary duty in traditional finance when order-snapping of clients is seen. While this concern remains largely theoretical, it’s worth noting that Ethermine, one of the largest Ethereum mining pools, stopped accepting DEX preemptive packages half a year ago due to “compliance.” If this concern persists, PBS may allow centralized exchanges to continue offering staking services at competitive prices, as they can still generate revenue from all forms of MEV without being affected by potential enforcement actions.
Agreement Level Reduction for MEV Opportunities
Certain MEV opportunities may be understood as flaws in user behavior or protocol design that allow pure extraction of MEV as a result of normal user-protocol interactions. These MEV opportunities may disappear over time as new protocols emerge that prevent them from being created.
For example, liquidity pool imbalances are often caused by users performing large atomic swaps within a single pool. In principle, users could spread trades across multiple DEXs to reduce overall price impact and execute trades at a lower cost; however, doing this manually is slow and cumbersome. Thus, DEX aggregators such as 1inch, ParaSwap, and Rango, which determine the optimal path for transaction routing in order to provide users with superior transaction execution across many different DEXs (and in the case of Rango, across multiple chains), become become more and more popular. Ultimately, as more trading volume moves to these aggregators, there will be correspondingly less room for arbitrage opportunities available. (Having said that, it's worth noting that individual routing transactions of larger orders through aggregators can still be sandwiched, and arbitrage between aggregating and non-aggregating DEXs is still possible.)
Similarly, the introduction of centralized liquidity on Uniswap V3 led to the phenomenon of "just-in-time (JIT) liquidity", that is, seekers insert a very narrow range of deep liquidity immediately before users trade, and then immediately withdraw liquidity, thus gaining a large A portion of the associated transaction costs. While this results in lower price slippage for executed orders, it greatly inhibits the provision of private liquidity and, in the most pathological cases, may reach an equilibrium where all liquidity is JIT and no Any passive liquidity forces traders to request quotes from JIT liquidity providers. This can be prevented by introducing protocol-level mechanisms that make JIT liquidity essentially impossible, such as CrocSwap's "time-to-live" requirement, which enforces a floor on how quickly users can mint and subsequently redeem liquidity positions.
Other protocols have succeeded in desensitizing users to MEV by adopting the general concept of the previous "open" process and increasing the level of "privacy", so that external actors can no longer interfere with the extraction of MEV. For example, CowSwap performs periodic batches of off-chain limit order matching between user-submitted orders. Since orders are matched directly, these trades are unlikely to be subject to sandwich attacks, as execution prices do not interact with external factors such as liquidity pool balances. By limiting the scope of exchange interactions to direct interactions between buyers and sellers, transactions are protected from typical forms of front-running.
Arguably another interesting application of scope constraints is evidenced by the KeeperDAO system, which aims to establish permissioned channels between specific searchers (called Keepers) and platforms that generate MEV opportunities, such as DEXs where imbalanced exchanges of users generate arbitrage Chance. For example, Keepers' addresses might be whitelisted to allow them to exchange at lower fees; in turn, we could simulate the system for other types of protocols. Keepers will then be able to monetize the MEV opportunity ahead of non-Keeper Seekers, and since they don't participate in auctions with a larger class of non-Keeper Seekers, they will also be able to capture more MEV instead of necessarily being driven to the bottom low profit margins. In return for access to this MEV-extracted "walled garden," Keepers then forfeit a portion of the profits to share with KeeperDAO and the MEV generation protocol.
In addition to KeeperDAO, other protocols have proposed similar MEV sharing schemes, such as bloXroute's BackRunMe, which protects users from being front-runners while giving specific searchers an earlier reverse opportunity. Collectively, these arrangements are somewhat similar to the pay-for-order-flow (PFOF) practice in traditional finance, with privileged seekers benefiting from the protection of the "toxic flow" of the broader seeker-block producer ecosystem, which keeps them Profits drop to near zero like how market makers avoid the toxic flow of highly informed HFT trades, and in both cases users experience lower trade execution costs. The MEV ecosystem created by these protocols shifts profits from block producers (who would otherwise be able to asymptotically capture 99+% of the value of these opportunities) to the rest of the cryptoeconomic ecosystem. Reducing MEV revenue for unprivileged searchers and block producers in this way may mitigate MEV-based centralization while modestly reducing the overall degree of network security.
As we have seen, there is a strong interest from both users and developers in building an MEV-resistant blockchain ecosystem at the protocol level. In general, if MEV opportunities are created by transactions that "leave money on the table", we should expect users to strongly prefer protocols that provide greater value by allowing them to easily withdraw at least some of the inefficiencies of the protocol (which would otherwise be considered as MEV). As the cryptoeconomic system matures, MEV searchers and block producers should expect the "easy income" from correctable inefficiencies to diminish over time. This could drive searchers, who have invested heavily in domain-specific expertise and hardware, to increasingly sophisticated forms of MEV.
Probabilistic MEV Extraction
Currently, most MEVs are captured in a very "low risk" manner. For example, atomic arbitrage deals or sandwich packages submitted via the Flashbots auction are completely risk-free; either they are accepted, in which case they are profitable, or they are not accepted, in which case the submitter The situation is no worse than before. However, as competition for MEV becomes more intense, whether due to the constant influx of more searchers into the fixed space of MEV opportunities, or as users and protocols continue to try to eliminate simple MEV opportunities and capture value themselves, Searchers are likely to increasingly turn to complex MEV strategies.
Similar to quantitative strategies in modern traditional finance, if MEV Seekers increase their willingness to store and manage risk, they will be able to access a wider range of MEV opportunities. That said, Seekers will be able to extract value through transaction reordering, which is not necessarily profitable, but can be expected to be, if the associated risks are properly managed and diffused.
Although seemingly abstract, a simple form of risk warehousing is liquidity sniping, where seekers race to buy an asset as soon as a liquidity pool is created. Usually, tokens bought by liquidity snipers are not immediately unloaded in the same block, but sold within minutes to hours. We offer the following comments:
Despite its superficial resemblance to "simple robots," we believe that mobility sniping still falls within the category of MEVs. The simple proof is that seekers are generally willing to pay block producers more to include their buy orders as soon as liquidity is added. The expression of preference for the ordering of transactions within a block clearly indicates the presence of MEV.
Liquidity sniper profits cannot be guaranteed. Depending on the pre-existing token allocation, the price may be lower than its entry price. However, under favorable market conditions, most new projects are likely to see significant price increases after increased liquidity. Therefore, searchers are taking inventory risk even though their transactions have positive expected value.
Recall that the market maker's role is characterized by accepting inventory risk in exchange for profit on the bid-ask spread. In low-latency, high-TPS blockchains that support traditional market-making strategies on a central limit order book, we are likely to see the roles of market makers and block producers merge, as transaction ordering permissions will allow them to apply complex management strategy and inventory risk of its market-making strategy. (This may be one of multiple motivations for Jump Capital's large investment in the Solana ecosystem, where they provide about 20% of staked SOL.)
In a similar fashion, we might expect MEV seekers to also begin to spread risk across time, much in the same way that modern high frequency trading firms execute hundreds of thousands of trades per day. Not all of these trades are profitable, but since so many trades are made, the law of large numbers ensures that they are always profitable on time scales of hours or days. There is no particular reason that transaction reordering privileges should only result in MEV extraction opportunities that are profitable over the timeframe of multiple transactions or within a single block, and thus effectively risk-free for seekers ; thus, it is not surprising that the searcher strategy incorporates modern financial sophisticated quantification techniques that allow extraction of low-certainty forms of MEV, especially on newer blockchains with low transaction fees and fast confirmation times.
In fact, one can already imagine how existing MEV extractions could be extended to probabilistic settings. Currently, a sandwich attack can either pre-run or post-run its target transaction; by excluding any other intervening transactions between the two halves of the sandwich, the sandwich attacker minimizes the risk (e.g., a price drop before they can sell their inventory). However, this requires precisely placing two separate transactions, each with an associated swap fee (0.3% in Uniswap's case). Recall that in a liquidity pool with two paired assets A and B, trades are "symmetrical" because buying A is roughly equivalent to selling B, and vice versa. Consider the following transaction sequence with two independent sandwich target transactions:
The sandwich attacker buys A
Target Transaction #1 Buy A
Sandwich attacker trades A for B
Target Transaction #2 Buy B
Sandwich Attacker sells B
In the example above, the sandwich attacker only paid the swap fee 3 times, but if the sandwich attacker sandwiched the two target transactions separately, they would have to pay the swap fee 4 times. Since the swap fee is 0.3% of the entire transaction size, being able to take some inventory risk between target transactions #1 and #2 can lead to significantly higher profits (with the additional difference in the distribution of higher expected value transaction returns) . However, sandwich attackers must take care to manage their inventory risk appropriately; e.g., if target transaction #1 is actually arbitraged using A's below-market price, it is unlikely that the sandwich attacker will be able to profitably exit the sandwich in the opposite direction (i.e. the sandwich transaction itself may carry information about future price movements). Depending on their particular setup, probabilistic MEV searchers may also impose position size limits on all open trades to prevent overexposure to any single asset's idiosyncratic risk.
As Obadia et al.Unity is strength: Formalizing the maximum extractable value across domains(2021), a final form of probabilistic MEV emerges when considering MEV across different domains. For Seekers who are not themselves block producers for all relevant domains, cross-domain MEV extraction (e.g., arbitrage across two different blockchains) necessarily involves some degree of uncertainty about the relative order or confirmation status of their transactions sex. For example, one could imagine a confirmation of a purchase on one blockchain, while an offsetting sale on another blockchain cannot be processed, leaving the searcher holding inventory, possibly at a loss. Nonetheless, those seekers who can competently manage these risks will be able to take full advantage of MEV extraction in an increasingly cross-chain world. (However, it is worth noting that cross-chain MEV profitability can be an important driver of overall cryptoeconomic centralization, as validators, nodes, and miners of multiple blockchains or bridges coming together under a single Seeker umbrella will Allows extremely efficient, low-risk extraction of inter-chain and intra-chain MEV.)
in conclusion
in conclusion
The enormous complexity of MEV can be seen from the above discussion, and out of necessity, this article only touches the gist of the situation roughly. However, there is still much room for more detailed research on MEVs, such as:
More comprehensive, cross-chain, quantitative analysis of MEV extraction
Theoretical and empirical research on probabilistic MEV and its similarities and differences with HFT in traditional finance
Apply a more complex auction mechanism to capture MEV and distribute it to different ecosystem participants
Future work in these directions is eagerly anticipated.
I'll end this article with a brief digression on my personal views on MEV. While this may border on pointless abstraction or speculation, I have come to believe that the "struggle" over MEV - around its extraction, beneficiaries, and mitigations - is how cryptoeconomic networks are inherently subject to competitive forces A perfect example of microcosm shaping, constantly driving the development of technological excellence. Consider, for example, how the complexity of running transactions directly drives the development of different blockchain architectures and protocols that aim to capture more value for users by internalizing the profits that would otherwise be leaders. Likewise, the generally adversarial nature of cryptoeconomic systems, whose permissionless and open nature allows any competent operator to extract value from flaws, forces these systems to prioritize security and robustness from the start.
This is a very desirable quality of infrastructure that may one day form the basis for the development of a new financial system. For example, compare the bulky and unwieldy technology of traditional banks, characterized by broken websites, outdated SMS verification practices, susceptibility to social engineering, and a myriad of ubiquitous attack vectors. This is the end result of a system that is inherently ill-adapted to the brutally confrontational nature of the globalized world. While cryptoeconomic systems may take a while to mature, they will be more durable, in part because the only survivors are those who have successfully adapted to adversarial environments from their genesis.
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