Coinspeaker Paradigm Researchers Propose MEV Tax to Redistribute Miners’ Transaction Profits
Paradigm researchers have introduced Miner Extractable Value (MEV) taxes, an innovation that allows applications on blockchain networks to capture their share of value and redirect it back to users and developers.
MEV is the profit miners or block builders can gain by ordering transactions within a block on a blockchain network. Miners have the power to select which transactions to include in a block and in what order they are to be processed. Thus, by capitalizing on these opportunities, they can generate lots of financial profit. However, this gain has only been for the miners and not for the developers who created the applications.
How MEV Taxes Could Benefit DeFi Applications
The researcher’s MEV taxes seek to provide a solution to change this methodology. They gave insight that, for MEV taxes to function, block proposers must follow the rules of competitive priority ordering. This process sorts transactions based on priority fees paid without engaging in censoring transactions or other activities that could affect the process. However, if block creators deviate from these rules, they can evade MEV taxes to gain the value generated by the transactions for themselves.
The researchers gave several ways this solution could work; they stated that decentralized exchange (DEX) routers could use the MEV taxes to increase the price received by swappers, while AMM can use it to reduce losses when providing liquidity in pools. Also, cryptocurrency wallets can capture any “backrunning” MEV associated with their users’ transactions. They stated:
“MEV taxes could be used to mitigate three important problems in MEV: letting DEX interfaces improve trade execution for swappers, letting AMMs reduce losses to arbitrage for their LPs, and letting wallets reduce MEV leakage for their users by selling the right to back-run the user.”
Off-chain or Dutch auction solutions such as protocols for oracles, collateralized lending protocols, and lending protocol liquidations also lend more use cases for MEV taxes.
Challenges and Limitations of Implementing MEV Taxes
The key point of MEV taxes is that they solely rely on the block builder adhering to the rules of competitive priority ordering. If these rules are not followed, the block creator could bypass the MEV tax and gain value, which leads to the approach’s limitation. It somewhat requires a high level of trust from the block builder.
The team stated that the solution lacks incentive incompatibility for a monopolistic block proposer, stating that the proposed solution can only work if proper competition exists for transaction inclusion. They revealed:
“They only work if there is fair competition for transaction inclusion, which can only happen if the block proposer follows rules that we’ll call “competitive priority ordering,” rather than maximizing their own revenue.”
The team, therefore, suggested some rules to enable its efficiency, such as priority ordering, censorship resistance, and pre-transaction.
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Paradigm Researchers Propose MEV Tax to Redistribute Miners’ Transaction Profits
