Author: 0XNATALIE
Paradigm researchers Dan Robinson and Dave White proposed a new concept, "MEV tax". The MEV tax mechanism allows applications to recover part of the MEV from transactions, with the goal of redistributing the value of MEV and preventing all of this value from being owned by the searchers who executed the transaction. This mechanism can be effectively implemented on OP Stack L2 such as OP Mainnet, Base, and Blast.
Introduction to MEV Tax
MEV taxes are a mechanism that allows smart contracts to automatically extract fees by analyzing the priority fee in transactions. Under this framework, smart contracts charge a certain percentage of MEV taxes based on the priority fee of the transaction. The priority fee is a fee paid by users to speed up the confirmation of their transactions by the network. After EIP-1559, Ethereum's transaction fees are divided into base fees and priority fees. The base fee is automatically set by the network and dynamically adjusted based on network congestion, while the priority fee is an additional fee paid by users to block proposers to incentivize the priority of their transactions.
Smart contracts check the priority fee of a transaction and charge a proportional additional fee, called a MEV tax. For example, under the MEV tax, users pay a 1u priority fee to the block proposer to incentivize them to process this transaction first. In order for the searcher to get all the MEV from this transaction (for example, to make a profit of 100u), he must pay 99u to the smart contract according to the 1:99 ratio fee set by the smart contract that interacts with this transaction, and this 99u will be returned to the application (for providing rewards to users, etc.). In the absence of the MEV tax, the user pays a 1u priority fee, and the proposer will get 1u if he processes this transaction, but the MEV (100u) generated by this transaction will go to the searcher.
Effectiveness based on competing prioritization rules
The effectiveness of the MEV tax is based on the rule of “competitive priority ordering”:
Sort by priority fee: Block proposers should sort transactions according to their priority fees. Transactions with higher priority fees should be processed first.
Censorship-free: Block proposers cannot censor or exclude any transaction, even those paying a lower priority fee.
No peeking and delay: Block proposers cannot peek at transaction contents in advance, nor can they delay the processing of certain transactions without reason.
Based on this rule, the MEV tax is only effective on OP Stack L2. Because the block proposers (sorters) on these chains follow the rules of competitive priority sorting. If the sorters violate these principles, they can also evade the MEV tax by manipulating the order of transactions and capture the value for themselves.
For Ethereum L1, blocks are built through competitive block auction systems such as MEV-Boost, where multiple block builders compete to maximize revenue by including high-fee transactions. Since the MEV tax reduces the benefits of builders, in a highly competitive block environment, builders tend to prioritize transactions that do not implement the MEV tax, so this mechanism is ineffective on Ethereum.
Problems that MEV Tax solves
The MEV tax can be adopted by any smart contract without the need for specific external facilities, allowing smart contract developers to customize the charging model according to their application needs. This flexibility ensures that different blockchain protocols and applications can be optimized according to their own strategies while maintaining compatibility with other systems. For example:
Optimize DEX transactions: When the MEV tax is introduced in DEX, the execution price of the transaction depends not only on the market supply and demand, but also on the MEV tax. In order to complete the transaction first and get a better price, the searcher needs to pay a higher MEV tax. This part of the fee can be used to increase the priority of the transaction in the block, or as a reward mechanism, fed back to users or liquidity providers, which may change the execution price of the transaction and indirectly reduce the slippage of the transaction price.
Reduce losses and rebalancing issues for liquidity providers in AMM: AMM can be set to prioritize transactions that pay higher MEV taxes, so that a portion of profits can be directly recovered from arbitrageurs and returned to the AMM or liquidity providers, ensuring that the returns of liquidity providers are more stable.
Capture the "backrun" MEV generated by transactions: By integrating the MEV tax into the smart contract wallet, a mechanism is designed to allow the user's wallet to automatically collect the MEV tax when trading. In this way, when other market participants try to use the MEV generated by the user's transaction, they must pay the MEV tax, which can be returned to the user of the original transaction. This mechanism effectively allows users to capture the MEV generated by their own transactions and protect their interests.
Limitations of MEV Tax
In addition to the effectiveness of the MEV tax, which is highly dependent on the sorter's strict adherence to the competition priority sorting rules mentioned above, it also faces some other limitations. For example, when a block is completely filled, the block proposer may have to abandon lower priority transactions instead of simply including them in the later stages of the block. In addition, the success of the MEV tax requires competition in the market, which means that the opportunity for transactions needs to be widely known. For some applications based on user intent, this may require the user's intent to be made public, resulting in potential value leakage in competition.
Although the MEV tax mechanism faces some challenges and limitations, this innovative approach is also a way to redistribute MEV reasonably, returning the MEV profits that originally belonged to searchers to applications. The purpose of MEV tax and MEV Share is similar, both of which are looking for ways to return MEV to promote fair distribution of the MEV ecosystem.
