Written by Bing Ventures
In the blockchain ecosystem, Maximum Extractable Value (MEV) has become an important research area. It is not only about technical implementation, but also about market behavior and economic benefits. As Ethereum moved to Proof of Stake (PoS), the concept of MEV has undergone significant evolution. Validators are now the new key players, able to not only control the order of transactions but also optimize profits through a variety of strategies. This shift prompts us to re-examine the definition of MEV and its performance under different consensus mechanisms.
This article will help you understand the challenges and opportunities brought by MEV through in-depth technical analysis.
The evolution of MEV
Maximum Extractable Value (MEV) refers to the total amount of value that a miner or validator can extract from block production on the network, beyond the standard block reward and gas fees. In the context of proof-of-work, MEV was originally referred to as "miner extractable value" and involves miners using their ability to choose the order of transactions and inclusion in blocks to maximize profits. This can include various strategies to manipulate the order of transactions for financial gain.
As Ethereum moved to proof-of-stake in 2022, the concept of MEV has expanded and evolved. The terminology now includes "maximum extractable value" to reflect that it is not only miners (now validators in PoS systems) who can extract value, but also other network participants. Validators in PoS systems, like miners in PoW systems, control the order of transactions and can influence which transactions are included in blocks.
Key players in MEV
Validators/Miners: They have the exclusive power to order and include transactions, allowing them to directly withdraw MEV.
Seekers: These are independent actors who use algorithms and bots to identify profitable MEV opportunities. They typically pay high gas fees to validators to prioritize including their transactions, which indirectly allows seekers to benefit from MEV.
MEV extraction strategy
Front-Running This involves bots detecting profitable transactions in the mempool and placing their own transactions with higher gas fees to be processed first. For example, Flashbots provides a market that aims to make this process more transparent and fair by allowing users and miners to agree on the order of transactions in advance.
Sandwich Attacks A more malicious strategy in which bots place orders around large trades on decentralized exchanges (DEX) to manipulate market prices and profit from the slippage caused. This directly affects the original trader's financial results.
DEX Arbitrage Seekers take advantage of price differences between tokens on different DEXs. By buying tokens at a lower price on one exchange and selling them at a higher price on another exchange, they help align market prices and improve market efficiency.
Liquidations In DeFi lending, borrowers are required to deposit some cryptocurrency as collateral. If the borrower is unable to repay the loan, the protocol typically allows anyone to liquidate the collateral and earn a liquidation fee from the borrower. MEV searchers will compete to determine which borrowers can be liquidated and collect liquidation fees for themselves.
Market size: new changes after Cancun Upgrade
Flashbot, the leader of the MEV track, provides a market that aims to enable MEV to be carried out in a more balanced and structured environment by allowing users and miners to agree on the transaction order in advance. Looking back at the projects under the "Infrastructure" sector in the past six months, MEV representative Flashbot had excellent revenue performance until April, and even recorded $1.428M in revenue in a single week in December, topping other projects in the sector. It can be seen that the MEV track once had excellent profitability. However, after Ethereum's Cancun Upgrade in March, Flashbot's revenue dropped significantly. The reasons are as follows:
1. EIP-4844 (Prototype Sharding Technology):
Increased transparency and predictability: By introducing data blocks (blobs), the protocol changes the way transaction data is processed, making the way the network handles large amounts of data more efficient and predictable. This change reduces the opportunity for MEVs to exploit transaction delays or reordering.
Improved network efficiency and reduced gas fees: This EIP reduces the gas fees for executing large-scale data processing transactions by providing an efficient way to store large amounts of data, making MEV strategies involving big data less expensive, but also more competitive because of the increased transaction processing speed.
2. EIP-1559 (Fee Market Reform):
Improved transparency and predictability: The introduction of the concepts of base fees and spike fees provides better predictability and stability for network transaction fees, reducing the opportunity for MEV manipulation through transaction fees.
3. EIP-2929 (Increase the gas cost of specific opcodes):
Increased execution costs: By increasing the gas costs of specific smart contract operations, this change could directly impact MEV strategies that rely on complex smart contract interactions, such as multi-step arbitrage or contract interactions, making them more expensive and less attractive.
Source: EigenPhi MEV
In terms of industry performance, in the seven days ending May 17, the profit from DEX arbitrage was about twice that of the sandwich attack; in terms of trading volume, the sandwich attack was far ahead, about seven times that of DEX arbitrage, and the profit/trading volume percentage of DEX arbitrage was about 14%, much higher than the 0.01% of the sandwich attack. From this, it can be concluded that DEX arbitrage is the most profitable operation in the industry.
Source: jhackworth
Uniswap is the decentralized exchange with the highest arbitrage trading volume. By analyzing the arbitrage performance in its liquidity pool, we can gain in-depth understanding of the entire DEX arbitrage situation.
Source: OP Crypto
From the perspective of on-chain transactions, MEV accounts for a very significant proportion of Uniswap’s transaction volume.
Industry Map: Major Players in the Upstream, Midstream and Downstream
Source: OP Crypto
Upstream: transaction signing and broadcasting.
Midstream: Deal sequencing and MEV opportunity discovery.
Downstream: block proposal and verification, complete MEV extraction.
Upstream The upstream mainly includes PRC providers, who are responsible for signing transactions and broadcasting signed transactions from local to the entire network. These operations are usually submitted by users or other arbitrary initiators and are initially included in the public memory pool (mempool). The main task of the upstream stage is to generate and broadcast transactions.
Midstream The midstream is responsible for block construction in a public or private environment. In this phase, block producers (such as validators and block builders) select transactions from the memory pool, sort and package them according to their preferences. In order to maximize profits, block producers usually decide the order of transactions based on the transaction fees. In addition, they will directly look for MEV opportunities, such as arbitrage opportunities, and decide how to distribute MEV profits. For example, they can choose to copy the transactions of searchers, conduct operational reviews and execute transactions themselves, or allow searchers to compete for on-chain positions by adjusting operational fees. The key activities in the midstream phase are transaction sequencing and the discovery and utilization of MEV opportunities.
Downstream The downstream is mainly responsible for proposing and verifying new blocks, ensuring that users' transactions and MEV extraction transactions are recognized by the network and ultimately obtain MEV income. Validators play an important role in this stage. They may come from various channels such as CEX, liquidity pledge, institutional pledge or personal pledge. The core task of the downstream stage is to package the sorted transactions into blocks, and finally confirm these transactions through the network consensus mechanism to complete the entire MEV extraction process.
Source: ChainLink
Searcher
Write code, often with the help of complex proprietary algorithms, to identify MEV opportunities in the memory pool.
Monitor public transaction pools and the MEV project’s private transaction pools.
Compete with other searchers to submit "transaction bundles" to block builders, along with the maximum gas fee they are willing to pay.
Block Builders
Compete in a live market to build blocks on behalf of validators.
Accepts transactions from searchers, selects the most profitable transaction packages, and sends these blocks to relayers through MEV programs (such as MEV Boost, Flashbot).
Relay
Acts as an intermediary between block builders and proposers (validators), allowing validators to offer their block space.
Latest Industry Developments
Looking back over the past few months, MEV has performed significantly in different areas. For example, Flashbots, through its innovative market structure, demonstrates the potential of MEV in a highly transparent and structured environment. Although Ethereum’s Cancun upgrade resulted in a reduction in Flashbots’ revenue, analysis shows that these changes are mainly due to network efficiency improvements and the implementation of new protocols, which reflects the dynamic nature of MEV strategies as they adapt and evolve.
In the future development of MEV, multiple new projects and technologies continue to emerge, such as Gnosis's Agnostic Relay and Automata Network's Conveyor, which demonstrate new ways to deal with MEV challenges under different technical and market conditions. In addition, SUAVE provides an innovative solution to the cross-chain MEV problem by unifying the memory pool across chains, which provides a new perspective for MEV research.
Gnosis
Gnosis' Agnostic Relay is an open source tool that provides MEV Boost relays in the Ethereum network, allowing anyone to participate in block construction and production. Its design and implementation rely on the knowledge and experience of the Gnosis community, and has received support and contributions from the Flashbots team.
Neutral Block Construction/Production: Agnostic Relay ensures that all submitted transactions can be verified without any filtering. This neutrality is essential to maintaining the decentralized and censorship-resistant properties of the blockchain.
Fork of Flashbots MEV-Boost Relay: Agnostic Relay is a fork of Flashbots MEV-Boost Relay, combined with the deep knowledge and active support of the Flashbots team and community to ensure its technical and practical reliability.
AutoMeta
Automata Network is a modular proof layer that extends machine-level trust to Ethereum through TEE (Trusted Execution Environment) coprocessors. Ethereum acts as a global validator in the network, anchoring a decentralized proof network across hardware and software components.
MEV Protection (Conveyor):
Conveyor prevents "sandwich attacks" by determining the order in which transactions are transmitted, preventing miners from reordering transactions. It properly orders transactions like a conveyor belt, protecting users from malicious manipulation.
Governance Privacy (Witness):
Witness allows users to make proposals and vote without revealing their identity, and incentivizes token holders to participate through zero Gas. Users can submit proposals and invite community members to vote through a simple interface. Votes are sent through a privacy relay, and the results are displayed according to the privacy level selected when the proposal was created.
Eden
Eden Network provides protection and support for the Ethereum ecosystem through multiple products, reduces the negative impact of MEV, and provides tools and data to increase returns for validators, builders, and searchers.
Eden RPC: A set of endpoints that protect Ethereum users from malicious MEV attacks (such as front-running and mezzanine attacks). Provides a safer transaction environment and reduces the additional fees users incur due to MEV.
Eden Relay: A set of tools to help Ethereum validators and builders maximize their income. Provides optimized block construction and proposal processes to increase the income of validators and builders.
Eden Bundles: An endpoint that allows advanced MEV searchers to submit transaction bundles to the builder network. Provides a more efficient way to extract MEV, increasing the benefits for searchers and builders.
Eden has updates for three products: 0xProtect, Eden Public Data, and Ethereum Mempool Streaming Service.
0xProtect:
Function: Maintain an on-chain OFAC sanctions list, allowing block producers to automatically filter transactions containing sanctioned wallet addresses.
How it works: Through the smart contract registry, the sanctions list is updated and maintained in real time to ensure that all transactions comply with OFAC sanctions requirements. Relevant parties can directly access the registry and automatically filter out non-compliant transactions.
Application scenarios: MEV searchers, block builders, relayers, and validators can use 0xProtect to ensure that their operations meet compliance requirements and avoid legal and regulatory risks.
Eden Public Data:
Function: Provides a set of public datasets stored in BigQuery, supporting a variety of data extraction and loading (ETL) processes.
Main datasets:
MEV-Boost:
MEV-Boost Bids: Builder bid data collected from relayers in the MEV-Boost ecosystem.
MEV-Boost Payloads: Payload data collected from relays in the MEV-Boost ecosystem.
Flashbots:
Mempool Dumpster: Transactions detected from Flashbots Mempool Dumpster.
MEV-Share: Transactions detected from Flashbots MEV-Share.
Gnosis:
MEV Blocker: Transactions detected from the Gnosis MEV Blocker.
Ethereum Auxiliary:
Tags by Pubkey: Tags of Ethereum public keys.
Ethereum Mempool Streaming Service: Aims to provide real-time transaction data streams to block builders, MEV searchers, and dApps to optimize the process of building blocks and transaction packages.
1. Real-time data streaming:
Providing real-time transaction data streams, users can instantly obtain pending transactions in the Ethereum public memory pool.
2. Rich data points:
Provides thousands of transaction data points, including transaction hash, sender, receiver, transaction amount, gas price, and more.
3. Optimize block construction:
Help users build better blocks and transaction packages through real-time access and rich data points.
CoW Protocol
MEV Blocker was developed by CoW DAO to protect Ethereum transactions by preventing front-running and mezzanine attacks. The project sends transactions to the searcher memory pool through an RPC endpoint, and searchers bid for opportunities to track and share the profits with users.
RPC endpoint:
Function: Provides an RPC endpoint to protect Ethereum transactions from front-running and mezzanine attacks.
Searcher Memory Pool:
Functionality: Transactions are sent via an RPC endpoint to a pool of searchers, who bid for the opportunity to track transactions.
Profit Sharing Mechanism:
Function: After the searcher successfully tracks the transaction, the profit is shared between the user and the searcher in a 90/10 ratio.
SUAVE (Flashbot)
SUAVE is a new model proposed by Flashbots that aims to solve some key issues in current MEV extraction, such as cross-chain MEV and builder centralization. SUAVE achieves cross-chain unification by creating a layer-0 blockchain that serves as a common memory pool for multiple blockchain networks.
Preference Submission:
Functionality: Instead of submitting specific transactions, users submit “preferences” that reflect their goals. These preferences can be set based on specific conditions and can vary in complexity.
Cross-chain unified memory pool:
Function: SUAVE, as a layer-0 blockchain, creates a unified memory pool across multiple blockchain networks. Through the cross-chain unified memory pool, SUAVE can effectively solve the cross-chain MEV problem and improve the fairness and transparency of cross-chain transactions.
The future of MEV: integration from technology to ethics
The transparency of MEV extraction is both an advantage and a potential risk. In the future, blockchain technology needs to find a new balance between transparency and preventing manipulation. We can use more complex zero-knowledge proof (ZKP) technology to keep transactions anonymous before verification while ensuring their legitimacy. This not only protects user privacy, but also prevents malicious manipulation and maintains the fairness of the network.
The integration of smart contracts and machine learning
The combination of smart contract automation and machine learning is the future direction of MEV extraction. Smart contracts can analyze market data in real time and use machine learning algorithms to predict optimal trading strategies. This dynamic adjustment capability will significantly improve the accuracy of MEV extraction. For example, combined with real-time market data, smart contracts can automatically adjust the order of transactions to maximize profits.
The potential and challenges of cross-chain MEV
Cross-chain MEV extraction is an area that has not yet been fully developed and has great potential. By developing new cross-chain protocols, such as Cosmos and Solana, MEV extraction between different blockchain networks can be achieved. This cross-chain solution not only improves the flexibility and scope of application of MEV, but also promotes the interoperability of the blockchain ecosystem. However, this also brings new challenges, such as the security and efficiency of cross-chain transactions, which need to be solved through innovative technical means.
Dynamics The rise of the MEV market
The future MEV market will be more dynamic and complex. Using AI and big data analysis technology, market trends and trading behaviors can be captured in real time, and MEV extraction strategies can be adjusted dynamically. For example, by analyzing historical trading data through machine learning algorithms, future market fluctuations can be predicted and more effective MEV extraction strategies can be formulated. The rise of this dynamic market will completely change the existing MEV ecosystem and make it smarter.
Optimizing incentive mechanisms
In order to attract more participants and maintain the healthy development of the network, we need to continuously optimize the economic incentive mechanism. By introducing new reward models and distribution mechanisms, we can ensure that every participant can benefit from MEV fairly. In addition, new business models can be explored, such as providing MEV protection services and developing MEV optimization tools, to increase the value of the entire ecosystem. This will help maintain the long-term stability of the network.
MEV is not only a technical issue, but also a complex area involving ethical considerations. We need to deeply consider the ethical impact of technology innovation. For example, when developing new technologies, we need to ensure that these technologies do not lead to unfairness in the market and maintain the transparency and fairness of the blockchain network. In the PoS system, validators have the ability to extract MEV by controlling the order of transactions, which may lead to network centralization and unfairness. To address this problem, we can explore new mechanisms such as dynamic validator selection and reputation-based reward systems. By introducing more randomness and diversified incentives, the decentralization and fairness of the network can be ensured.
