In the blockchain ecosystem, Maximal Extractable Value (MEV) has become an important area of research, involving not only technical implementation but also market behavior and economic impact. With Ethereum’s transition to Proof of Stake (PoS), the concept of MEV has undergone significant evolution. Validators have now become key players, capable of controlling transaction ordering and optimizing profits through various strategies. This shift prompts a re-examination of MEV’s definition and its performance across different consensus mechanisms.

Bing Ventures is dedicated to exploring industry frontiers, and this article will provide an in-depth technical analysis to help readers understand the challenges and opportunities presented by MEV.

Changes in MEV

Maximal Extractable Value (MEV) refers to the total value that miners or validators extract from block production on a network, beyond the standard block rewards and gas fees. In the context of Proof of Work, MEV was initially known as “Miner Extractable Value,” involving miners maximizing profits by choosing the order of transactions and which transactions to include in a block. This could involve various strategies to manipulate transaction ordering for financial gain.

With Ethereum’s transition to Proof of Stake in 2022, the concept of MEV has expanded and evolved. The term now includes “Maximal Extractable Value” to reflect that it is not only miners (now validators in PoS systems) who can extract value, but also other network participants. In PoS systems, validators, like miners in PoW systems, control the order of transactions and can influence which transactions are included in a block.

Key players in MEV

1. Validators/Miners: They have exclusive power to order and include transactions, allowing them to directly extract MEV.
2. Searchers: These are independent participants 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 searchers to benefit from MEV.

MEV extraction strategy

1. 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 marketplace aimed at making this process more transparent and fair by allowing users and miners to agree on transaction order in advance.
2. Sandwich Attacks: A more malicious strategy where bots place orders before and after a large transaction on a decentralized exchange (DEX) to manipulate market prices and profit from the resulting slippage. This directly impacts the financial outcome for the original trader.
3. DEX Arbitrage: Searchers exploit price differences of tokens between different DEXs. By buying tokens at a lower price on one exchange and selling them at a higher price on another, they help align market prices and improve market efficiency.
4. Liquidations: In DeFi lending, borrowers must deposit cryptocurrency as collateral. If borrowers fail to repay the loan, protocols often allow anyone to liquidate the collateral and earn liquidation fees. MEV searchers compete to identify which borrowers can be liquidated and collect liquidation fees for themselves.

Market Size: New Changes After Cancun Upgrade

The leader in the MEV space, Flashbots, provides a marketplace aimed at facilitating MEV in a more balanced and structured environment by allowing users and miners to agree on transaction order in advance. Looking back at projects in the “infrastructure” sector over the past six months, MEV, represented by Flashbots, showed excellent revenue performance up until April. Notably, it recorded $1.428M in a single week in December, outperforming other projects in the sector, highlighting MEV’s strong profitability. However, after Ethereum’s Cancun Upgrade in March, Flashbots’ revenue significantly decreased for the following reasons:

1. EIP-4844 (Proto-Danksharding):
2. Increased transparency and predictability: By introducing data blobs, this EIP changed how transaction data is handled, making the network’s data processing more efficient and predictable. This reduced MEV opportunities that exploit transaction delays or reordering.
3. Improved network efficiency and reduced gas fees: This EIP provides an efficient way to store large amounts of data, lowering gas fees for processing large-scale data transactions. While it reduced the cost of MEV strategies involving large data, it also increased competition due to faster transaction processing.
4. EIP-1559 (Fee Market Reform):
5. Increased transparency and predictability: The introduction of base fees and tip fees provided better predictability and stability for network transaction fees, reducing MEV opportunities related to manipulating transaction fees.
6. EIP-2929 (Increased Gas Costs for Certain Operations):
7. Increased execution costs: By raising the gas costs for certain smart contract operations, this EIP directly impacted 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, during the 7 days up to May 17, profits from DEX arbitrage were approximately twice that of sandwich attacks. However, in terms of trading volume, sandwich attacks significantly led, being about seven times greater than DEX arbitrage. The profit-to-trading-volume percentage for DEX arbitrage is around 14%, much higher than the 0.01% for sandwich attacks. Therefore, 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 within its liquidity pools, we can gain deeper insights into the overall state of DEX arbitrage.

Source: OP Crypto

From an on-chain transaction perspective, MEV’s trading volume on Uniswap is extremely significant.

Industry map: major players in upstream, midstream and downstream industries

Source: OP Crypto

Upstream: Transaction Signing and Broadcasting

Midstream: Transaction Sequencing and MEV Opportunity Discovery

Downstream: Block Proposing and Verification, Completing MEV Extraction

Upstream

The upstream primarily includes RPC providers who are responsible for signing transactions and broadcasting the signed transactions from local nodes to the entire network. These operations are usually submitted by users or other arbitrary initiators and are initially included in the public mempool. The main task in the upstream stage is to generate and broadcast transactions.

Midstream

Midstream is responsible for block construction in public or private environments. In this stage, block producers (such as validators and block builders) select transactions from the mempool, sort and package them according to their preferences. To maximize profits, block producers usually decide the order of transactions based on transaction fees. Additionally, they directly look for MEV opportunities, such as arbitrage opportunities, to decide how to allocate MEV profits. For example, they can choose to copy searchers’ transactions, perform operations themselves, or allow searchers to compete for on-chain positions by adjusting operation fees. The key activities in the midstream stage are transaction sequencing and the discovery and utilization of MEV opportunities.

Downstream

Downstream is mainly responsible for proposing and verifying new blocks, ensuring users’ transactions and MEV extraction transactions are confirmed by network consensus and ultimately obtaining MEV revenue. Validators play a crucial role in this stage, and they may come from various channels such as CEX, liquid staking, institutional staking, or individual staking. The core task in the downstream stage is to package the sorted transactions into blocks and confirm these transactions through the network consensus mechanism, completing the entire MEV extraction process.

Source: ChainLink

Searcher

1. Programmers who use complex proprietary algorithms to identify MEV opportunities in the mempool.
2. They monitor both public transaction pools and private pools of MEV projects.
3. They compete with other searchers by submitting “bundles” to block builders, including the maximum gas fees they are willing to pay.

Block Builder

1. They compete in real-time markets to build blocks on behalf of validators.
2. They accept transactions from searchers, select the most profitable bundles, and send these blocks to relays through MEV programs (such as MEV Boost, Flashbots).

Relay

1. They act as intermediaries between block builders and proposers (validators), allowing validators to offer their block space.

Latest industry developments

Reflecting on the past few months, MEV has shown significant performance across various sectors. For instance, Flashbots, through its innovative market structure, has demonstrated the potential of MEV in a highly transparent and structured environment. Although the Cancun upgrade of Ethereum led to a reduction in Flashbots’ revenue, analysis reveals that these changes are primarily due to increased network efficiency and the implementation of new protocols. This reflects the dynamic nature of MEV strategies in adapting and evolving.

In the future development of MEV, numerous new projects and technologies are emerging. For example, Gnosis’ Agnostic Relay and Automata Network’s Conveyor showcase new approaches to addressing MEV challenges under different technological and market conditions. Additionally, SUAVE, by unifying mempools across chains, offers an innovative solution to cross-chain MEV issues, providing new perspectives for MEV research.

Gnosis

Gnosis’ Agnostic Relay is an open-source tool for providing MEV Boost relays on the Ethereum network, allowing anyone to participate in block building and production. Its design and implementation rely on the knowledge and experience of the Gnosis community and have received support and contributions from the Flashbots team.

1. Neutral Block Building/Production: Agnostic Relay ensures that all submitted transactions can be validated without any filtering. This neutrality is crucial for maintaining the decentralization and censorship resistance of the blockchain.
2. Flashbots MEV-Boost Relay Fork: Agnostic Relay is a fork of the Flashbots MEV-Boost relay, combining the extensive knowledge and active support of the Flashbots team and community, ensuring its reliability in both technical and practical applications.

AutoMeta

Automata Network is a modular proof layer that extends machine-level trust to Ethereum through TEE (Trusted Execution Environment) co-processors. Ethereum acts as a global validator on this network, anchoring a decentralized proof network across hardware and software components.

1. MEV protection (Conveyor)
   1. Conveyor prevents “sandwich attacks” by determining the order of transmitted transactions, thus preventing miners from reordering them. It sorts transactions appropriately, like a conveyor belt, protecting users from malicious manipulation.
2. Governance privacy (Witness)
   1. Witness allows users to make proposals and vote without revealing their identities, incentivizing token holders to participate with zero gas fees. Users can submit proposals and invite community members to vote through a simple interface. Voting is sent through privacy relays, and results are displayed according to the privacy level chosen when the proposal was created.

Eden

Eden Network provides protection and support to the Ethereum ecosystem through various products, mitigating the negative impacts of MEV and offering tools and data to enhance the earnings of validators, builders, and searchers.

1. Eden RPC: A set of endpoints that protects Ethereum users from malicious MEV attacks, such as front-running and sandwich attacks. It provides a safer transaction environment, reducing additional costs incurred by users due to MEV.
2. Eden Relay: A suite of tools designed to help Ethereum validators and builders maximize their revenue. It offers optimized block building and proposal processes, increasing the earnings of validators and builders.
3. Eden Bundles: An endpoint that allows advanced MEV searchers to submit transaction bundles to the builder network. It provides a more efficient method for extracting MEV, boosting the earnings of searchers and builders.

Eden has three product updates: 0xProtect, Eden Public Data, and Ethereum Mempool Streaming Service.

1. 0xProtect

Function: Maintains an on-chain OFAC sanctions list, allowing block production participants to automatically filter transactions that include sanctioned wallet addresses.

How It Works: Updates and maintains the sanctions list in real-time via a smart contract registry, ensuring all transactions comply with OFAC sanctions. Participants can directly access this registry to automatically filter out non-compliant transactions.

Use Cases: MEV searchers, block builders, relays, and validators can use 0xProtect to ensure their operations comply with regulatory requirements, avoiding legal and compliance risks.

1. Eden Public Data

Function: Provides a range of public datasets stored in BigQuery, supporting various data extraction and loading (ETL) processes.

Main Datasets:

1. MEV-Boost:

MEV-Boost Bids: Builder bidding data collected from MEV-Boost ecosystem relays.

MEV-Boost Payloads: Payload data collected from MEV-Boost ecosystem relays.

1. Flashbots:

Mempool Dumpster: Transactions detected from Flashbots Mempool Dumpster.

MEV-Share: Transactions detected from Flashbots MEV-Share.

1. Gnosis:

MEV Blocker: Transactions detected from Gnosis MEV Blocker.

1. Ethereum Auxiliary:
2. Tags by Pubkey: Tags for Ethereum public keys.
3. Ethereum Mempool Streaming Service : Aims to provide real-time transaction data streams for block builders, MEV searchers, and dApps to optimize block and transaction bundle construction.
4. Real-Time Data Stream: Offers real-time transaction data streams, allowing users to access pending transactions in the Ethereum public mempool instantly.
5. Rich Data Points: Provides thousands of transaction data points, including transaction hashes, senders, receivers, transaction amounts, gas prices, and more.
6. Optimizing Block Building: Helps users construct better blocks and transaction bundles through real-time access and rich data points.

CoW Protocol

MEV Blocker, developed by CoW DAO, aims to protect Ethereum transactions by preventing front-running and sandwich attacks. The project uses an RPC endpoint to send transactions to a searcher’s mempool, where searchers track bidding opportunities and share the profits with users.

1. RPC Endpoint:
   1. Function: Provides an RPC endpoint to protect Ethereum transactions from front-running and sandwich attacks.
2. Searcher Mempool:
   1. Function: Transactions are sent through the RPC endpoint to a searcher mempool, where searchers track and bid for transaction opportunities.
3. Profit Sharing Mechanism:
   1. Function: After searchers successfully track transactions, the profits are shared between users and searchers in a 90/10 split.

SUAVE (Flashbot)

SUAVE, proposed by Flashbots, is a new model designed to address key issues in current MEV extraction, such as cross-chain MEV and builder centralization. SUAVE creates a layer-0 blockchain that acts as a shared mempool for multiple blockchain networks, achieving cross-chain unification.

1. Preference Submission:  

Function: Users no longer submit specific transactions but instead submit “preferences” that reflect their objectives. These preferences can be set based on specific conditions and vary in complexity.

2. Cross-Chain Unified Mempool:  

Function: SUAVE, as a layer-0 blockchain, creates a unified mempool that spans multiple blockchain networks. Through this cross-chain unified mempool, SUAVE effectively addresses cross-chain MEV issues, enhancing fairness and transparency in cross-chain transactions.

The future of MEV: From technology to ethics

The transparency of MEV extraction is both an advantage and a potential risk. In the future, blockchain technology will need to find a new balance between transparency and preventing manipulation. One approach is to use more advanced zero-knowledge proof (ZKP) technologies to keep transactions anonymous before they are verified, while ensuring their legitimacy. This not only protects user privacy but also prevents malicious manipulation, maintaining the fairness of the network.

The integration of smart contracts and machine learning

The integration of smart contract automation with machine learning is a future direction for 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 enhance the accuracy of MEV extraction. For example, by combining 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 emerging field with significant potential. By developing new cross-chain protocols, such as those seen in Cosmos and Solana, MEV extraction across different blockchain networks can be achieved. This cross-chain solution not only enhances the flexibility and applicability of MEV but also promotes interoperability within the blockchain ecosystem. However, it also introduces new challenges, such as the security and efficiency of cross-chain transactions, which need to be addressed through innovative technological approaches.

The rise of the dynamic MEV market

The future MEV market will be more dynamic and complex. By leveraging AI and big data analytics, market trends and trading behaviors can be captured in real time, allowing for dynamic adjustments to MEV extraction strategies. For example, machine learning algorithms analyzing historical transaction data can predict future market fluctuations, enabling the development of more effective MEV extraction strategies. This rise of a dynamic market will fundamentally transform the existing MEV ecosystem, making it more intelligent.

Optimize incentive mechanism

To attract more participants and maintain the healthy development of the network, we need to continuously optimize economic incentive mechanisms. Introducing new reward models and distribution mechanisms will ensure that every participant benefits fairly from MEV. Additionally, exploring new business models, such as providing MEV protection services and developing MEV optimization tools, can increase the value of the entire ecosystem. This will help sustain the network’s long-term stability.

MEV is not just a technical issue but also a complex field involving ethical considerations. While pursuing technological innovation, we must deeply consider its ethical impacts. For instance, when developing new technologies, we need to ensure they do not lead to market unfairness, preserving the transparency and fairness of the blockchain network. In PoS systems, validators can extract MEV by controlling transaction order, which may lead to network centralization and unfair practices. To address this issue, we can explore new mechanisms such as dynamic validator selection and reputation-based reward systems. Introducing more randomness and diverse incentive measures can help ensure the network’s decentralization and fairness.

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