• Forward the Original Title‘浅析MEV的发展现状及趋势’.

1. Definition and Background of MEV

MEV (Maximum Extractable Value) refers to the value extracted from users by rearranging, inserting, and censoring transactions within a block, such as arbitrage and liquidation. Fundamentally, it can be understood as “the additional revenue gained by adjusting the order of transactions when creating new blocks.”

The concept of MEV was first introduced by Phil Daian in “Flash Boys 2.0.” Before the Ethereum merger, MEV was primarily captured by miners and was therefore also referred to as “Miner Extractable Value” at that time. MEV originates from the fact that when users submit a transaction on the blockchain, it generally first enters the Mempool, a publicly accessible pool of pending transactions. Arbitrageurs and miners can retrieve from the Mempool and find opportunities to extract MEV.

After the Ethereum merger, roles in the MEV supply chain changed due to changes in the mining mechanism. Before Danksharding was implemented, Flashbots proposed MEV-Boost as an off-chain practice of PBS. Builders focus on constructing blocks and maximizing the profit of each block as much as possible, and then the most profitable blocks are submitted to the Proposer. The implementation of the PBS mechanism has brought some changes to the interests of the blockchain mining industry and promoted the specialization and commercialization of related institutions in the industry chain, forming a new pattern of the MEV supply chain.

2. MEV Supply Chain

The on-chain process of Tx based on MEV-Boost is as follows (light green in the figure represents the conventional on-chain process of Tx, and white modules represent the on-chain process of MEV):

Source: Flashbots

Compared with the conventional Tx on-chain process, MEV’s Tx on-chain process uses Flashbots’ MEV-Boost to implement PBS’s out-of-protocol practice, and at the same time, MEV is divided and captured by the roles of Searcher, Builder, and Validator.

Searcher: Typically, these are roles such as arbitrage and liquidation robots, DeFi traders, and Ethereum DApps with advanced use cases. They find all extractable value on the chain through different methods and then bundle transactions together to provide to the Builder.

Builder: Builders are generally professional institutions (there have been 36 active Builders in the past 14 days, with the top 6 monopolizing over 88% of the market share). They select the most profitable bundles from the Bundles sent by Searchers and package them into Full Blocks, which are ultimately sent to Validators via Relay. Several bundles can be combined to form a Block, which may also include pending transactions from other users in the Mempool.

Source: MEVBoost.pics

Relay: Relay is responsible for connecting Builder and Proposer, verifying the validity and bid of the block submitted by Builder, and submitting the valid highest bid to Proposer. It is currently an oligarchy, with only 11 active Relays. However, Relay does not participate in the division of MEV profits and is a neutral infrastructure;

Source: MEVBoost.pics

Validator: Validator is the Miner of ETH2.0. Validators (Proposers in Validators) are responsible for proposing Blocks to the network and adding Blocks to the chain. At present, Validator’s competitive landscape is gradually stabilizing, with Lido ranking first in market share. Validators can obtain both consensus rewards (block rewards) and execution rewards (MEV+Tips).

Source: MEVBoost.pics

Various projects are currently involved in different stages of the MEV supply chain. In the Searcher stage, there are many arbitrage and liquidation robots, DeFi traders, market makers, etc. There are also projects serving these Searchers, such as data platforms like EigenPhi that showcase on-chain arbitrage cases. In the Builder stage, there are specialized institutions such as Flashbots, BloXroute, Blocknative, etc. The Relay, as a neutral infrastructure in the MEV supply chain, is a trusted link, and there are currently 11 active Relays. Many projects are also involved in the Validator stage. Relatively speaking, the Validator network has a certain level of robustness. Judging from recent financing situations, new teams are still interested in entering this field.

3. Classification of MEV

According to the method of obtaining MEV, it can be mainly classified into the following categories:

Front Running: This involves preemptively executing a transaction by paying a higher gas fee than the target transaction in the Mempool. For example, if there is a transaction in the Mempool for a certain token pair that will cause significant price fluctuations, one can insert a transaction before it. Alternatively, when a new NFT project launches, one can preemptively mint NFTs. Currently, preventing preemptive transactions is relatively simple by integrating a Private Transaction Pool similar to Flashboots Auction, which provides Front Running Protection.

Back Running: This refers to inserting a transaction after another transaction that causes significant price fluctuations, which may involve arbitrage, liquidation, etc. For example, if a large transaction occurs on-chain, causing price fluctuations for a certain token pair, one can insert a transaction afterward to balance the price on a DEX and profit from arbitrage. Alternatively, if a collateralized loan triggers a liquidation, one can insert a liquidation order afterward.

Sandwich Attack: This is essentially a combination of Front Running and Back Running. Searchers search for potential large transactions in the Mempool and preemptively buy assets that will appreciate before the transaction occurs. They then sell these assets immediately after the large transaction is executed to profit from the price difference.

Time Bandit Attack: This type of MEV mainly occurs in blockchain networks with the longest chain rule, such as the Bitcoin network based on the Nakamoto consensus.

In terms of the outcomes of these MEV occurrences, Back Running MEV is generally benign for blockchain networks, such as arbitrageurs using price differences between two DEXs and flash loans to achieve risk-free arbitrage, and liquidators maintaining the healthy operation of lending protocols. However, Front Running and Sandwich Attacks may result in losses for other users.

4. MEV’s Current Status and Future

MEV is a highly controversial topic due to the existence of non-benign MEV, which seems to lack ethical principles. For instance, Front Running, Sandwich Attacks, and Time Bandit Attacks can disrupt the trading experience and harm the interests of ordinary users on the blockchain. Therefore, for a long time, I hoped that the industry could introduce a solution/product/protocol to prevent the occurrence of these non-benign MEV.

However, the characteristics of transactions being publicly visible in the Mempool and the bidding rules for transaction ordering on-chain determine that MEV is inevitable. As a second-best option, if your transactions cannot avoid being extracted for MEV, it is better to use products/protocols that can provide feedback to you.

In response to the negative externalities that MEV (especially non-benign MEV) may bring to stateful blockchains (such as Ethereum), there are currently some products in the industry that can mitigate these impacts. For example, the Flashbots series of products:

Flashbots Auction: Flashbots Auction provides a private communication channel between Ethereum users and validators, enabling the effective conveyance of preferred transaction order within blocks. Through such products, on-chain transaction users can achieve Pre-trade Privacy, Failed trade privacy, Finality protection, and more.

Flashbots Protect RPC: This is an RPC endpoint product that allows users to achieve Front-Running Protection. Users can add it to their wallets, enabling their transactions to be submitted to Flashbots Auction. For users, there is no perceptible difference from regular transactions, but the results can achieve Front Running Protection and Failed trade Privacy.

MEV-Boost: In the PoS era, validators can independently sequence transactions from the Mempool, package them, or choose blocks with higher MEV income sequenced by the builder pushed by MEV-Boost. Through MEV-Boost, validator income can be significantly increased, so most validators choose to integrate MEV-Boost instead of sequencing themselves.

Source: IOSG Ventures Jiawei

From the perspective of the MEV Supply Chain, these three products play a role in various stages of the MEV Supply Chain.

Regarding the future of the MEV field, combined with the current development status of the MEV field, we believe there may be several main trends:

1. Domination Effect: Over 90% of the past 500 Epochs have been served by MEV-Boost, and Flashbots’ series of products have almost dominated every aspect of block production in the PoS era. With Flashbots as the First Mover, new entrants into the MEV field will need some core competitiveness to seize more market share.

2. Orderflow is Key: To gain more MEV opportunities, having sufficient Orderflow is essential. For ordinary transaction users, it is practically impossible to eliminate MEV. Even if users adopt Flashbots Protect RPC, they can only prevent Searchers in the Public Mempool from capturing potential MEV for their transactions. Builders in the Flashbots Auction network still have the opportunity to extract MEV from their transactions. Therefore, for ordinary users, since it is impossible to avoid being extracted for MEV, it is better to choose wallets, DEXs, or other Dapps that will reward MEV income to users.

3. Multichain MEV Still Has Growth Potential: MEV within the Ethereum chain may have been largely captured. However, the blockchain is a Multichain ecosystem, and there may still be some growth potential for MEV opportunities between Layer1 and Layer1, as well as between Layer1 and Layer2.

4. The On-chain Demand for Anti-censorship Transactions Continues to be Met: According to MEVwatch data, blocks on the Ethereum blockchain that comply with OFAC requirements account for 57.49% of the total blocks. In the recent 100 blocks, only 35 blocks have executed OFAC compliance, with minimal impact on on-chain demand for anti-censorship transactions. Although after the Merge, the major staking platforms are mostly centralized, these centralized entities may be subject to legal regulation, posing a challenge to Ethereum’s censorship resistance. However, even if over 90% of validators route transactions through MEV-compliant relays, transactions resistant to censorship can still be executed on-chain within an hour.

Disclaimer：

1. This article is reprinted from [IOBC Capital]. Forward the Original Title‘浅析MEV的发展现状及趋势’.All copyrights belong to the original author [0xCousin]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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