The Ethereum blockchain has always been a hotbed for innovation, and the recent Merge represents one of the most significant updates in its history. The Merge brought with it a new mechanism for capturing value, known as Maximal Extractable Value (MEV). This article delves into the complexities of MEV in Ethereum post-Merge, its impact on the network, and the social pressures it brings.
Understanding MEV in Ethereum Post-Merge
In Ethereum post-Merge, MEV refers to the value that can be gained by re-ordering transactions within a block. This is achieved by having the responsibility of building the block and re-ordering the transactions, or by bribing those that have this responsibility to include your transactions at various points.
In the pre-merge era, the miner that guessed the correct block hash first got to build and add a block to the chain, so it was always unknown who would be the party adding the block until it was suddenly known. Now, whoever mines the block is determined in a pseudo-random way, and it is determined ahead of time. This opens up an attack vector where a validator can DDOS the validator before them if they know their IP address, which stops them from extracting MEV from their block and proposing a valuable block.
The MEV-Boost System
After the Merge, Ethereum transitioned to a MEV-Boost system, which was made for the Proof-of-Stake algorithm. This system introduced new actors such as builders, who are responsible for aggregating transactions and bundles into blocks. A builder accepts sealed-price bids from searchers and runs optimizations to find the most profitable ordering.
The MEV-Boost system in Ethereum post-Merge is an adaptation of the Maximum Extractable Value (MEV) system for the Proof-of-Stake (PoS) algorithm. It was developed by Flashbots and works as follows:
Builder API: This is a modified version of the Engine API used by Beacon Chain nodes to connect execution clients responsible for creating blocks, as well as consensus clients that propose blocks.
Block Builders: These are entities that invest in the specialized equipment required for block production. They receive transactions from seekers (users who find opportunities for receiving MEV and make transactions based on them) and form the most profitable block using various strategies.
Relayers: These entities validate blocks before passing them to validators. They also value the MEV reward and protect the network from spam.
Escrow: This entity receives the contents of the block from the relay, making the data available to the validator.
This system allows validators to extract MEV by having the responsibility of building the block and re-ordering the transactions. The ability of someone to extract MEV will also be determined by how much access to private transaction flow they have, as the more transactions they actually have access to, the more transactions they can extract value from.
Sealed-Price Bids and Transaction Privacy
Sealed-price bids in the MEV-Boost system are a mechanism that allows entities, known as searchers, to propose transactions for inclusion in a block. These searchers find profitable Maximum Extractable Value (MEV) transactions and propose them to block builders, who then decide which transactions to include in their block.
In a sealed-price bid auction, all bids are revealed at once, with buyers only required to pay what they initially bid. This method eliminates the bidding wars that result in massive stress to the network and higher gas fees for regular transactions.
When a searcher finds a profitable MEV transaction, they submit a sealed-price bid to the builder. The bid includes the transaction details and the amount the searcher is willing to pay to have the transaction included in the block. The builder then accepts the bid and uses it to form the most profitable block.
This system allows for greater transaction privacy, as transactions are not sent to the public mempool but are instead sent to the builder, who can then decide how to include them in their block.
Optimizing for Profit
Builders in the MEV-Boost system optimize for the most profitable ordering by using a combination of strategies:
Private Value and Common Values: Builders have access to private transaction data, which they can use to their advantage. They can use this information to simulate how block space not occupied by bundles can be filled with profitable transactions from the mempool and other sources. This requires some knowledge of basic searching strategies.
Latency Advantages: Builders that are closer to the network (i.e., have lower latency) have an advantage in the auction settings. This is because they can bid later in the auction, giving them more information about the state of the market.
Searcher Collaboration: Builders rely on close collaboration with specialized searchers that identify MEV from strategies more complex and profitable than their own. This close collaboration can help builders identify more profitable transactions.
Block Subsidies: Some builders propose blocks with a higher bid than block reward value, suggesting that these builders are subsidizing their blocks in some fashion. This can help certain builders outperform others.
Builder Censorship: Builders that censor by default lead to censored blocks being sent to non-censoring relays. This can give certain builders a competitive edge over their peers.
Social Pressures and Changes in Timeframes
The post-Merge Ethereum landscape introduces several potential social pressures surrounding MEV:
Regulatory Scrutiny: With the transition to Proof-of-Stake, the landscape of MEV could shift dramatically. Regulatory bodies around the world need to establish whether value extraction by miners constitutes illegal activity. In most jurisdictions, activities such as front-running are considered illegal. Validators operating under centralized service providers like Coinbase, Kraken, and Binance may face legal considerations when proposing blocks that feature blatant front-running.
Validator Incentives: The majority of captured MEV used to accrue to miners under Proof-of-Work. With the switch to Proof-of-Stake, this MEV is now structured to flow to validators. However, whether or not validators choose to act similarly to miners today is dependent on their choices.
In conclusion, the post-Merge Ethereum landscape introduces several potential social pressures surrounding MEV, including regulatory scrutiny, shifts in validator incentives, the impact of fixed block times, and the emergence of new forms of MEV.