You may have heard people talking about the controversial topic of MEV. Some people see MEV as a big opportunity, and some see it as a big problem. You may be wondering what Figment and other validator operators plan to do about MEV as we get ever-closer to smart contract support for PoS Ethereum. I’ll explain MEV in a simple, relatable way. If you want to know what our position is, skip to the bolded part in the last paragraph.
What is MEV?
MEV = “maximal extractable value”
MEV is the revenue that block producers make from their unique role in Ethereum. Ethereum was designed to reward block producers with transaction fees and block reward subsidies, but Ethereum miners have found new, unconventional ways to profit from their unique position. A miner could, for example, detect a valuable arbitrage transaction posted by a user and then the miner could prioritize a competing transaction to profit from the arbitrage opportunity, front-running the user. These new, extra-protocol sources of revenue are what we’re really talking about when we talk about MEV.
What makes MEV valuable?
Block producers are the gatekeepers of Ethereum transactions. And there’s more value tied up in these transactions than just the costs of computation to process the transactions, because some transactions are worth way more than others are. Block producers gate-keep DeFi activity, trading activity, and other high-value activity, and transaction priority is critical to realizing the value. There are many stakeholders that are willing to pay large sums to guarantee the priority of certain transactions, so there’s a lot more revenue to be made outside of the standard Ethereum transaction fees and block subsidies. You can learn more about what I mean with simple and relatable explanations from my 18-minute presentation here: https://www.crowdcast.io/e/playfulsummit/33
What are the problems with MEV?
There are a number of problems that emerge from the competition for prioritized transactions (described in my presentation), but the biggest problem is the risk of centralization. MEV is hard to do and the payout is bigger than the standard Ethereum incentives are, so MEV activity has more economies of scale. Those block producers (ie. validators) that are better at MEV than the others can better scale their efforts (and profits) faster than other block producers can, and winners can emerge–thus centralization. Centralization is likely the biggest systemic risk to Ethereum.
Flashbots’ solution to MEV problems
If we can’t eliminate the risk of centralization, we can perhaps firewall it by unbundling MEV from block production. Flashbots (https://github.com/flashbots/pm) will create a marketplace for high-value transactions, where the MEV work can be outsourced to “searchers.” Searchers then bid for block producers to prioritize their transactions, effectively sharing the revenue. All of this takes place outside of normal block production. The point is that block producers can stick to what they do best–making (and not manipulating) blocks–while still benefiting from high-value, high-priority transactions. Ideally block producers will prefer the Flashbots marketplace to high-risk behaviours (see presentation) that risk their operations and the stability of the Ethereum network.
What can you expect from block producers?
We may see the threat of MEV eliminated at a protocol level before smart contract support in PoS Ethereum, eliminating the need for a market-based solution like Flashbots. Otherwise, we expect that all competitive staking services will engage in MEV, unless otherwise explicitly stated. All liquid staking solution providers (like the Lido, Rocket Pool, and Stakewise teams) have indicated that they will use Flashbots’ market-based solution for MEV.
What can you expect from Figment?
At Figment we believe that the Flashbots solution is most aligned with the Ethereum ecosystem’s values. Flashbots’ solution is permissionless, transparent, and fair. We think that it is well-designed to minimize the MEV externalities that systematically threaten Ethereum, and the researchers and key stakeholders we have spoken to all agree. If the systemic threats from MEV are not resolved at a protocol level prior to smart contract support in PoS Ethereum, Figment will use the Flashbots client software. To our knowledge, no key Ethereum stakeholders have raised substantial issue(s) with the Flashbots solution. Please connect with us if you feel differently.
Thanks for reading, and you can find me on Twitter here: https://twitter.com/Ether_Gavin
