Maximal Extractable Value, or MEV, is an often misunderstood term in Web3, but is also highly important. We hope that our policy on MEV can shed some light on the core benefits of MEV and how our principles affect how Figment engages in MEV.
What is MEV?
MEV is the maximum value that can be extracted from block production above the block reward and gas fees by including, excluding and reordering transactions. On the Ethereum network, searchers currently look for profitable opportunities and pay miners to execute them. Post merge, validators will take over the role of proposing blocks and a new group, builders, will be responsible for constructing blocks – the idea being that separating these two roles reduces centralization risk (see here).
MEV – The Good and the Bad
From a high-level, MEV more fully recognizes the value of each block and, as a result, the entire network. There have been criticisms leveled at MEV, some of which are well-founded – certain types of transactions such as sandwich attacks and generalized frontrunners exploit users. The flip side is that there are many useful types of transactions that support apps built on Ethereum such as arbitrage and liquidations.
Security is another aspect that is roughly balanced – MEV has the potential to encourage more attacks on the network; however, with an increasing yield, MEV is also likely to lead to more staking, which means a higher cost to attack the network (i.e., higher security).
Lastly, there are likely to be more benefits of MEV following the merge – staking service providers are likely to share MEV benefits with stakers and accumulate stake, thereby increasing the security of the network. Compare this to miners today – they are likely to sell MEV rewards they receive to cover energy costs and they are not likely investing in new hardware with the upcoming merge (i.e. no security benefits).
You can learn more about MEV by reading our deeper dive here.
Figment’s MEV Policy
There are ultimately two actors involved in MEV execution – Searchers and Validators. Searchers are the actors who discover MEV opportunities and submit transactions on the network to extract that discovered value. Validators are the actors responsible for proposing blocks on a network and executing transactions within the blocks they produce.
As validators of a network, Figment’s role is to ensure that we are engaging in validation activities that create more:
- Secure blockchains.
- Efficient blockchains.
- Rewards for our customers without harming security and efficiency.
It is important for us to build our MEV policy with these 3 goals in mind.
On top of this, we believe MEV solutions that are neutral, secure, and open have the potential to set a MEV standard, which will result in a better experience for end-users of these networks.
Neutral – Neutral MEV creates an even playing field for MEV participants that ultimately creates a fairer market for blockspace, which results in more stable gas prices and limits the ability to spam the network.
Secure – Malfunctions in MEV extraction infrastructure should not impact a validator’s ability to propose blocks. Solutions that allow validators to automatically revert back to local block production are important for the security of the network.
Open – Open MEV offers a universally accessible tool for MEV participation and allows rewards earned from MEV to be visible on-chain, which creates competition between validators in MEV profit-sharing between stakers.
By abiding by these 3 principles, we believe we can offer the highest reward rate possible for our customers without compromising the security or efficiency of networks we support. In fact, the security and efficiency of chains can be improved upon as more validators abide by a MEV standard on a given network since:
- The reward rate for staking increases through engaging in fair MEV extraction, thus increasing the value of staking which will result in a higher stake rate on a network.
- A MEV standard on a network will result in the most valuable blocks being produced, which will lead to less spam transactions submitted and executed on a network.
- A MEV standard results in validators extracting MEV at the same rate, which minimizes centralization risks of MEV and limits reward concentration within the validator set.
Our Ethereum MEV Solution
We plan to leverage Flashbots’ MEV-Boost for our Ethereum validators. This solution, slated to be ready by the merge, will allow our ETH customers to participate in MEV once our validators begin executing transactions on Ethereum.
A case study written by Flashbots last year concluded that validators that run MEV-Boost would have a significantly higher reward rate than validators who do not. We estimate this number to be a ~25% – 50% reward rate increase for our ETH customers by the time of the merge.
MEV-Boost is designed to support all Ethereum clients which will ensure that client diversity is maintained on the network, and has a security model in place that will allow validators to revert back to local block production in case a fault occurs in the software. This offers our validators security and liveness guarantees while running MEV-Boost.
We see Flashbots as the MEV standard for Ethereum and are actively exploring other solutions like Skip (Cosmos ecosystem) and Jito (Solana) in other ecosystems.
MEV is inevitable, but there are ways to democratize access to the value that is extracted. The most obvious path towards democratization is through sharing rewards with our delegators, which we intend to do on every network where we participate in MEV in order to create more secure and efficient blockchains.