Detailed explanation of the evolution of the MEV market from zero-sum game to separation of powers, the dark forest is being illuminated.

Evolution of MEV market from zero-sum game to separation of powers, dark forest illuminated.

Author: Cynic LeoDeng

TL;DR

• What is MEV: MEV stands for Miner Extractable Value (also known as Maximal Extractable Value), which refers to the additional income that miners can obtain by manipulating transactions (adding, deleting, and reordering transactions). The ways to obtain MEV include DEX arbitrage, liquidation, front-running, back-running, sandwich attacks, etc.
• Impacts of MEV: Front-running and sandwich trading can lead to a poor user experience and more severe losses. However, DEX arbitrage and loan liquidation can help the Defi market reach equilibrium faster and maintain market stability.
• Continuous growth of the MEV market: After The Merge of Ethereum, the MEV revenue received by Flashbots’ Block Proposers on Ethereum alone has exceeded 206,450 ETH (as of early July 2023).
• As one of the dominant forces in the MEV field, Flashbots allows Miners and Searchers to share MEV revenue through MEV-Geth. MEV-Boost allocates MEV among Proposers, Builders, and Searchers while protecting users’ transactions from front-running. MEV-share aims to enable users, wallets, and Dapps to capture MEV generated by their transactions. MEV-SGX utilizes SGX trusted hardware to completely replace the trusted MEV-Relay role and achieve permissionless transactions. SUAVE attempts to address the centralization risks brought by MEV as a dedicated chain, providing transaction sorting and block building services to all existing chains.
• New variables in the MEV market: Chainlink, as the largest oracle platform in the market, attempts to mitigate the MEV problem through transaction sorting at the oracle network level. The emergence of UniswapX effectively solves the problem of “sandwich attacks” but also brings new issues such as MEV auditing.

What is MEV

MEV stands for Miner Extractable Value (also known as Maximal Extractable Value), which refers to the additional income that miners can obtain by manipulating transactions (adding, deleting, and reordering transactions).

In a general public chain, all transactions need to be submitted to the Mempool, waiting to be included in a block. Miners/validators, as the roles responsible for block production in the blockchain ecosystem, have a high degree of power to decide which transactions to include in a block. Initially, miners only sorted transactions in the order of transaction fees, determining the order in which transactions are included in a block. Later, it was discovered that by monitoring transactions in the Mempool, miners can add, delete, or change the order of transactions in a block to obtain additional income beyond block rewards, which is known as MEV.

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In practice, there are specialized searchers who use complex algorithms to find profit opportunities. Since searchers compete with each other in the public Mempool, when a searcher discovers an MEV opportunity, they would increase the transaction fee to ensure that their submitted transactions are included. Miners and searchers share the MEV revenue.

CGVFOF According to the general consensus in the industry, the ways to obtain MEV can be divided into: DEX arbitrage, liquidation, front-running, back-running, sandwich attacks, etc. For blockchains that use probabilistic finality consensus algorithms (such as Bitcoin and Ethereum 1.0 that use PoW consensus algorithms), Fee Sniping attacks may also occur.

• DEX arbitrage. Prices may differ between different DEXs. By using the atomic transaction feature of the blockchain, one can buy at a low price on one DEX and sell at a high price on another DEX to achieve risk-free arbitrage.
• Liquidation in lending. When the collateralization ratio in a lending protocol falls below a predetermined threshold, the protocol usually allows anyone to liquidate the collateral and immediately repay the lender. During liquidation, the borrower usually needs to pay a large liquidation fee, part of which goes to the liquidator, creating an opportunity for MEV.
• Front-running. When a profitable transaction is detected, one can submit the same transaction with a higher transaction fee in order to include their transaction in a block before the original transaction, thus obtaining profit. Of course, front-running does not only refer to duplicating the same transaction, but in a broad sense, it means inserting a transaction before a certain transaction to obtain profit.
• Back-running. For DEXs that use AMM automatic market-making mechanisms, large-scale transactions can result in significant slippage. When a large-scale transaction occurs, the market is in an imbalanced state. Back-running refers to adding a transaction after a large-scale transaction to buy assets at a price lower than the market equilibrium price.
• Sandwich attacks. Sandwich attacks are a combination of front-running and back-running. Sandwich attacks refer to buying at a low price before a large-scale transaction, and when the price increases due to the large-scale transaction, selling at a high price to obtain high profits.
• Fee Sniping attacks. The recent hot market for BRC-20 has caused congestion in the Bitcoin network, resulting in continuously rising transaction fees. People have begun to pay attention to the possible occurrence of Fee Sniping attacks. On PoW consensus blockchain networks, if the potential returns are large enough, miners can rollback or reorganize the most recent blocks to gain more profits by reordering or including certain specific transactions. Note: Before The Merge, Ethereum also adopted PoW consensus, but it was referred to as Time Bandit.

Implications of MEV

MEV can harm users and even the entire blockchain network, but at the same time, it also makes the market more balanced and efficient.

1. Positive aspects

DEX arbitrage and liquidation can help the Defi market reach equilibrium faster and maintain market stability. Like traditional finance, MEV searchers are actually the prerequisite for the existence of efficient financial markets. For this type of MEV, the profits obtained by MEV searchers come from the market.

2. Negative aspects

Front-running and sandwich attacks can result in a bad user experience and more severe losses. Competing MEV searchers will cause network congestion and increase gas fees through gas bidding.

For PoW chains with probabilistic finality, the more serious concern is the possibility of Fee Sniping attacks. Time-Bandit attacks violate the blockchain’s principle of “immutability” and can seriously undermine the security and stability of the blockchain network. Therefore, the recent BTC community is concerned about the current situation brought by the Oridinal protocol.

For PoS chains, especially for the current ETH2.0, MEV can lead to centralization of validators. Larger staking pools will gain higher MEV profits, which will in turn increase their resources for extracting MEV, resulting in the Matthew Effect and ultimately centralizing validators, thereby reducing security.

Development of MEV

Early Stages (2010-2017):

In 2015, Bitcoin core developer Peter Todd proposed the concept of “Replace By Fee (RBF)” on Twitter, which is the precursor to the concept of Front Running mentioned earlier. It points out that users can replace the original transaction by submitting a transaction with at least one identical input and higher transaction fees.

Based on RBF, the Bitcoin community gradually evolved its research on Fee Sniping. Fee Sniping refers to miners intentionally re-mining one or more previous blocks to obtain the fees originally earned by the miners who created these blocks.

Although the likelihood of successfully re-mining previous blocks is small compared to extending the chain with new blocks, this method may be more profitable if the previous blocks are more valuable in terms of transaction fees than the transactions in the miner’s current mempool. Fee Sniping was later expanded to the EVM model and described as “Time Bandit” attacks in the “Flash Boys 2.0” paper.

Official Emergence (2018-2019):

MEV only occurs when there is a dispute over the state and unconfirmed state transitions. Bitcoin almost does not have shared state and state transitions are strictly defined, so MEV on Bitcoin is limited to attempts of Fee Sniping and double-spending attacks. On Ethereum, which has Turing completeness and smart contracts, the opportunities for MEV are significantly increased.

In 2016, EtherDelta, the first DEX on Ethereum, was launched, adopting a sub-matching order book design, which actually provided a wide range of MEV opportunities to the market, but no one fully utilized them at the time.

In 2017, the first algorithmic stablecoin on Ethereum, DAI, appeared, providing the function of liquidation for DeFi. The market saw large-scale but infrequent MEV opportunities (Spike MEV). In 2018, Hayden Adams founded Uniswap, the first DEX on Ethereum to use AMM automated market-making mechanism. The AMM mechanism relies on MEV extractors to maintain market efficiency, greatly increasing the MEV opportunities in the market.

Flashbots Emergence (2019-2021):

In April 2019, “Flash Boys 2.0” was published, bringing MEV research into the mainstream. At the end of 2019, a group of like-minded digital nomads formed Pirate Ship, later renamed Flashbots, with a robot emoji as their logo.

In January 2021, Flashbots Auction (mev-geth and flashbots relay) was officially launched, and the extracted MEV increased significantly with the heat of Defi Summer.

Current Situation: Diverse MEV Market, Flashbots Leading the Way

As the MEV market continues to grow, many projects have also joined the open ranks. Flashbots currently only supports the Ethereum mainnet, so mainstream Alt Layer1 and Layer2 are learning from Flashbots and trying to implement MEV auction functionality.

Some projects have chosen a different path, attempting to completely solve the MEV problem by encrypting the transaction pool. Flashbots itself is also constantly innovating. After the Flashbots Alpha in early 2021, it has successively implemented Flashbots Protect, MEV-Boost, MEV-Share, and the next stage SUAVE is also under development.

How big is the MEV market?

In theory, the potential MEV income in user-submitted transactions could be infinite. However, it is impossible to determine the size of the MEV income through limited calculations, and the discovered MEV income constitutes the lower bound of potential MEV. Generally, people estimate the possible MEV market situation through realized MEV (REV).

Ethereum MEV market statistics after The Merge Source: https://explore.flashbots.net/

According to data provided by Flashbots, as of early July 2023, 206,450 ETH of REV has been extracted after the Ethereum Merge. However, this is only the MEV income received by Block Proposers, and Searchers’ income has not been calculated.

Will there be improvements without market competition?

Based on the historical experience accumulated in human society, the “invisible hand” is often a better choice in most cases. However, almost no one denies that the market economy is not applicable in certain specific areas, and abusing the market can have serious consequences.

The problem of higher Gas Prices caused by Front Running is rooted in Ethereum’s pricing mechanism. Can Gas Prices be kept at a fixed level to avoid Searchers’ Priority Gas Auction?

However, an obvious result of doing so would be collusion off-chain, where Searchers with MEV opportunities would bribe miners to include their transactions earlier in the block, which would in turn give rise to small-scale off-chain markets that go against the open and permissionless nature of Ethereum.

Of course, we can allow miners/validators in the network to undergo some form of authoritative certification to ensure they do not engage in malicious behavior, but this introduces a strong assumption of trust and turns it into a permissioned chain.

In short, CGV believes that it is difficult to completely eradicate the MEV problem while maintaining the existing features of Ethereum.

How to mitigate the adverse effects of MEV

Protocol-level PBS – Ethereum Community’s Solution

In PoS, validators take turns to propose blocks as proposers, and consensus is reached among validators to determine whether the block should be written on the chain. In PoW, the task of proposing and reaching consensus on blocks is carried out by miners, which is essentially the same.

PBS is mainly designed to solve the centralization problem among validators caused by current MEV. In the default MEV process, block producers have two tasks: 1) construct the best block from all available transactions (block building), and 2) propose the block along with the proof of work or stake to the network (block proposing).

When MEV has not been fully explored, step 1) is actually sorting the transactions in descending order based on transaction fees and simply including them in the block. With the increasing profits from MEV, larger mining pools/validator pools actually obtain a larger share of the MEV profits, resulting in the Matthew effect and further centralization of the consensus network.

In addition, the actual entity that proposes blocks in decentralized mining pools will have the opportunity to obtain MEV, while other members cannot share the profits. The unfairness of the mechanism will reduce the adoption rate of decentralized mining pools, further increasing the centralization of the consensus network.

The roles that may be involved in MEV can be divided into several categories:

1. Producer: Block producer (Miners, Validators)

2. Proposer: Block selector (selects the block constructed by the Builder with the highest MEV)

3. Builder: Block constructor (responsible for determining the content of the block)

4. Searcher: Searches for MEV hidden in transactions

5. User: Submits transactions that may contain MEV

Of course, in the current stage, many roles are actually performed by the same entity. For example, in the ordinary Ethereum consensus process, the Producer, Proposer, and Builder are the same role.

Vitalik’s Early Solutions

As early as the beginning of 2021, Vitalik proposed two solutions, each with a different focus. It is worth noting that the solutions discussed in this section are at the protocol level of Ethereum, where PBS is enforced by the protocol, rather than through private negotiations like Flashbots.

PBS aims to achieve the following five objectives:

1. Trustless Proposer Friendliness: Builders do not need to trust proposers

2. Trustless Builder Friendliness: Proposers do not need to trust builders

3. Weak Proposer Friendliness: Proposers do not require high computational resources or high technical difficulty

4. Bundle Non-Stealability: Proposers cannot steal the profits in the blocks submitted by builders

5. Simplicity and Security of Consensus: Consensus remains secure, preferably without modifying the current block proposing mechanism

Solution 1

• Builders create bundles and send bundle headers to proposers, including the hash of the bundle body, payment to the proposer, and the builder’s signature
• Proposers select the bundle header with the highest profit, sign and publish a proposal containing that bundle header
• Upon seeing the signed proposal, the builder publishes the complete bundle

Analysis based on five objectives:

• Proposers can collect fees paid by builders but prevent builders from receiving MEV profits, for example, by only publishing proposals at the end of a slot, causing builders to not have enough time to publish complete bundles, not meeting objective 1
• Submitting bundle headers ensures receiving payments from builders without trusting them, meeting objective 2
• Only involves simple network communication and basic signing operations, meeting objective 3
• Proposers cannot exclusively access bundle contents, only seeing headers, meeting objective 4
• Due to the introduction of a new role, builders, fork rules need to be modified, increasing the possible scenarios from 2 to 3 and increasing the complexity of fork selection, potentially introducing new uncertainties, not meeting objective 5

Solution 2

• Builders create bundles, send bundle headers to proposers, including the hash of the bundle body, payment to the proposer, and the builder’s signature
• Proposers select a list of bundle headers from what they see and sign a declaration for the list
• Builders publish the corresponding bundle body after seeing the declaration
• Proposers select a bundle header from the list they signed and publish a proposal containing it

Analysis based on five objectives:

• Only when the bundle is fully included in the proposal will the builder complete the payment to the proposer, meeting objective 1
• Builders can publish multiple high-fee bundle headers without publishing actual bundle bodies, preventing proposers from publishing valid bundles, not meeting objective 2
• If the number of receivable bundles is not limited, it may cause proposers to receive too many bundle bodies, leading to high network bandwidth, not meeting objective 3
• Proposers signing the declaration in advance limits them to propose a limited number of bundles in the slot, preventing them from stealing profits, meeting objective 4
• Builders do not directly participate in the consensus process, proposers behave the same as before without an increase in fork scenarios, meeting objective 5

Two Evolving Paths – Two Slot PBS vs Single Slot PBS

These two paths respectively represent the improvement and refinement of Vitalik’s early proposals, Two Slot PBS and Single Slot PBS corresponding to Solution 1 and Solution 2.

In Two Slot PBS, a new block type called “Intermediate Block” will be added to store the block content of the winning builder. In Slot n, the Proposer will propose a regular Beacon Block, which includes a commitment to the block content of the winning builder.

Then, in Slot n+1, the winning Builder will propose an Intermediate Block, which includes the content of the winning block. These two can be seen as two parts of a large block, but completed in two stages (slots). The first stage is equivalent to the block header, while the second stage is the actual block body. If there is no Beacon Block, it means that no Builder wins the bid, and there will be no subsequent Intermediate Block.

Both of these blocks need to go through Committee’s Attestation voting. The Beacon Block is voted on by only one committee, while the Intermediate Block is voted on by all remaining committees in the slot. The votes for each block (whether it’s a Beacon Block or an Intermediate Block) will appear in the next Slot’s Block.

If the builder doesn’t see the Beacon Block for a long time, it may mean that the Beacon Block hasn’t been published in a timely manner, so the builder won’t publish the Intermediate Block. Additionally, to avoid the builder’s loss caused by the delayed appearance of the Beacon Block, the scheme defines a well-defined Fork Choice Rule to reject that Beacon Block.

Two Slot PBS design source: https://ethresear.ch/t/two-slot-proposer-builder-seLianGuairation/10980

Single Slot PBS uses a decentralized committee as an intermediary to store the content of the blocks. The builder sends the bundle header to the Auction subnet and the encrypted bundle body to the committee. After the committee’s votes exceed the threshold, the proposer sends a proposal. Upon receiving the proposal, the committee decrypts and broadcasts the bundle body, allowing PBS to complete block production in a single slot.

Single Slot PBS design source: https://ethresear.ch/t/single-slot-pbs-using-attesters-as-distributed-availability-oracle/11877

Ethereum needs protocol-level PBS, not just because of MEV

Implementing PBS at the protocol level in Ethereum may shake the foundation of consensus and create various new problems. Why modify the protocol layer instead of solving it through other solutions above the protocol? It can be considered that the Ethereum community is not just concerned about MEV. PBS, in addition to alleviating the MEV problem, is also of great significance to the long-term development of Ethereum.

In PBS, the proposer does not need to handle transaction ordering, which achieves statelessness. It does not need to store the complete state of Ethereum, but only needs to verify the validity of the transactions in the blocks packaged by the builder based on Merkel Proof. With Danksharding gradually coming into play, the future storage burden will become heavier. The statelessness feature is crucial, as it reduces the storage requirements for proposers, allowing more people to become proposers and increasing decentralization.

The proposal of PBS by the Ethereum community is actually similar to EIP-1559 back in the day. Miners/validators, as the role of determining the content of blocks, have high privileges. If miners/validators profit too much, it will lead to further centralization and excessive power that affects the security of the entire consensus network. What PBS aims to do is weaken the position of miners/validators, reduce their income, and decentralize power among the people.

In addition, in the PBS scheme implemented by Flashbots MEV-Boost, there is a problem of transaction censorship due to the trust assumption of the Relay. This severely undermines Ethereum’s vision of censorship resistance and permissionlessness.

Transaction audits can account for up to 80%. Source: https://www.mevwatch.info/

Ethereum protocol-level PBS doesn’t require a trusted relay and can force the Builder to include audited transactions by constraining the Proposer, thereby enhancing Ethereum’s resistance to censorship.

Summary: Ethereum protocol-level PBS achieves the distribution of interests between the Builder and Proposer, lowers the barrier for Proposers, improves Ethereum’s decentralization, and enhances resistance to censorship. However, it does not improve the user experience for ordinary users.

Flashbots – Absolute Dominance in the MEV Field

Flashbots attempts to mitigate the MEV problem through market auctions, providing benefits to MEV participants.

In Flashbots’ official documentation, it is categorized as 1) Flashbots Auction 2) Flashbots Data 3) Flashbots Protect 4) Flashbots MEV-Boost 5) Flashbots MEV-Share. However, MEV-Boost is actually a phased plan within the Flashbots Auction. I will describe the development of Flashbots in chronological order.

The Flashbots Auction consists of two stages: MEV-Geth for ETH1.0 (Before The Merge) and MEV-Boost for ETH2.0 (After The Merge).

MEV-Geth

In early 2021, Flashbots released MEV-Geth and MEV-Relay. MEV-Geth is a patch on the Go-Ethereum client with just over a hundred lines of code, and MEV-Relay is a bundle forwarder responsible for forwarding transaction bundles between Searchers and Miners.

MEV-Geth and MEV-Relay provide a private transaction pool and a sealed bid block space auction, transforming MEV from a dark forest into a market economy. The bundle, as a new type of transaction, represents preferences for transaction order.

The Flashbots Auction introduces a new RPC called “eth_sendBundle” for standardized bundle communication. The bundle includes a series of signed transactions and the conditions under which these transactions are included.

Moreover, Flashbots also provides a Flashbots Protect RPC node, which allows users to modify the RPC node in their wallets to avoid Front Running attacks on their transactions in the public transaction pool. Additionally, as Flashbots Protect submits user transactions through a separate block production process, there are no reverts, and users do not have to pay for failed transactions. (But it brings an exclusive EOF order flow.)

MEV-Geth quickly gained adoption by over 90% of Ethereum miners and greatly increased their profits. However, the simple auction design has some notable drawbacks, including 1) the need to trust miners, 2) compatibility only with Geth, lacking diversity, and 3) the auction service running on centralized servers, posing a single point of failure risk. Additionally, due to the general competitive relationship among searchers, the majority of profits go to miners, which brings centralization risks to Ethereum.

source: https://twitter.com/lvanseters/status/1481988717367767042/photo/4

MEV-Boost

After The Merge, Ethereum switched to PoS consensus, and the centralization issue brought by MEV became more apparent. Flashbots designed MEV-Boost to address this problem.

MEV-Boost can be regarded as a variant of Single Slot PBS. Unlike Ethereum’s protocol-level PBS, this solution provides services as optional middleware, rather than enforcing behavior through the protocol and does not modify the consensus process.

Relay is no longer an intermediary between User/Searcher and Miner, but an intermediate node between Builder and Validator. Each role, including Builder, Relay, and Validator, will choose the block to submit to downstream based on maximum profit according to the transaction flow submitted by User/Searcher.

source: https://docs.flashbots.net/flashbots-auction/overview#

MEV-Boost adopts the commit-reveal scheme proposed in Single Slot PBS. Only when the Validator commits to a block header, will the Builder reveal the full content of that block. The specific process is shown in the following figure:

Prior to the Proposal, the Validator needs to register with MEV-Boost and relays to ensure that block builders can construct blocks for a specified validator.

1. Users/Searchers submit transactions to block builders through public/private mempool.

2. Block builders construct the execution payload based on the received transactions. In terms of profit distribution, the builder sets its own address as the LianGuaiyload’s coinbase address, and the last one is set to transfer to the proposer’s address. The block is sent to the relay.

3. The relay verifies the validity of the block and sends the ExecutionLianGuaiyloadHeader to MEV-Boost. MEV-Boost selects the highest-profit ExecutionLianGuaiyloadHeader submitted by different relays and forwards it to the Validator.

4. The Validator signs the header and submits it back to MEV-Boost through submitBlindedBlock, which is then forwarded to the relay. After the relay verifies the signature, it sends the complete LianGuaiyload body to MEV-Boost and forwards it to the consensus, allowing the Validator to propose SignedBeaconBlock to the network.

source: https://twitter.com/keccak254/status/1656984680003153924

Compared with MEV-Geth, MEV-Boost has stronger versatility and can be used as a plugin for Consensus Clients, supporting multiple clients, while eliminating the centralization problem of Miners.

However, after PBS, Builders have gained more power. Builders that dominate the market can have the ability to review and monopolize the transaction order flow. Currently, the centralization risk can only be prevented by encouraging competition among Builders. The trust level of the Relay is also further weakened, but it may still pose a risk to Builders and Proposers through the submission of virtual bids. Currently, the problem is mitigated by allowing Validators and Builders to freely choose the Relay by monitoring the honesty level of the Relay.

MEV-Share

MEV-Geth allows Miners and Searchers to share MEV profits; MEV-Boost distributes MEV among Proposers, Builders, and Searchers while protecting users’ transactions from Front Running.

However, neither consider the users’ profits. In the Web3 philosophy, the value created by users’ data should be returned to the users themselves, and MEV-Share is the practitioner of this philosophy. MEV-Share is committed to allowing users, wallets, and Dapps to capture the MEV generated by their transactions.

MEV-Share introduces the role of Matchmaker as an intermediary between Users, Searchers, and Builders to maintain user privacy by limiting the user transaction information exposed to Searchers.

At the same time, Searchers are limited to inserting their own transactions only after the user’s transaction, i.e., Back Running, to avoid user loss. Back Running does not cause user loss, and the profits obtained through Back Running are actually generated by market imbalances.

Users can simply connect their wallets to the Flashbots Protect RPC to send transactions to the Matchmaker, or they can send private transactions through the Matchmaker API, and users can specify the Builders they want to submit in the transactions.

For Searchers, they need to listen to the selective part of transaction information sent by the Matchmaker through SSE Event Stream. SSE is a technology that allows the server to push information to the client actively without the client initiating a request, allowing the client to receive real-time updates of the blockchain’s state. Searchers will select transactions from it and insert a self-signed tx after them to create a bundle.

Searchers can share partial information of the transactions in the bundle with other Searchers to obtain MEV feedback and increase the chance of their bundle being included in the block. Searchers can also specify Builders in the privacy field of the bundle, and the final bundle will be sent to Builders recognized by both Users and Searchers.

SGX Encryption – Trusted Hardware Eliminates Trust Assumptions

The exploration and discussion of using SGX to mitigate MEV problems in the market were initially initiated by Flashbots.

The MEV-SGX solution was elaborated in June 2021 on the Ethereum forum, mainly aimed at the trust issue of MEV-Relay in the initial version of Flashbots Alpha (the initial version of Flashbots MEV-Auction) released in early 2021, hoping to build a completely private and permissionless MEV auction through MEV-SGX.

The article discussed solutions such as 1. Sending only block headers, hiding transaction trie 2. Collateralized block headers 3. Time-lock encryption 4. Secure isolation zone, and finally decided to use the secure isolation zone (widely used is Intel’s SGX) to provide complete privacy and permissionlessness.

In the MEV-SGX solution, SGX serves as a Trusted Execution Environment (TEE), replacing the single trust intermediary in MEV-Relay, with each Searcher and Miner using an SGX. The tamper-proof feature of SGX ensures that the other party runs specific code in an environment that cannot be tampered with or invaded.

The SGX of the searcher is responsible for ensuring the validity of the blocks and the profitability of the miners (proposers do not need to trust builders); the SGX of the miner is responsible for decrypting and broadcasting the content of the blocks (builders do not need to trust proposers, and proposers cannot steal the profits submitted by builders in the blocks).

It is worth noting that when this scheme was proposed, Ethereum was still in the PoW consensus, so the term “miner” was used instead of “validator”, but in fact, their functions in the consensus are the same, which is to package transactions and propose blocks.

When Ethereum enters the 2.0 phase through The Merge and transitions to the PoS consensus, the volume of MEV-SGX gradually decreases as part of the complete solution, and is replaced by MEV-Boost and MEV-Share. However, SGX has not been completely abandoned, but the implementation difficulty of MEV-SGX is high, so the community chose the more realistic MEV-Boost and MEV-Share, and will use SGX to patch the defects of the current scheme in the future.

On December 20, 2022, the flashbots community announced the first running of Geth (Go implementation of the Ethereum client) in SGX, verifying the technical feasibility of applying SGX to MEV. On March 3, 2023, the flashbots community announced the running of the block builder in SGX, taking a step closer to the privacy of transactions and the decentralization of builders.

By executing the block building algorithm in a secure enclave, it ensures that participants other than users cannot see the content of user transactions, maintaining privacy. At the same time, by running a verifiable block execution algorithm, it can prove the economic efficiency of the blocks without compromising privacy. In the long run, running builders in SGX can provide proposers with verifiably valid blocks and provide real bidding, potentially completely replacing the trusted MEV-Relay role and achieving permissionless operation.

SUAVE – The Future of MEV

MEV-Share solves the issue of profit distribution brought by MEV, but it still cannot eliminate the centralization risk brought by block building power. In the current stage of Flashbots, due to 1) exclusive order flow and 2) cross-chain MEV, the Builder market has a positive flywheel effect, which easily leads to centralization risks.

SUAVE (Single Unified Auction for Value Expression) attempts to address the centralization risk brought by MEV. SUAVE is another attempt at modular blockchain, aiming to provide a plug-and-play mempool and decentralized Block Builder for all blockchains as a dedicated blockchain, providing transaction sorting and block building services to all existing chains.

source: https://writings.flashbots.net/the-future-of-mev-is-suave/

By supporting multi-chain features, it effectively improves the efficiency of extracting cross-chain MEV; as a blockchain, its decentralized nature will solve the centralization risk of Block Builders in previous solutions.

SUAVE consists of the following three main components:

1. Universal Preference Environment: Preferences can be understood as a type of transaction improvement on the bundle, reflecting the needs of users/searchers for transaction execution (e.g., transaction parameters, time, order). It maintains the privacy and non-revocability of the bundle before confirmation. The “universal” aspect reflects SUAVE’s multi-chain feature, aggregating transactions submitted by users/searchers on all chains to SUAVE, providing a universal sorting layer that can gather user preferences to improve MEV extraction efficiency, and allowing collaboration between Block Builders from different domains to improve efficiency.

2. Optimal Execution Market: Executors participate in bidding based on user-submitted preferences, providing users with the best execution and enabling cross-domain preference expression, returning as much MEV revenue as possible to users.

3. Decentralized Block Building: In a decentralized blockchain network, Block Builders construct blocks for various domains based on user preferences and the optimal execution path. While maintaining decentralization, this component provides blocks with maximized MEV for Validators on various chains. The prerequisite for this component is the sharing of order flow and bundles between Block Builders without revealing content.

source: https://writings.flashbots.net/the-future-of-mev-is-suave/

Of course, it must be pointed out that SUAVE is still at an early stage, and the technical roadmap is not yet clear, and the solution design is also ambiguous. The details are still being pushed forward. This may be a difficult task. Flashbots calls MEV the Millennium Prize Problem of the crypto world and calls for cooperation to create a decentralized future.

New Variables in the MEV Market

Chainlink: Fair Sequencing Services (FSS) – The MEV Mitigation Solution Chosen by Arbitrum

Chainlink, as the largest oracle platform in the market, attempts to mitigate MEV by transaction sequencing at the oracle network level. In my opinion, its inspiration should be to prevent front-running on oracle reports. Since oracle reports have a significant impact on prices, manipulating the order of oracle reports in blocks can result in high MEV.

Fair Sequencing Services (FSS) can be described simply as follows: Decentralized Oracle Nodes (DON) provide tools to distribute transaction sequencing and implement strategies specified by dependency contract creators. Ideally, it is a fair strategy (typically FCFS, sorting based on arrival time) that does not give advantages to participants who want to manipulate transaction sequencing. These tools together constitute FSS.

FSS consists of three components. The first is transaction monitoring.

1. Transaction Monitoring: In FSS, oracle nodes monitor the mempool of the MAINCHAIN in O and allow off-chain transaction submissions through dedicated channels.

2. Transaction Sequencing: Nodes in O sort transactions for the dependency contract SCON based on the strategy defined for that contract.

3. Transaction Publishing After the transactions are sorted, the nodes in O collectively send the transactions to the main chain.

4. FSS Diagram source: Chainlinkv2 WhiteLianGuaiper

The potential benefits of FSS include:

• Fair Ordering: FSS includes tools to help developers ensure that transactions inputted into a specific contract are sorted in a fair manner, where users with abundant resources or technical capabilities cannot gain an advantage. The typical strategy for fair ordering is FCFS (First-Come-First-Served).

Transaction sorting for specific contracts source: https://blog.chain.link/chainlink-fair-sequencing-services-enabling-a-provably-fair-defi-ecosystem/

• Reduced or Eliminated Information Leakage: By ensuring that network participants cannot leverage knowledge about upcoming transactions, FSS can mitigate or eliminate attacks based on pre-transaction information available in the network. Preventing attacks exploiting such leakage ensures that adversarial transactions relying on pending original transactions cannot enter the ledger before the original transactions are submitted.
• Reduced Transaction Costs: By eliminating the need for participants to pursue speed when submitting transactions to smart contracts, FSS can greatly reduce the cost of transaction processing.
• Priority Ordering: FSS can automatically provide special priority ordering for critical transactions. For example, to prevent front-running attacks on oracle reports, FSS can retroactively insert oracle reports into a series of transactions.

Compared to MEV mitigation solutions in smart contracts, FSS implemented using DON achieves lower latency because its MEV defense mechanism is executed off-chain, resulting in millisecond-level network latency instead of multiples of 12s block latency.

UniswapX: Addressing MEV Sandwich Attacks but Introducing MEV Scrutiny

On July 17th, leading decentralized exchange (DEX) Uniswap announced in a tweet that it will launch a new open-source protocol called UniswapX, which aggregates liquidity from decentralized pools and introduces new features such as “MEV attack prevention”.

UniswapX adds some new features in the process of off-chain order matching. These features include not strictly following price order for sorting, executing limit orders, and using a local ledger to handle price differences.

Due to these changes, transactions stored in the Mempool become increasingly difficult to predict, further compressing the arbitrage space for MEV. The existence of MEV is mainly attributed to the mechanical mechanism where miners prioritize packaging based on the amount of gas. However, through adjustments in off-chain ledgers, we can indeed significantly improve MEV.

Uniswap traders suffer significant harmful MEV every day due to “sandwich attacks,” with potential losses of up to $3 million. The design goal of UniswapX is to address this issue by converting original transactions into intents submitted to Uniswap’s central server. This effectively solves the problem of “sandwich attacks” but also introduces a new issue of MEV scrutiny.

In the process of quoting and trading, the fair price may tend to favor the quoter. In this case, the only quoter is often willing to submit quotes by putting transactions on the chain during the exclusive window period. However, this also provides an opportunity for validators, who may collude to review transactions. Although this type of attack does not appear to be common at this stage, if some validators become powerful enough, or consistently win multiple blocks, or if the infrastructure used for validator collusion is widely adopted, we may see a malignant growth in MEV review issues.

CGVFOF believes that although the Ethereum Foundation has a practical or biased negative attitude towards MEV, under the current blockchain ecosystem, centralized miners/validators have a large amount of power, making it difficult to solve the problem in one step through means such as encrypting transactions. Otherwise, it will cause violent market fluctuations and be detrimental to the sustainable development of the blockchain ecosystem.

Therefore, progressive improvement solutions such as Flashbots introduce multi-party participation in MEV, balance each other, gradually weaken the centralized discourse power, minimize the impact of MEV on users, and ultimately migrate to privacy transaction schemes with less friction (as emphasized by Vitalik in The Three Transitions).

From this perspective, MEV has gradually transitioned from the initial dark forest zero-sum game to the stage of checks and balances with the separation of powers, and perhaps slowly moving towards comprehensive privacy. However, in any case, MEV is still a large market with sustainable development potential, and will attract more participants and more interesting new things.

References:

1. https://ethereum.org/en/developers/docs/mev/

2. https://bitcoinops.org/en/topics/replace-by-fee/

3. https://bitcoinops.org/en/topics/fee-sniping/

4. https://medium.com/@Prestwich/mev-c417d9a5eb3d

5. https://medium.com/@VitalikButerin/i-feel-like-this-post-is-addressing-an-argument-that-isnt-the-actual-argument-that-mev-auction-b3c5e8fc1021

6. https://www.paradigm.xyz/2021/02/mev-and-me#mev-is-hard-to-fix

7. https://ethresear.ch/t/proposer-block-builder-seLianGuairation-friendly-fee-market-designs/9725

8. https://thedailyape.notion.site/MEV-8713cb4c2df24f8483a02135d657a221The Future of MEV is SUAVE | Flashbots

9. https://collective.flashbots.net/t/frp-18-cryptographic-approaches-to-complete-mempool-privacy/1210

10. https://explore.flashbots.net/

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