Flashbots Research Report A Beam of Light for MEV, Piercing the Dark Ethereum Night Sky

Flashbots Research Report Shedding Light on MEV in Ethereum

Project Introduction

Flashbots is a research and development organization aimed at mitigating the negative impact of Maximal Extractable Value (MEV) on blockchain, especially Ethereum. Their main goal is to build a permissionless, transparent, and sustainable ecosystem for MEV through products like MEV-Boost. The future development of MEV should focus on cross-chain MEV capture, minimizing value loss, minimizing potential negative impact on protocol real users, and ensuring fair distribution among participants.

Author

Elma Ruan, senior investment researcher at WJB, holds dual master’s degrees in market/finance from Ivy League schools and has 5 years of experience in WEB3, specializing in DeFi, NFT, and other areas. Before entering the crypto industry, she worked as an investment manager at a large securities company.

1. Research Points

1.1 Core Investment Logic

Maximal Extractable Value (MEV) is a small part of the underlying infrastructure that is closely related to transactions within a block. It has a high income effect, with income increasing in proportion to the complexity of transaction scenarios, and relatively low risk. Solving the MEV problem is an important part of Ethereum’s development roadmap, aiming to ensure reliable, fair, and trustworthy neutral transactions and address the MEV problem. The future development of MEV focuses on cross-chain MEV capture, minimizing value loss, minimizing potential negative impact on protocol real users, and ensuring fair distribution among participants.

When it comes to MEV, various strategies such as frontrunning, sandwich attacks, and transaction tracking are often associated with it. These strategies may bring unfair results to certain participants in the blockchain ecosystem and harm the interests of ordinary users. The founders of Flashbots believe that the MEV problem is also an important issue in the Ethereum ecosystem, which may lead to unfair transactions and market distortions. Therefore, the founders created the Flashbots project to provide a trusted and neutral communication channel for the Ethereum ecosystem, enabling private communication between miners and other participants to address the MEV problem. The core infrastructure of Flashbots is the relay, which collects transaction packets from different participant networks and forwards them to miners. The relay can verify the validity of transactions and prevent malicious transactions. At the same time, the relay can help miners better utilize MEV, thereby increasing their profits.

The pairing between users and Searchers is achieved through the Flashbots service. Users can selectively expose their transaction information to Flashbots. Searchers bundle and package these transaction information sets and submit them to Block Builders to build the entire block, which helps Searchers to conduct arbitrage more efficiently. If users are willing, arbitrageurs can share a portion of the MEV profits with users, creating a win-win situation. This mechanism also provides a benign auction process for other arbitrageurs, who can obtain profits by offering higher prices, avoiding transaction failures and excessive gas fees. In addition, by filtering out failed transactions, it reduces the occupation of on-chain space, to some extent alleviating congestion issues and achieving multiple wins.

Overall, it is beneficial for all parties involved:

Proposers: By collaborating privately with Searchers, Proposers can prioritize and gain more benefits.

Searchers: With Flashbots, they can avoid resource wastage, save costs, and access more transaction information.

Transaction users: They can avoid interference from malicious behavior when initiating transactions and reduce losses from errors.

Flashbots: By obtaining exclusive transaction information from users and Searchers, Flashbots can gain more profit opportunities and become stronger.

However, Flashbots also have some disadvantages. Firstly, Flashbots’ relays require a large amount of computing resources and bandwidth, which may lead to performance issues. Secondly, Flashbots needs sufficient support from participants, otherwise it may not be effective. This requires Flashbots to establish cooperative relationships with other participants in the Ethereum ecosystem to ensure widespread adoption and support for Flashbots. Finally, although Flashbots is currently a non-profit organization, it still needs to submit transactions to centralized Flashbots servers, which may have some centralization risks.

In the context of the industry, the emergence of Flashbots is a positive signal. As the cryptocurrency market continues to develop, the issue of MEV has become increasingly serious. Flashbots’ solution provides a viable solution for the Ethereum ecosystem to mitigate the negative impact of MEV. The fair and market-oriented distribution of MEV provides predictable returns for the LSD protocol and Ethereum stakers, promoting the growth of Ethereum staking and the adoption of the LSD protocol for MEV solutions. At the same time, the fair and market-oriented distribution of MEV also promotes the growth of on-chain activity, enhances the user experience on-chain, drives the adoption of MEV products, and creates a virtuous cycle of demand for Ethereum staking. In addition, market-oriented MEV protocols can better allocate benefits and promote the overall growth of the Ethereum ecosystem.

In the long run, the MEV track has broad prospects. Although it is currently in its early stages, it has already begun to show network effects. Flashbots has built a foundation for the rapid growth of MEV and provides many opportunities for the future.

1.2 Valuation

The Flashbots project has been valued at $1 billion. According to The Block, the Ethereum infrastructure services provider completed a $60 million Series B financing in July 2023.

2. Project Overview

2.1 Project Scope

Flashbots’ business scope mainly includes Flashbots Auction, Flashbots Protect, Flashbots Data, MEV-Boost, and MEV-Share. Flashbots Auction is a permissionless, transparent, and fair ecosystem designed to efficiently extract maximum benefits and protect against transaction frontrunning. Flashbots Protect offers secure and user-friendly transaction methods, preventing malicious transactions and allowing users to share MEV. Flashbots Data provides tools for analyzing Ethereum MEV, stored in a Postgres database. MEV-Boost enhances validator efficiency, promoting Ethereum competition and decentralization. MEV-Share is an open-source protocol that enables users, wallets, and applications to internalize the maximum profit loss (MEV) they generate from their trades.

2.2 Development History and Roadmap

Future Roadmap:

SUAVE is a project called “Single Unified Auction for Value Expression” aimed at addressing the issue of MEV (Miner Extractable Value) by building a decentralized transaction serialization layer. SUAVE consists of three main components: a general preference environment, a best execution market, and a decentralized block construction network. SUAVE aims to empower users and maximize decentralization on public blockchains. It is a standalone network that can serve as a plug-and-play mempool and decentralized block builder for any blockchain. Flashbots is one of the creators of SUAVE, and in the SUAVE whitepaper, Flashbots explicitly states that they will continue to improve SUAVE and include SUAVE in future important plans.

– Q2 2021: Release the first version of SUAVE, supporting mainstream public chains such as Ethereum and BSC.

– Q3 2021: Support more public chains, including Polygon and Solana.

– Q4 2021: Support cross-chain MEV solutions and more MEV capture strategies.

– 2022: Launch the second version of SUAVE, supporting more MEV capture strategies and higher throughput.

– 2023: Plan to release the SUAVE testnet chain to begin testing its new features.

– Future: Further enhance the security and decentralization of SUAVE, support more public chains and cross-chain solutions.

In addition, SUAVE’s future plans include cooperation with other MEV-related projects and organizations to promote the development and decentralization of MEV. SUAVE also plans to achieve decentralization through community governance to ensure its long-term sustainability and development.

2.3 Team Information

2.3.1 Overall Situation

Figure 2

According to LinkedIn, Flashbots currently has 28 employees, most of whom specialize in computer science, mathematics, psychology, and economics. These employees have diverse professional backgrounds and expertise in various technologies and fields, including but not limited to Python, blockchain, machine learning, and C language. Their knowledge and skills enable them to tackle complex technical challenges in the Ethereum ecosystem and make positive contributions to the research and development of the Flashbots project.

2.3.2 Founders

Co-founder: Philip Daian

In addition, Stephane Gosselin, co-founder of Flashbots, resigned from the company in October 2022 due to differences with the team regarding the review process.

Alex Obadia is a former co-founder and top-level strategy researcher at Flashbots. He left Flashbots on June 20, 2023 for personal reasons.

2.3.3 Core Members

Andrew Miller

Director of Trusted Execution Environments and SUAVE Research

Miller is well known for his research in cracking Intel SGX code. He has served as the Deputy Director of the Initiative for Cryptocurrencies and Contracts (IC3). Miller plans to take a temporary leave from his position as an assistant professor at the University of Illinois, where he is currently focused on electrical and computer engineering.

Hasu, Director of Flashbots Strategy

Hasu serves as a strategic advisor for the leading liquid staking protocol Lido, as well as the Director of Strategy for the Flashbots research and development team, which aims to protect users from MEV impact. Currently, he spends approximately 90% of his time on Flashbots and 10% on Lido. He also serves as a research collaborator at LianGuairadigm investment firm, co-founder of Deribit Insights, and has represented MakerDAO. He educates and promotes industry development through writing, social media, and podcasts.

2.4 Financing Situation

The company was founded in 2020 and has gone through two rounds of financing. In the initial stage, the company received seed funding from LianGuairadigm, the investment amount of which was not disclosed. In 2023, the company conducted Series B financing, raising $60 million, with LianGuairadigm being a significant investor in the round.

3. Business Analysis

3.1 Target Audience

The main target audience of Flashbots includes:

1) Arbitrage and liquidation bots, DeFi traders: They profit by finding extractable value on the Ethereum chain and bundling these transactions together to provide them to Flashbots’ Builders.

2) Ethereum Dapps with complex use cases: These Dapps leverage the functionality provided by Flashbots to optimize the execution of their transactions, improving efficiency and profitability.

3) Professional Builder organizations: These organizations select the most profitable transactions from the transaction bundles sent by Searchers, package them into complete blocks, and ultimately send them to Validators via Relay. Currently, there are a few active Builders in the market, with a few organizations dominating the market share.

4) Miners: Validators of ETH2.0 who propose blocks to the network and add them to the chain.

5) Regular Ethereum users: They can interact directly with Flashbots and execute their transactions using the tools and interfaces provided by Flashbots.

3.2 Business Categories

The business scope of Flashbots mainly includes the following aspects:

1) Flashbots Auction: It provides a permissionless, transparent, and fair ecosystem for efficiently extracting Miner Extractable Value (MEV) and protecting transactions from front-running behavior, while maintaining the principles of Ethereum. Flashbots Auction provides a private channel between Ethereum users and validators to effectively communicate transaction ordering within a block.

2) Flashbots Protect: It provides Ethereum users with a user-friendly, secure, and powerful trading environment. It is configurable and allows users to choose which builders to send transactions to and customize their MEV sharing settings according to their needs. It also provides protection against transaction front-running, preventing transactions from being captured by malicious transactions in the public Mempool. If a transaction creates MEV, users can receive rewards through the MEV-Share mechanism.

3) Flashbots Data: It provides a tool for MEV inspection on Ethereum, which can analyze blocks, including validator payments, token transfers and profits, exchanges, and arbitrage data, and store all the data in a Postgres database for querying and analysis.

4) MEV-Boost: The main purpose is to enhance the efficiency of Ethereum validators by accessing the competitive block building market. The MEV-Boost mechanism separates the roles of proposers and block builders, thereby promoting the decentralization and censorship resistance of the Ethereum network.

5) MEV-Share: It is an open-source protocol that allows users, wallets, and applications to internalize the MEV they generate from their transactions. It is neutral, meaning that any searcher can participate, without being restricted to specific block builders.

In summary, Flashbots primarily involves Flashbots Auction, Flashbots Protect, Flashbots Data, MEV-Boost, and MEV-Share, aiming to enhance the efficiency of MEV, protect transaction security, and provide competitive block building.

3.3 Business Details

The business of Flashbots mainly involves four parts: Searchers, Relays, Builders, and Proposers. These roles play different roles and responsibilities in the process of a single block generation.

The following is the process and responsibilities of these roles in a single block generation:

Builders: Builders create blocks by collecting transactions from users, searchers, or other order flows. Their goal is to maximize their own and proposers’ MEV by constructing blocks with maximum executable value.

Relays: Relays are trusted third parties that act as bidirectional communication channels between proposers and builders. They act as validators, validate the validity of blocks, and calculate the amount to be paid to proposers.

Proposers: Proposers are Ethereum proof-of-stake validators. After receiving the block headers and payment values submitted by relays, they evaluate all received bids and sign the block header associated with the highest payment.

Searchers: Searchers monitor the public transaction pool and Flashbots’ private transaction pool to find the optimal transaction order for maximizing profits, and package them for Builders.

The operation process is as follows: Builders create blocks and submit them to Relays. Relays verify the validity of the blocks, calculate the amount to be paid to the proposers, and send the block headers and payment values to the current proposers. The proposers evaluate the received bids, choose the block header associated with the highest payment, sign it, and send it back to Relays. Relays use the beacon node to publish the block and return it to the proposers. Finally, rewards are distributed to Builders and proposers in the form of transactions within the block and block rewards.

1. Flashbots Auction

Flashbots Auction is an open, transparent, and fair ecological auction mechanism designed to efficiently obtain MEV (Miner Extractable Value) and prevent frontrunning, in line with the principles of Ethereum. It enables efficient communication of the priority order of transactions within a block through a private communication channel between Ethereum users and validators.

Flashbots Auction is initially based on mev-geth and mev-relay. In PoS Ethereum, it is built on top of Mev-Boost, which implements Ethereum’s “proposer-builder separation”.

However, it also exposes a series of negative effects caused by MEV:

1) Inefficient communication of transaction order between PGA (Private Goods Auction) bot operators and POW (Proof-of-Work) miners, resulting in network and congestion.

Ordinary users bear the cost of high gas fees and block space scarcity.

2) The MEV incentive mechanism poses a certain threat to the security of Ethereum consensus. It encourages on-chain history reorganization to capture past MEV and at the same time promotes centralization of transaction routing for better privacy protection, latency control, and transaction order control.

3) Related parties are developing permissioned and exclusive transaction routing infrastructure, which undermines the neutrality, transparency, decentralization, and fairness of Ethereum. Flashbots Auction, as an open and democratic option, aims to mitigate the above negative effects and security threats.

Working Principle

Flashbots Auction is a system that provides a private transaction pool and sealed block space auction mechanism. This system allows block producers to delegate others to find the optimal way to construct blocks in an untrusted environment.

In a regular Ethereum transaction pool, users broadcast transactions to the public P2P network and specify gas prices to indicate the fees they are willing to pay for computation on the Ethereum network. When block producers receive transactions, they sort them based on gas prices and then use a greedy algorithm (a greedy algorithm is a method for selecting a locally optimal solution in computer science, aiming to achieve a globally optimal solution through local optimal choices. Here, it refers to block producers using a greedy algorithm to generate a block with the highest fees) to produce a block to maximize their income from transaction fees. This mechanism combines the characteristics of English auction and all-pay auction, where participants bid for block space in an open environment, and the highest bidder wins, with all participants bearing the costs.

This mechanism has the following problems:

1) The public transaction pool leads to a bidding war for block space, increasing network load and gas price fluctuations, which is not favorable for participants without a prior bidding strategy.

2) Full payment auctions result in failed transactions that were not selected, wasting valuable block space on the blockchain. In addition, bidders underestimate their bids due to execution risks, ultimately causing artificial block space scarcity and reducing validator income.

3) Relying solely on the gas price mechanism prevents bidding participants from expressing preferences for transaction order, as they can only bid for the top position in the block. This forces participants to adopt other ineffective strategies to increase their chances of having their transactions included in the block, such as sending a large number of useless transactions to occupy block space. This situation leads to a waste of public resources and efficiency losses.

On the contrary, Flashbots auctions use the First-Price Sealed-Bid Auction (FPSBA) mechanism, where participants can communicate specific bids and transaction order preferences through private channels without paying the cost of unsuccessful bids. This mechanism maximizes validator income as each transaction has a corresponding bid, allowing validators to choose the highest income transaction combination. At the same time, different participants need to determine their bids based on the expected income from MEV opportunities, which can be seen as a price discovery process that determines the market value of MEV opportunities. Most importantly, the FPSBA mechanism eliminates the issue of front-running caused by public bidding.

Flashbots Auction Roadmap

The Flashbots team has adopted a step-by-step approach to decentralize the Flashbots auction architecture. During this process, they will gradually introduce new technologies and improvements to enhance the entire architecture.

 Pre-transaction privacy: Transactions are only made public after being included in a block, excluding intermediaries such as relayers and block producers.

 Failed transaction privacy: Unsuccessful bid transactions will not be included in the block and will not be made public.

 Efficiency: MEV extraction will not cause unnecessary network or link congestion.

 Bundle merging: Merge multiple incoming bundles in a conflict-free manner.

 Irreversible protection: Once a block containing Flashbots bundles is propagated, it becomes difficult to modify through chain reorganization, preventing temporal attacks.

 Complete privacy: Intermediaries like relayers and validation nodes cannot see transaction contents before they are included on-chain.

 Permissive: No trusted intermediaries that review transactions.

Technical Architecture

The Flashbots auction architecture proposes a network consisting of three different participants, each specializing in the part of the work required to maintain this communication channel. Block builders are responsible for constructing complete blocks, and validators make proposals.

For Searchers

Searchers refer to Ethereum users who, for various purposes, prioritize using the Flashbots private transaction pool over the conventional P2P transaction pool. These users are responsible for monitoring the on-chain state and sending transaction bundles to relays.

They can be mainly divided into three categories:

Ethereum transaction bot operators: They need fast and risk-free access to block space, such as arbitrage and liquidation bots.

Ethereum users seeking transaction frontrunning protection, such as Uniswap traders.

Ethereum Dapps with complex usage features, such as implementing account abstraction or zero-gas transactions.

(Searchers gather information from various sources and create bundles based on this information to send to block builders.)

By directly submitting bundles to block builders instead of using the peer-to-peer network, Searchers can achieve “transaction front privacy,” meaning that their transactions are not visible to others on the network. Searchers can express their willingness to pay for transaction inclusion in two ways: by setting the gas price for the Ethereum transaction or by directly transferring funds to a Coinbase address. Unlike setting gas prices, direct payments can avoid unnecessary failed bid fees and only require payment upon successful inclusion. This approach ensures transaction privacy while improving economic efficiency.

For Block Builders

Block Builders are a group of professionals who receive transactions from users and Searchers and strive to construct the most profitable blocks from these transactions. The constructed blocks are then sent to validators through the MEV-enhanced relays. Searchers will send bundles to one or more block builders.

(Block builders use bundles from Searchers and transactions from the transaction pool to construct blocks.)

Relays

Relays are a component of PBS (Periscope Block Scope) and are responsible for hosting blocks from builders for use by validators.

(Relays select the most profitable blocks from their builders and host them for use by validators.)

With MEV-Boost technology, validators can choose the most profitable blocks from multiple relays. Each relay keeps the contents of the block confidential until the validator decides to propose it to the network.

In particular, relays perform the following steps:

Receive new blocks from block builders.

Send the most profitable blocks to validators when requested.

Validators establish their commitment to propose a complete block by signing the block header.

After receiving the validator’s signed block header, the relay sends the complete block to the validator.

Execute all operations quickly and reliably to ensure that the validator does not miss the proposal deadline.

Validators/Proposers

In PoS Ethereum, validators are responsible for proposing blocks to the network and appending blocks to the blockchain.

(Validator nodes use MEV gains to select the most profitable block for proposing among multiple relays)

When block builders generate blocks, the blocks are often more profitable if they include MEV transactions that can maximize revenue. Validators can obtain higher profits by selecting blocks with the highest profitability. This process is called Mev-Boost, which can increase the profits of validator nodes.

Bundles

Searchers use Flashbots to submit transaction bundles to block builders for inclusion in blocks. A bundle combines one or more transactions and executes them in the provided order. In addition to the transactions from searchers, the bundle may potentially include pending transactions from other users in the mempool, and the bundle can also selectively choose specific blocks for inclusion.

Bundle Pricing

From a high level, Flashbots’ block builders aim to include the most profitable transactions in the blocks they build. In Ethereum’s PoW mechanism, Flashbots’ block builders achieve the searchers’ maximum profit goal by inserting the searcher’s bundle at the top of the block and removing less profitable but mineable transactions from the block’s tail. Therefore, for a Flashbots bundle to be considered profitable, it must have a higher Gas Price than the transactions it replaces in the block’s tail.

In PoS Ethereum, the basic rule for pricing bundles on Flashbots is similar; more profitable transactions are usually favored by the block building algorithm. The profitability of a bundle/transaction is determined by the Gas Price, priority fee, and direct validator payment price used for each transaction.

In the PoS mechanism, bundles do not place transactions between bundle transactions but can be placed anywhere in the block. This means that in addition to bundling transactions, other transactions from the mempool can also be added to the blockchain. However, transactions in the bundle are not directly added to the blockchain.

Bundle Sorting Formula

Flashbots’ block builders use a new algorithm to generate the most profitable block. This design has some important changes to note for searchers:

Bundles are no longer sorted and included based on effective Gas Price; the algorithm optimizes the overall block profit.

No longer guaranteed to execute at the top of the block.

Other transactions (such as transactions from the memory pool) may be implemented between two different bundles instead of between transactions within a bundle.

RPC Endpoint

Advanced users can interact with the RPC endpoint on relay.flashbots.net or one of the following test URLs.

The bundle relay URL is as follows:

Searchers Reputation

During periods of high load, Flashbots provides consistent access to the Flashbots block builder for searchers with a good performance record. To address complex application layer attacks, that is, layer 7 attacks, one of the solutions being explored is to enhance the Flashbots infrastructure by introducing a searcher reputation mechanism.

EIP-1559 Support

Since mev-geth v1.10.5-mev-0.3.0, Flashbots has started supporting EIP-1559 transactions. For searchers who want to continue using traditional transaction methods, no configuration changes are required. However, EIP-1559 brings significant changes to the base fee of blocks, which means that searchers who used to trade with 0 gas price need to make some level of adjustments to their transactions. Nevertheless, searchers still have the opportunity to prioritize fee payments, either by transferring directly to the Coinbase or by paying a gas price higher than the EIP-1559 base fee. However, in any case, the user’s transaction must include an Ethereum Gas Price equal to or greater than the base fee.

2. Flashbots Protect

Overview

Flashbots Protect RPC does not track any user information (such as IP address, location, etc.) and does not store or log user information. Flashbots Protect is a user-friendly, secure, and powerful Ethereum transaction method that is suitable for both beginners and experienced users.

It has the following main advantages:

1) Configurability: Users can choose to send transactions to different builders and set MEV shares.

2) Prevent frontrunning: User transactions will not be discovered by sandwich bots in the public mempool.

3) Get MEV rewards: If a user’s transaction generates MEV, the user can receive up to 90% of the rewards through MEV-Share.

4) No failed transactions: Only when a user’s transaction operation is not canceled or rolled back, will it be included in the transaction, so users do not need to pay for failed transactions.

MEV-Share (more detailed introduction later)

Through MEV-Share, users have the opportunity to earn up to 90% of the MEV revenue generated through their transactions on exchanges. By default, Protect users connect to a sustainable and optimized Stable configuration that Flashbots continuously optimizes for better execution while protecting users from harmful MEV.

Flashbots MEV-Share nodes maintain a stable configuration that is continuously optimized to provide better execution while protecting users from harmful MEV. Users only need to send transactions to Flashbots Protect to earn revenue. Advanced users can have more precise control over transactions and preferences through the advanced panel or by manually setting their Protect RPC requests.

There are three ways to use Flashbots Protect:

1) Add Flashbots Protect RPC (https://rpc.Flashbots.net) to the user’s wallet, suitable for most users.

2) Use eth_sendRawTransaction to send transactions to https://rpc.Flashbots.net.

3) Use eth_sendPrivateTransaction to send transactions to Flashbots.

The easiest way to use it is to add Flashbots Protect RPC to the user’s wallet and configure which miners to send transactions to and customize the MEV-Share settings.

Accelerate Transaction Inclusion

Transactions sent through Flashbots Protect are by default only shared with Flashbots, which only builds a portion of the Ethereum blocks. If users want to increase the chances of their transactions being included, they can choose to share their transactions with more miners. Simply select other miners in the options of the “Connect Wallet to Protect” button.

Cancel Transactions

Transactions submitted to Flashbots Protect are sent to Flashbots MEV-Share nodes and held there for up to 6 minutes.

Flashbots Protect allows users to cancel pending transactions by submitting a cancellation transaction to Flashbots Protect. To cancel a transaction, users need to send a new transaction that meets the following conditions:

To cancel a transaction, you can submit a transaction with the same address, including the same nonce, sender, and recipient address, and the data field is empty. This cancellation transaction is free and is mainly used to verify the operational authority of the original transaction account. Since the cancellation transaction will not be allowed to enter the blockchain, it will not incur any fees.

Fix Stuck Transactions

If a user’s transaction is in the “pending” state or has a very high nonce, the user needs to clear the activity and nonce data in MetaMask. This will cause MetaMask to update the nonce and transaction history from the network. During this process, the user’s funds and keys are safe.

3. Flashbots Data

MEV-Inspect

mev-inspect-py is an MEV detection tool for Ethereum. It can analyze various information in blocks, including validator payments, token transfers and profits, transactions and arbitrage, and more. All this data is stored in a Postgres database for easy querying and analysis.

The detection of blocks is done in the following steps:

Get the trace information, receipts, and block data from the RPC endpoint.

Decode the trace information using known ABIs (Application Binary Interfaces) in order to understand its meaning.

Extract structured objects from the decoded trace information, such as transfer and swap operations.

Save these structured objects to the database for future querying and analysis.

4. MEV-Boost

MEV-Boost is an open-source middleware software used by validators to access a competitive block-building market. It is developed by Flashbots and aims to implement proposer-builder separation (PBS) in Proof of Stake (PoS) Ethereum. With MEV-Boost, validators can obtain blocks from the builder market. Builders generate blocks with transaction order and proposer fees and provide them to validators. By separating the roles of proposers and builders, MEV-Boost encourages more decentralization and censorship resistance in the Ethereum network.

Significance

In Ethereum, MEV has a centralized influence. Without intervention, competition around MEV opportunities could lead to instability in the consensus mechanism and may also require the establishment of permissioned communication infrastructure to ensure a balance between searchers, block producers, and validators. For PoS Ethereum, the opportunity to obtain MEV becomes more important because the planned reduction in block rewards will make MEV a larger portion of validator’s total income. Validators running MEV-Boost maximize their stake rewards by selling their block space on the open market. It is estimated that validators using MEV-Boost can increase their stake rewards by more than 60%.

How it works

PoS node operators need to run three software components: validator client, consensus client, and execution client. MEV-Boost, as an additional component of the consensus client, is an independent open-source software responsible for querying and outsourcing block construction to a network of builders.

Builders prepare complete blocks, optimize MEV extraction, and distribute rewards fairly, then send the blocks to relays. An instance of MEV-Boost can be configured to connect to multiple relays.

Relays aggregate blocks from multiple builders and determine the most profitable block to submit to the proposer. Then, the consensus client of the proposer receives the most profitable block received via MEV-Boost and propagates it to the Ethereum network for validation and block inclusion.

5. MEV-Share

MEV-Share is an open-source protocol designed to maximize the extractable value from internal trades within users, wallets, and applications. Through an “orderflow auction” mechanism, it allows users to choose to share transaction data with searchers willing to bundle their transactions. Users have the freedom to redistribute the searcher’s bids, either to themselves, validators, or other participants. MEV-Share is neutral, open to searchers, and does not favor any specific block builder. Its goal is to reduce the centralized influence of exclusive order flow on Ethereum and enable wallets and other order flow sources to participate in the MEV supply chain.

Using MEV-Share is simple, users only need to send transactions to Flashbots Protect and utilize the service’s Flashbots MEV-Share nodes. Through MEV-Share, MEV is returned to its original creators: the users. The protocol is designed to be scalable and decentralized, allowing searchers to integrate without permission and without favoring any specific block builder.

Users send their transactions to specific MEV-Share nodes, which selectively share transaction information with searchers based on the user’s privacy preferences. Based on this information, searchers submit partial bundles to the MEV-Share node, attempting to extract MEV from the user’s transactions without viewing the complete transaction data. The MEV-Share node simulates a portion of the searcher’s submitted bundle. It then sends successful bundles and a condition to the block builder. In other words, the MEV-Share node helps searchers share information about their successful transaction bundles, which means users will receive 90% of the MEV return from their own transactions. This mechanism ensures users receive fair compensation during the process.

Currently, the MEV-Share node only accepts retrospective operations.

6.REV

After the merger on September 15, 2022, the project will change MEV to REV (Realized Extractable Value).

REV can be divided into the following 2 parts:

Among them, REVS is the value passed to the searcher, and REVM is the value passed to the miner. It should be noted that, as described below, REV already includes the opportunity cost of mining (i.e., the actual REV of the opportunity depends on the network gas price at the time of mining).

The searcher’s REV consists of the following parts:

In the transaction that executes the extraction operation, Vout represents the value flowing from the searcher to the blockchain (excluding gas fees); Vin represents the value flowing from the blockchain to the searcher; MEVg represents the gas price of the transaction; MEVs represents the size of the transaction, that is, the total gas consumed by them. Vout, Vin, and MEVg are denominated in the base network currency (ETH), while MEVs is calculated in gas units. Separating gas fees from Vout helps quantify extraction costs and is the method for actually calculating REV.

Here, the term “blockchain” refers to any other address that is unrelated to the EOA or smart contract controlled by the searcher who extracts the transaction (corresponding to a smart contract or EOA). Identifying these addresses is a heuristic guidance process based on known searcher patterns and may have omissions. In addition, any auxiliary transactions related to MEV extraction (such as “meat” in the sandwich attack) are not part of the above variables. Turning to the miner’s side:

Among them, geff represents the effective gas price of transactions that should have been included in the block in the case of no opportunity utilization. Therefore, REV includes the opportunity cost borne by miners through including MEV extraction transactions.

Since the transactions in the transaction pool are transient, it is not possible to measure geff only through blockchain data and logs after the fact. Because Flashbots adopts an approximate method, which also serves as a lower bound for the value realized by miners:

Among them, gtail is the gas price of the last transaction in the block.

Therefore, even though the roles of miners and searchers are somewhat blurred, the opportunity cost of extraction can be clearly determined, that is, the subtractive part of MEV.gtail.

Finally, at this stage, the value distribution between the searcher and the miner depends entirely on the choice of MEV, and the choice of MEV is influenced by other searchers attempting to exploit this opportunity.

3.4 Industry Space and Potential

3.4.1 Background

MEV can be divided into the following categories:

1) Transaction Execution:

Pre-transaction MEV: Operations conducted before transaction execution, primarily obtaining value through bidding on public transaction pools or transaction redirection.

Mid-transaction MEV: Value generated during transaction execution, including manipulation of transaction queue order and transaction reordering.

Post-transaction MEV: Operations conducted after transaction execution, typically related to interaction with smart contracts on the blockchain, including mining rewards and flash loans.

2) Market Manipulation:

Pre-market MEV: Obtaining profits by manipulating the market outside of exchanges, such as information manipulation and collusion manipulation.

In-market MEV: Obtaining profits through operations and trading activities within exchanges, including market manipulation and stop-loss activation.

Post-market MEV: Obtaining profits through operations after the completion of trades, such as trade returns and market adjustments.

3) Blockchain Protocol:

Contract transactions MEV: Transactions executed through smart contracts, obtaining value by manipulating contract logic.

Block mining MEV: Manipulating the order of blocks during the mining process to obtain value.

Solving the MEV (Miner Extractable Value) problem is an important part of Ethereum’s development roadmap. On November 5, 2020, Vitalik Buterin, co-founder of Ethereum, released an updated version of the Ethereum development roadmap, introducing a new phase called “The Scourge” aimed at ensuring reliable, fair, and trusted neutral transactions and addressing the MEV problem. This means that protocols addressing the centralization issue of MEV will receive more attention, and the importance of this track will gradually increase.

In the past few years, the development of MEV has gone through different stages. The early stage (2010-2017) was the embryonic period of MEV, mainly focused on the Bitcoin network, such as fee sniping and double-spending attacks. The formal birth stage (2018-2019) was a significant growth period for MEV on Ethereum, including the emergence of decentralized exchanges, algorithmic stablecoins, and automated market-making mechanisms, providing more opportunities for MEV.

Currently, there are various solutions in the MEV market, with Flashbots being the most prominent organization. Flashbots enables MEV extraction through encrypted bots, and the launch of its MEV auction platform has received widespread attention and substantial MEV income. The market potential of the MEV track is enormous. According to data provided by Flashbots, over 206,450 ETH in MEV revenue has already been realized before the Ethereum merge, but this only represents the revenue accepted by block proposers, and the revenue for searchers is not yet included. Based on the current market development, the market size of MEV could be infinite. Moreover, the current actual MEV income is only a fraction of the potential.

Overall, the development prospects of the MEV track are broad. With continuous technological and protocol innovations, the attention to solving the MEV problem will further increase, bringing more opportunities and benefits to users and participants.

3.4.2 Market Size

The revenue scale of this field is almost synchronous with the trading volume of the cryptocurrency market. The size of MEV is influenced by two main factors: there is a positive correlation between arbitrage frequency and price fluctuations, and there is also a positive correlation between arbitrage volume and total trading volume.

Take Flashbots as an example. Its total gross extraction profit is 713.95 million, which is considered as benign MEV, and it has a positive impact on determining market value, completing the core functions of DeFi, and the trading volume of DEX. On the other hand, the revenue from sandwich attacks is 1206.11 million, which is considered as adverse MEV. Most MEV-protective DEXs hope to control and retain this part of the profit.

Using Uniswap, PancakeSwap, and Sushi as anchors, the cumulative fees of these three DEXs are 5.21 billion, and the MEV income obtained through Flashbots accounts for about 37% of it. In addition to the main DEXs, other DApps, Layer 2 solutions, and alternative layers on Ethereum can also generate considerable MEV income. To calculate the transmission of these fees throughout the value chain and form the scale of various segments, it is necessary to analyze the distribution of MEV profits among different participants.

According to Eigenphi’s data, in January and February 2023, MEV searchers obtained 48.3 million US dollars from the transactions of all users through wallets and RPCs, of which 34.7 million US dollars flowed to builders, and builders transferred 30.3 million US dollars to validators. The profit distribution is as follows: searchers receive 7.3 million US dollars (17.4%), builders receive 4.4 million US dollars (10.5%), and validators receive 30.3 million US dollars (72.1%). It can be seen that the majority of the profit (72%) is still obtained by downstream validators.

Out of the 48.3 million US dollars, 6.3 million US dollars are used for the burning of EIP 1559. The priority fees for ordinary transactions transmitted from wallets and RPCs to builders and then to validators are 32.554 million US dollars. And wallets and RPCs burned 227.2 million US dollars in ordinary transactions for EIP 1559.

In the bull market of 2021, the overall revenue ceiling reached 476 million US dollars. According to the calculation based on the lower 10x price-income multiple, the scale of the entire field is close to 500 million US dollars. The scale of each segment can be roughly estimated based on the proportion, with searchers exceeding 1 billion US dollars and validators exceeding 3.5 billion US dollars.

However, robots participating in on-chain transactions and profiting from them may still bear the costs of many failed transactions and other off-chain hedging costs, which are not included in the calculation. In addition, this calculation only considers the income obtained by direct participants and does not take into account the market of indirect participants. In fact, the scale of the entire field far exceeds the above figures.

3.5 Business Data

Operational Data

Note: After the merger on September 15, 2022, the project will change MEV to REV (Realized Extractable Value). Compared to the theoretical maximum amount, this more accurately represents the actual realized and extracted amount. In simple terms, REV refers to the income miners earn in the blockchain network, while MEV is a more specific concept that involves the potential value miners obtain from ordering transactions and manipulating certain on-chain activities.

REV:

As of August 31, 2023, the total amount extracted since the merger is 288,829 ETH, and the amount extracted in the past 30 days is 18,860 Ethereum (Searchers’ revenue is not included). Since October 2022, the total amount of Ethereum paid to Proposers has been continuously increasing, rising from 1.6K per week in October 2022 to 287.1K per week in August 2023, an increase of more than 179 times.

REV Detailed Analysis (The following dataset includes statistics on two types of REV attacks, arbitrage, and liquidation captured by mev-inspect-py after the merger)

According to the data, the protocol with the largest proportion in MEV arbitrage is Uniswap V2, accounting for 64.11%. Followed by Uniswap V3, Curve, and Balancer V1. In arbitrage trades, the highest proportion of tokens is WETH, accounting for 91.58%. Followed by USDC, USDT, and other tokens. In terms of liquidation, the Aave protocol accounts for 68.8%, and Compound V2 accounts for 31.2%. The total liquidation profit value is approximately 1.22 million US dollars. In terms of tokens, WETH has the highest proportion, accounting for about 25.09%, followed by USDC, accounting for 24.07%.

It should be noted that due to the incomplete coverage of token prices denominated in US dollars, the project can only detect about 85% of the total arbitrage volume (denominated in US dollars).

Flashbots Relay Metrics

According to the dataset, which includes the MEV-Boost situation of Flashbots relays running on the Ethereum mainnet, we can observe that the total amount of Ethereum (ETH) paid to validators in Flashbots MEV-Boost relays continues to increase. In November 2022, the block rewards reached a peak of 13K ETH per week, and overall, the average ETH paid to validators per week is between 2-4K.

During the entire time period, the total number of blocks submitted by MEV-Boost relays is approximately 2.5 million. Among them, Flashbots accounts for 40.1%, while others account for 59.9%.

Flashbots Relay Validator Registration Data:

According to the data, registered Flashbots relay validators account for 81% of the total number of validators. Currently, the total number of validators is about 810,000. Overall, the number of registered validators continues to increase. From September to November 2022, the growth rate of validators was fast, with a peak in weekly registrations. However, from November 2022 to September 2023, the number of registered validators showed a significant decline. Especially from December 2022 to April 2023, the number of registered validators was at a low point. Currently, the registration volume of validators is maintained at a relatively moderate level.

Social Media Data

Twitter: The project has not yet set up an official account.

Discord: There are currently 26,870 followers on Discord, with 3,996 people online.

The discussions in the Discord community are very active and cover many technical topics.

3.6 Project Competitive Landscape

3.6.1 Project Introduction

Manifold Finance

Manifold Finance (FOLD) is an MEV relay infrastructure project aimed at improving the connection between DeFi, DApps, and protocols, and providing solutions. Manifold Finance was founded by Sam Bacha in 2020 and acts as an intermediary between Ethereum users and validators.

One of their main focuses is to protect users from the impact of MEV attacks, such as sandwich attacks, which can exploit transactions and manipulate prices. Through their first product YCabal, Manifold Finance redefines the trading process, preventing malicious arbitrage attacks on-chain and reducing gas fees.

Skip Protocol

Skip Protocol has developed an MEV product ecosystem adapted for Cosmos. The goal of these products is to help blockchains achieve long-term financial sustainability and leverage MEV to achieve this goal. By providing dedicated MEV infrastructure, Skip Protocol enables the blockchain community to autonomously control the acquisition and distribution of MEV income. Their products can help stakers, validators, and protocols profit from MEV while improving the on-chain user experience. Additionally, these products enable traders to execute more complex and profitable trading strategies.

3.6.2 Comparative Analysis

Manifold Finance, Skip Protocol, and Flashbots are all organizations or protocols aimed at mitigating the negative impact of MEV. Among them, Manifold Finance and Flashbots are technical infrastructures, while Skip Protocol is a decentralized protocol.

Manifold Finance reduces the negative impact of MEV through the SecureRPC system and OpenMEV SDK, while Flashbots researches the democratization and redistribution of MEV income through a series of products, bringing more transparency to the ecosystem.

Skip Protocol focuses on addressing the integration of MEV searchers and validators by creating a sealed bidding, closed auction system that allows traders to submit tip transactions to validators, who prioritize them in blocks based on the situation, thus earning more rewards.

Flashbots is a research organization aimed at mitigating the negative impact of MEV. The Flashbots auction bypasses traditional public bidding auctions, allowing users to privately communicate their bids and transaction order preferences while maximizing validator rewards and preventing frontrunning transactions. The combination of a private transaction pool and sealed bidding ensures fairness and optimal block construction on the Ethereum network.

Therefore, the differences between these three organizations or protocols lie in their products, technical infrastructure, and focus on problem-solving.

3.7 Token Model Analysis

Total Token Supply and Distribution

The project has not yet issued tokens.

4. Preliminary Value Assessment

4.1 Core Issues

Does the project have a reliable competitive advantage? Where does this competitive advantage come from?

1) Cutting-edge technology and unique market positioning: Flashbots aims to solve the issues of block competition and transaction frontrunning (MEV) in Ethereum. Its cutting-edge technology and unique market positioning give Flashbots a competitive advantage in the Ethereum ecosystem.

2) Market demand and industry partnerships: Flashbots also collaborates with multiple projects and exchanges in the Ethereum ecosystem to jointly promote technological and market development, providing Flashbots with a greater competitive advantage.

3) Strong team capabilities: The Flashbots project is composed of top engineers and researchers from the Ethereum developer community. They have a deep understanding of blockchain technology and rich experience, enabling them to respond to market challenges and drive the project’s development. Strong team capabilities are one of the important factors in establishing a competitive advantage for the Flashbots project.

What are the main variable factors in the project’s operations? Are these factors easy to quantify and measure?

1) Transaction volume: This is an important indicator for measuring the activity and user participation in the Flashbots project. Higher transaction volume means more users are using Flashbots’ services. This can be quantified and measured by statistics on the number, value, and frequency of transactions.

2) Partnerships and community engagement: The Flashbots project needs to closely collaborate with different stakeholders such as Ethereum miners, researchers, and developers to jointly promote the development of Ethereum. The number and quality of partnerships, as well as the activity and participation of the community, can be important indicators for measuring project collaboration and community building.

3) Technological innovation and research achievements: One of the goals of the Flashbots project is to drive innovation in new technologies in Ethereum. Measuring the impact and quality of the project’s technological innovation and research achievements may be relatively subjective, but it can be assessed by evaluating the quality and influence of the technical specifications, tools, and software that the project participates in.

These variable factors can be quantified and measured to some extent, especially in terms of transaction volume. The participation of partners and the community can be preliminarily measured by paying attention to social media activities, the number and quality of collaborative projects, and the number of participants in activities. Technical innovation and research results may require more in-depth evaluation, taking into account factors such as quality, feasibility, and influence.

4.2 Main Risks

1. Centralization: Flashbots is an organization that aims to maximize the interests of Ethereum, but this may sometimes conflict with the expectations of the Ethereum community. For example, Flashbots announced that it will review transactions blacklisted by the U.S. Department of the Treasury’s Office of Foreign Assets Control, which decision has attracted widespread attention and opposition from the public. These issues may have an impact on Flashbots’ reputation in the Ethereum community and the trust of its users.

2. Insufficient liquidity: Insufficient liquidity in Flashbots auctions may prevent them from functioning effectively, thereby affecting the feasibility of their business model. In addition, liquidity issues in Flashbots auctions may prevent them from attracting enough users and validators, thereby affecting their long-term development.

3. Performance issues: The operation of Flashbots’ relayers requires a significant amount of computational resources and bandwidth, which may lead to some performance issues. In addition, performance issues with Flashbots may affect their stability and reliability in the Ethereum network, thereby affecting the feasibility of their business model.

4. Transaction ordering market issues: The transaction ordering market in Flashbots auctions may result in some transactions being prioritized, which may cause dissatisfaction and questioning from the public.

5. Legal and regulatory issues: The operation of Flashbots auctions may be subject to restrictions and constraints from legal and regulatory authorities, which may affect the feasibility and long-term development of their business model.

6. Mechanism risks: The development of permissioned and exclusive transaction routing infrastructure may have a negative impact on the neutrality, transparency, decentralization, and fairness of Ethereum. Flashbots Auction, as an open and democratic choice, needs to find solutions in future development to avoid such impact.

5. References

1. https://www.Flashbots.net/ Official website

2. https://explore.Flashbots.net/ Flashbots browser

3. https://docs.Flashbots.net/Flashbots-mev-share/introduction Flashbots Docs

4. https://writings.Flashbots.net/ Official blog

5. https://www.linkedin.com/comLianGuainy/Flashbots/about/ LinkedIn Flashbots

6. https://medium.com/Flashbots Medium

7. https://crypto-fundraising.info/projects/Flashbots/ Fundraising information

8. https://skip-protocol-docs.netlify.app/ Skip Protocol official website

9. https://ld-capital.medium.com/mev%E7%9A%84%E6%9C%AA%E6%9D%A5%E5%8D%B3%E5%8A%A0%E5%AF%86%E4%B8%96%E7%95%8C%E7%9A%84%E6%9C%AA%E6%9D%A5-mev%E8%B5%9B%E9%81%93%E9%87%8D%E8%A6%81%E6%80%A7%E8%A2%AB%E4%BD%8E%E4%BC%B0%E4%BA%86%E5%90%97-80d84c0152b6 The future of MEV is the future of the crypto world

10. LD Capital: Has the Importance of MEV Track Been Underestimated?

We will continue to update Blocking; if you have any questions or suggestions, please contact us!

DEXETHPOWVitalik Buterin

Was this article helpful?

93 out of 132 found this helpful