Ethereum On-Chain Guide | What is the "Miner Extractable Value" (MEV) Crisis? How to improve miner's unconventional transactions?

The competition among DeFi arbitrageurs has led to external influences such as blockchain network congestion and actual risks. Flashbots aims to mitigate these risks.

(This article is authorized for reprint from ChainNews, titled "The Spread of Ethereum Dark Forest, How Does Flashbots Mitigate the Crisis of 'Miner Extractable Value'?", original article here)

Flashbots is a research institution aimed at reducing the negative externalities and risks posed by Miner Extractable Value (MEV) on smart contract public chains. We propose a permissionless, transparent, and fair ecosystem for MEV value extraction to ensure the ideals of Ethereum. This article covers the background and motivation of the Flashbots project.

Advertisement - Please scroll down for more content

What Is "MEV"?

"Miner Extractable Value" (MEV) is a way to evaluate the profits obtained by miners (or validators, sorters, or other privileged parties in a protocol) when generating blocks, through arbitrary inclusion, exclusion, or reordering of transactions. It is designed as a metric to study consensus security. MEV includes "conventional" profit methods like transaction fees and block rewards, as well as "unconventional" profit methods where miners profit from reordering, front-running, or censoring transactions within the blocks they produce.

The term MEV might lead one to believe that miners extract the value. In reality, MEV in the Ethereum ecosystem is primarily obtained by DeFi traders through structured arbitrage strategies, while miners profit indirectly by receiving transaction fees from these traders. A typical example of structured arbitrage trading is Uniswap price arbitrage: when there is a price deviation in a Uniswap pool, an arbitrage opportunity arises to balance the pool price with that of other exchanges. Of course, miners can also decide to run this arbitrage strategy themselves instead of letting traders take advantage of it for the sake of transaction fees.

MEV Crisis

On Ethereum, traders express their willingness to have their transactions included in a particular block by adjusting gas fees. Miners, being rational actors, naturally prioritize processing transactions with the highest gas fees, ordering transactions in blocks based on the level of gas fees. The financial systems built on Ethereum create numerous pure profit opportunities like liquidation and arbitrage. However, these arbitrage opportunities are limited and fleeting, leading traders to compete for them. Currently, this competitive relationship mainly manifests as "front-running" or "backrunning":

"Front-running": Also known as Priority Gas Auctions (PGA). Transaction A offers a higher gas fee than the pending transaction B, so transaction A is prioritized and included in the block before transaction B. (For example, taking advantage of Uniswap price arbitrage to balance pool prices)

"Backrunning": Transaction A offers a slightly lower gas fee than the pending transaction B, allowing transaction A to be included in the block immediately after transaction B. (For example, updating oracle prices leading to asset liquidation in DyDx due to a certain collateral ratio breach)

However, both "front-running" and "backrunning" are inefficient and cause negative externalities like network congestion (e.g., p2p network load) and on-chain congestion (e.g., block space occupation). Moreover, the profit motive for time bandit attacks and the unstable Ethereum protocol security resulting from MEV competition have led to the emergence of permissioned communication infrastructure between traders and miners. Such infrastructure erodes Ethereum's principles of neutrality, transparency, decentralization, and permissionlessness.

Although these risks and negative externalities have long existed, we are at a critical juncture in Ethereum's future development. A series of events in the past six months have pushed network usage to a tipping point:

• Stable growth in contract interactions (e.g., more complex transactions on Ethereum leading to an absolute increase in MEV extraction)
• Token market caps surpassing ETH market cap (e.g., ERC-20 token MEV revenue starting to compete with ETH transaction fees)
• Transaction fees exceeding block rewards (e.g., traders competing for transaction opportunities driving up gas prices. This indicates that miners' MEV-related earnings may exceed block rewards.)
• Normalization of frontrunning (e.g., a sign of increasing proficiency in mining MEV value)
• Acceptance of permissioned mempool (e.g., another indicator of increasing proficiency in mining MEV value)

These circumstances indicate that the existing risks and negative externalities are escalating.

These circumstances indicate that the existing risks and negative externalities are accelerating.

Addressing the MEV Crisis

First, let's understand what Flashbots is.

Flashbot is a research institution focused on reducing the negative externalities and risks posed by Miner Extractable Value (MEV) to smart contract blockchains. We advocate for a permissionless, transparent, and fair ecosystem for mining MEV value to ensure Ethereum's ideals.

Our solution to mitigate the MEV crisis is divided into three parts: "Illuminating the Dark Forest," "Democratizing Value Extraction," and "Profit Distribution." We believe each part is crucial to Flashbots' success.

Illuminating the Dark Forest

Ethereum users are currently unaware of the existence of MEV. Understanding it requires extensive data analysis and deep knowledge of smart contracts, as MEV involves complex transactions, sometimes obfuscated logic, and conflicting interests at different levels (users, traders, general frontrunners, miners).

As critical security infrastructure moves off-chain and on-chain state and scale grow, this problem becomes more severe, making it increasingly difficult to fulfill the original promise of transparency in cryptocurrencies. The goal of "Illuminating the Dark Forest" is to uphold this original promise. More practically, we aim to objectively assess the negative externalities of MEV and the impact of Flashbots' technology, quantify the harm MEV causes to users, and provide developers with tools to reduce MEV extraction from the DApp layer.

The first step in "Illuminating the Dark Forest" is quantifying the impact of MEV. To achieve this, we've created MEV-Inspect. By scanning Ethereum blocks, the MEV metrics are visualized, allowing for a better understanding of the MEV ecosystem and contributing to eliminating information asymmetry in the community.

Democratizing Value Extraction

MEV value extraction is at risk of becoming centralized among a few players. For instance, it may be limited to permissioned "transaction dark pools" with significant hash power, or large traders and miners conducting off-chain transactions on a single line.

This centralization of power and capital is a critical threat to security and undermines Ethereum's core tenets: permissionlessness and decentralization.
We believe that without adopting a neutral, public, and open-source permissionless MEV value extraction infrastructure, MEV could become a game for insiders. "Democratizing MEV Value Extraction" aims to ensure equal access for participants of all sizes to the foundational financial modules, preserving Ethereum's core tenets.

"MEV-Geth" is our first step in achieving "Democratizing Value Extraction."

MEV-Geth is an upgraded version of the go-ethereum client. It enables block space sealed-bid auction mechanisms for transaction priority communication. Essentially, MEV-Geth creates more efficient communication channels between miners and traders bidding for priority transactions. While MEV-Geth's concept verification is based on incomplete trust assumptions, we believe it represents a significant improvement over the current state. Adopting MEV-Geth will alleviate network and on-chain congestion caused by front-running and backrunning bots.

Profit Distribution

MEV involves the entire Ethereum ecosystem, from miners and traders to DeFi developers and the most important Ethereum users. Our preliminary research shows that the profit distribution from MEV value extraction by traders and miners is uneven. As MEV value extraction becomes more frequent, we anticipate a need for user-centric value redistribution to help maintain system stability.

We believe Flashbots and the community need to deeply consider value distribution to maximize social welfare. Especially with the inherent incentives and risks of MEV, we aim not only to mitigate such risks but also to incentivize all system participants through benign economic cycles, strengthening Ethereum's core values.

Our Public Commitment

Flashbots originated from MEV Pi-Rate Ship, a neutral, multi-blockchain interdisciplinary research cooperative supporting MEV-related theoretical and empirical research. As an open research institution, we commit to:

• Uphold Ethereum's core values in our products, such as openness, permissionlessness, and decentralization, to prevent the impending MEV crisis.
• Open-source our research and Flashbots core infrastructure code for the benefit of all.
• Fully consider the needs of users, miners, developers, node operators, public infrastructure operators, contract/DApp developers, and ecosystem researchers to create a sustainable ecosystem coordinating the primary participants.
• Contribute to public ethical research issues in the MEV field that remain unresolved.

At this critical juncture, as institutions and individuals participating in decentralized finance, this is the belief we hold. Manipulating user transactions to gain significant value will become a centralizing force, undermining consensus stability. Any system with the potential to profit from manipulating prices will harm user interests. MEV could develop into a scenario where the interests of the majority are sacrificed, compromising the value of cryptocurrencies for the benefit of a few.

Alternatively, we can choose to use MEV to benefit all users, enhance the security of the next generation financial infrastructure, and avoid the structural unfairness issues of the previous generation of products. By openly extracting MEV value and tools, funding public research to address MEV issues, and incentivizing all ecosystem participants through Flashbots' capital coordination, we can work together to lay the foundation for the next generation of fair infrastructure.

More Information:

• Ethereum on-chain PGA visual data
• For more about Flashbots organization, research roadmap, and project technical details, visit the ETHResearch forum
• Subscribe for Flashbots activity updates
• Join the Flashbots Discord community or contact via email: [email protected]

Flashbots was initiated and advocated by Scott Bigelow, Phil Daian, Stephane Gosselin, Alex Obadia, and Tina Zhen, with continuous support from members of MEV Pi-Rate Ship and Paradigm.