In the blockchain ecosystem, Maximal Extractable Value (MEV) has become an important area of research. It concerns not only technical implementation but also market behavior and economic benefits. With Ethereum's transition to Proof of Stake (PoS), the concept of MEV has undergone significant evolution. Validators have now become key participants, as they can control the order of transactions and optimize profits through various strategies. This shift prompts us to re-examine the definition of MEV and its performance under different consensus mechanisms.
Bing Ventures is committed to exploring the forefront of the industry, and this article will provide an in-depth technical analysis to help everyone understand the challenges and opportunities presented by MEV.

The Evolution of MEV

Maximal Extractable Value (MEV) refers to the total value that miners or validators can extract from block production on the network, exceeding standard block rewards and gas fees. In the context of Proof of Work, MEV was initially referred to as "Miner Extractable Value," involving miners maximizing profits by choosing the order of transactions and which transactions to include in blocks. This may include various strategies to manipulate transaction order for financial gain.
With Ethereum's transition to Proof of Stake in 2022, the concept of MEV has expanded and evolved. The current terminology includes "Maximal Extractable Value" to reflect that not only miners (now validators in PoS systems) can extract value, but also other network participants. Validators in PoS systems, like miners in PoW systems, control the order of transactions and can influence which transactions are included in blocks.
Key Participants in MEV

1. Validators/Miners: They have exclusive power to order and include transactions, allowing them to directly extract MEV.
2. Searchers: These are independent participants who use algorithms and bots to identify profitable MEV opportunities. They often pay high gas fees to validators to prioritize their transactions, indirectly allowing searchers to benefit from MEV.

MEV Extraction Strategies

1. Front-Running

This involves bots detecting profitable transactions in the mempool and placing their own transactions with higher gas fees to be processed first. For example, Flashbots provides a market aimed at making this process more transparent and fair by allowing users and miners to agree on transaction order in advance.

2. Sandwich Attacks

A more malicious strategy where bots place orders before and after large transactions on decentralized exchanges (DEX) to manipulate market prices and profit from the resulting slippage. This directly affects the financial outcomes of the original traders.

3. DEX Arbitrage

Searchers exploit price differences of tokens between different DEXs. By buying tokens at a lower price on one exchange and selling them at a higher price on another, they help align market prices and improve market efficiency.

4. Liquidations

In DeFi lending, borrowers need to deposit some cryptocurrency as collateral. If borrowers fail to repay their loans, protocols typically allow anyone to liquidate the collateral and earn liquidation fees from the borrower. MEV searchers compete to determine which borrowers can be liquidated and collect liquidation fees for themselves.

Market Size: New Changes After the Cancun Upgrade

The leading player in the MEV space, Flashbots, provides a market aimed at allowing users and miners to agree on transaction order in advance, enabling MEV to operate in a more balanced and structured environment. Looking back at the projects under the "infrastructure" category over the past six months, MEV represented outstanding revenue performance for Flashbots, recording $1.428M in a single week in December, surpassing other projects in the sector, indicating that the MEV space once had excellent profitability. However, following Ethereum's Cancun Upgrade in March, Flashbots' revenue significantly decreased, due to the following reasons:

1. EIP-4844 (Prototype Sharding Technology):

2. Increased transparency and predictability: By introducing data blobs, this protocol changes the way transaction data is processed, making the network's handling of large amounts of data more efficient and predictable. This change reduces MEV opportunities that exploit transaction delays or reordering.

3. Improved network efficiency and reduced gas fees: This EIP lowers the gas fees for executing large data processing transactions by providing an efficient way to store large amounts of data, reducing the costs of MEV strategies involving large data, but also increasing competition due to improved transaction processing speed.

4. EIP-1559 (Fee Market Reform):

5. Increased transparency and predictability: The introduction of base fees and priority fees provides better predictability and stability for network transaction fees, reducing MEV opportunities manipulated through transaction fees.

6. EIP-2929 (Increased Gas Costs for Specific Opcodes):

7. Increased execution costs: By raising the gas costs for specific smart contract operations, this change may directly impact MEV strategies that rely on complex smart contract interactions, such as multi-step arbitrage or contract interactions, making them more expensive and less attractive.

   

Source: EigenPhi
In terms of industry performance, during the 7 days ending May 17, profits from DEX arbitrage were approximately twice that of sandwich attacks; however, in terms of trading volume, sandwich attacks far outpaced DEX arbitrage, being about seven times greater, with the profit/trading volume percentage for DEX arbitrage around 14%, significantly higher than the 0.01% for sandwich attacks. This indicates that DEX arbitrage is the most profitable operation in the industry.

Source: jhackworth
Uniswap is the decentralized exchange with the highest arbitrage trading volume, and by analyzing its liquidity pool's arbitrage performance, we can gain insights into the overall state of DEX arbitrage.

Source: OP Crypto
From an on-chain transaction perspective, the transaction volume of MEV in Uniswap is significantly notable.

Industry Landscape: Key Participants in Upstream, Midstream, and Downstream

Source: OP Crypto
Upstream: Transaction signing and broadcasting.
Midstream: Transaction ordering and MEV opportunity discovery.
Downstream: Block proposal and validation, completing MEV extraction.
Upstream
Upstream primarily includes PRC providers responsible for signing transactions and broadcasting signed transactions across the network. These operations are typically submitted by users or other arbitrary initiators and are initially included in the public mempool. The main task of the upstream phase is to generate and broadcast transactions.
Midstream
Midstream is responsible for block construction in public or private environments. At this stage, block producers (such as validators and block builders) select transactions from the mempool, ordering and packaging them according to their preferences. To maximize profits, block producers typically decide the order of transactions based on the gas fees. Additionally, they actively seek MEV opportunities, such as arbitrage opportunities, to determine how to allocate MEV profits. For example, they may choose to replicate searchers' transactions, conduct operational reviews, and execute transactions themselves, or allow searchers to compete for on-chain positions by adjusting operational fees. The key activities in the midstream phase are transaction ordering and the discovery and utilization of MEV opportunities.
Downstream
Downstream is primarily responsible for proposing and validating new blocks, ensuring that users' transactions and MEV-extracted transactions achieve network consensus and ultimately generate MEV revenue. Validators play a crucial role at this stage, coming from various channels such as CEX, liquid staking, institutional staking, or individual staking. The core task of the downstream phase is to package the ordered transactions into blocks and confirm these transactions through the network consensus mechanism, completing the entire MEV extraction process.

Source: ChainLink
Searchers

• Write code, often using complex proprietary algorithms, to identify MEV opportunities in the mempool.
• Monitor public transaction pools and private transaction pools of MEV projects.
• Compete with other searchers to submit "transaction bundles" to block builders, along with the maximum gas fees they are willing to pay.

Block Builders

• Compete in real-time markets to build blocks on behalf of validators.
• Accept transactions from searchers, selecting the most profitable transaction bundles, and send these blocks to relayers through MEV programs (such as MEV Boost, Flashbots).

Relayers

• Act as intermediaries between block builders and proposers (validators), allowing validators to provide their block space.

Recent Developments in the Industry

Looking back over the past few months, MEV has shown significant performance across different domains. For instance, Flashbots has demonstrated the potential of MEV in a highly transparent and structured environment through its innovative market structure. Although Ethereum's Cancun upgrade led to a decrease in Flashbots' revenue, analysis reveals that these changes primarily stem from improved network efficiency and the implementation of new protocols, reflecting the dynamic characteristics of MEV strategies in their adaptation and evolution.
In the future development of MEV, several new projects and technologies are emerging, such as Gnosis's Agnostic Relay and Automata Network's Conveyor, showcasing new approaches to addressing MEV challenges under different technological and market conditions. Additionally, SUAVE offers an innovative solution to cross-chain MEV issues through a unified cross-chain memory pool, providing new perspectives for MEV research.

Gnosis

Gnosis's Agnostic Relay is an open-source tool providing MEV Boost relaying on the Ethereum network, allowing anyone to participate in block building and production. Its design and implementation rely on the knowledge and experience of the Gnosis community and have received support and contributions from the Flashbots team.

• Neutral Block Building/Production: Agnostic Relay ensures that all submitted transactions are validated without any filtering. This neutrality is crucial for maintaining the decentralization and censorship resistance of the blockchain.
• Fork of Flashbots MEV-Boost Relay: Agnostic Relay is a fork of the Flashbots MEV-Boost relay, combining the deep knowledge and active support of the Flashbots team and community, ensuring its reliability in both technical and practical applications.

AutoMeta

Automata Network is a modular proof layer that extends machine-level trust to Ethereum through TEE (Trusted Execution Environment) co-processors. Ethereum serves as a global validator in this network, anchoring a decentralized proof network across hardware and software components.

• MEV Protection (Conveyor):
• Conveyor prevents miners from reordering transactions by determining the order of transaction transmission, thus preventing "sandwich attacks." It appropriately sorts transactions like a conveyor belt, protecting users from malicious manipulation.
• Governance Privacy (Witness):
• Witness allows users to propose and vote without revealing their identities, incentivizing token holders to participate through zero gas fees. Users can submit proposals through a simple interface and invite community members to vote, with results displayed based on the privacy level chosen at the time of proposal creation.

Eden

Eden Network provides protection and support for the Ethereum ecosystem through multiple products, reducing the negative impact of MEV and offering tools and data to enhance the earnings of validators, builders, and searchers.

• Eden RPC:
  A set of endpoints that protect Ethereum users from malicious MEV attacks (such as front-running and sandwich attacks). It provides a safer trading environment, reducing additional costs incurred by users due to MEV.
• Eden Relay:
  A suite of tools that helps Ethereum validators and builders maximize their revenue. It offers optimized block building and proposal processes, increasing the earnings of validators and builders.
• Eden Bundles:
  An endpoint that allows advanced MEV searchers to submit transaction bundles to the builder network. It provides a more efficient way to extract MEV, increasing the earnings of searchers and builders.

Eden has three product updates: 0xProtect, Eden Public Data, and Ethereum Mempool Streaming Service.

• 0xProtect:

• Function: Maintains an on-chain OFAC sanctions list, allowing block production parties to automatically filter transactions containing sanctioned wallet addresses.

• How it works: Through a smart contract registry, the sanctions list is updated and maintained in real-time, ensuring all transactions comply with OFAC sanctions. Relevant parties can directly access this registry to automatically filter non-compliant transactions.

• Use Cases: MEV searchers, block builders, relayers, and validators can utilize 0xProtect to ensure their operations comply with regulatory requirements, avoiding legal and regulatory risks.

• Eden Public Data:

• Function: Provides a series of public datasets stored in BigQuery, supporting various data extraction and loading (ETL) processes.

• Main Datasets:

  • MEV-Boost:
  1. MEV-Boost Bids: Builder bidding data collected from the relays of the MEV-Boost ecosystem.
  2. MEV-Boost Payloads: Payload data collected from the relays of the MEV-Boost ecosystem.
  • Flashbots:
  1. Mempool Dumpster: Transactions detected from the Flashbots Mempool Dumpster.
  2. MEV-Share: Transactions detected from Flashbots MEV-Share.
  • Gnosis:
  1. MEV Blocker: Transactions detected from Gnosis MEV Blocker.
  • Ethereum Auxiliary:
  1. Tags by Pubkey: Tags for Ethereum public keys.

• Ethereum Mempool Streaming Service:

Aims to provide real-time transaction data streams for block builders, MEV searchers, and dApps to optimize the block and transaction bundle building process.

1. Real-time Data Streams:

2. Provides real-time transaction data streams, allowing users to instantly access pending transactions in the Ethereum public mempool.

3. Rich Data Points:

4. Offers thousands of transaction data points, including transaction hashes, senders, receivers, transaction amounts, gas prices, etc.

5. Optimized Block Building:

6. By providing real-time access and rich data points, it helps users build better blocks and transaction bundles.

CoW Protocol

MEV Blocker, developed by CoW DAO, aims to protect Ethereum transactions by preventing front-running and sandwich attacks. The project sends transactions to a searcher mempool through an RPC endpoint, where searchers bid for tracking opportunities and share the profits with users.

• RPC Endpoint:

• Function: Provides an RPC endpoint to protect Ethereum transactions from front-running and sandwich attacks.

• Searcher Mempool:

• Function: Transactions are sent through the RPC endpoint to a searcher mempool, where searchers bid to track transaction opportunities.

• Profit Sharing Mechanism:

• Function: After successfully tracking a transaction, searchers share the profits with users and themselves at a 90/10 ratio.

SUAVE (Flashbot)

SUAVE is a new model proposed by Flashbots aimed at addressing key issues in current MEV extraction, such as cross-chain MEV and builder centralization. SUAVE creates a layer-0 blockchain that serves as a common memory pool for multiple blockchain networks, achieving cross-chain unification.

• Preference Submission:

• Function: Users no longer submit specific transactions but submit "preferences" that reflect their goals, which can be set based on specific conditions and vary in complexity.

• Cross-Chain Unified Memory Pool:

• Function: SUAVE, as a layer-0 blockchain, creates a unified memory pool that spans multiple blockchain networks. Through this cross-chain unified memory pool, SUAVE effectively addresses cross-chain MEV issues, enhancing the fairness and transparency of cross-chain transactions.

The Future of MEV: A Fusion of Technology and Ethics

The transparency of MEV extraction is both an advantage and a potential risk. In the future, blockchain technology needs to find a new balance between transparency and preventing manipulation. We can achieve this by adopting more complex zero-knowledge proof (ZKP) technologies that keep transactions anonymous before they are verified while ensuring their legitimacy. This not only protects user privacy but also prevents malicious manipulation, maintaining fairness in the network.
The Fusion of Smart Contracts and Machine Learning
The combination of automation in smart contracts and machine learning is a future direction for MEV extraction. Smart contracts can analyze market data in real-time, using machine learning algorithms to predict optimal trading strategies. This dynamic adjustment capability will significantly enhance the accuracy of MEV extraction. For example, by combining real-time market data, smart contracts can automatically adjust transaction order to maximize profits.
The Potential and Challenges of Cross-Chain MEV
Cross-chain MEV extraction is an underdeveloped area with enormous potential. By developing new cross-chain protocols, such as Cosmos and Solana, MEV extraction can be achieved across different blockchain networks. This cross-chain solution not only enhances the flexibility and applicability of MEV but also promotes interoperability within the blockchain ecosystem. However, it also brings new challenges, such as the security and efficiency of cross-chain transactions, which need to be addressed through innovative technological means.
The Rise of Dynamic MEV Markets
The future MEV market will be more dynamic and complex. Utilizing AI and big data analysis technologies, market trends and trading behaviors can be captured in real-time, dynamically adjusting MEV extraction strategies. For instance, by analyzing historical trading data with machine learning algorithms, future market fluctuations can be predicted, leading to more effective MEV extraction strategies. This rise of a dynamic market will fundamentally change the existing MEV ecosystem, making it smarter.
Optimizing Incentive Mechanisms
To attract more participants and maintain the healthy development of the network, we need to continuously optimize economic incentive mechanisms. By introducing new reward models and distribution mechanisms, we can ensure that every participant can fairly benefit from MEV. Additionally, new business models can be explored, such as providing MEV protection services and developing MEV optimization tools, increasing the overall value of the ecosystem. This will help maintain the long-term stability of the network.
MEV is not only a technical issue but also a complex field involving ethical considerations. We need to deeply consider the ethical implications while pursuing technological innovation. For example, when developing new technologies, it is essential to ensure that these technologies do not lead to unfair market phenomena, maintaining the transparency and fairness of blockchain networks. In PoS systems, validators have the ability to extract MEV by controlling transaction order, which may lead to centralization and unfairness in the network. To address this issue, we can explore new mechanisms, such as dynamic validator selection and reputation-based reward systems. By introducing more randomness and diversified incentives, we can ensure the decentralization and fairness of the network.