An introduction to maximal extractable value on Ethereum

MEV is a complex, systemic problem for public blockchains.

In brief

• Maximal extractable value (MEV) is a complex, systemic problem for public blockchains, particularly for smart contract blockchains with significant transaction volume, such as Ethereum.
• MEV, if left unchecked, can present systemic consensus-layer vulnerabilities but there are potential solutions.
• All participants of a given blockchain should be aware of the risks posed by MEV on their selected blockchain, the opportunities being captured by certain participants and the planned mitigants or solutions.

MEV arises as a function of the overlapping preferences of market participants who transact on a blockchain. MEV is a complex systemic challenge for blockchains with various potential solutions, implementation paths and externalities.¹ Ethereum, and more specifically the public mempool (the set of pending, unconfirmed transactions), has been described as the “dark forest,” a reference to science fiction by Chinese writer Cixin Liu, meaning “an environment in which detection means certain death at the hands of advanced predators. In this environment, publicly identifying someone else’s location is as good as directly destroying them.” In this paper, we attempt to illuminate the dark forest by answering the question, what is MEV?

In the first half of the paper, we define who the MEV participants are, how they capture value, and the serendipitous emergence of Flashbots. Then we will explain the MEV supply chain in terms of how it functioned on proof of work Ethereum and how it functions post-merge, on proof of stake Ethereum.

In the second half, we examine what types of mitigation and redistribution strategies at the application and consensus layers are being developed by the top researchers in this domain. Finally, we address the existential threat of cross-domain MEV and postulate a conclusion about the MEV end game, ultimately placing users in the privileged position that has been historically occupied by miners.²

Conclusion

As cryptography progresses, MEV mitigation at the protocol level is likely. There will be a progression of implementing consensus changes like SSLE, VDFs, Single slot finality and zero knowledge Ethereum Virtual Machine. Changes that require social consensus like PBS will need strong support. The most promising solution at the consensus level is likely committee-based MEV smoothing.

MEV smoothing could force the community to have more conversations around what types of MEV are acceptable. In a PBS world, the proposer will be incentivized to accept the maximum bid from a builder. In an MEV smoothing world, the proposer does not have that incentive, as they are accepting the bid for all participating validators. This could lead to discussion around whether blocks should contain sandwich attacks or other types of user-extracting MEV. Should builder bids, representing the MEV extracted, be burned? A clear benefit is the formation of social consensus around MEV.

MEV will exist in some form. Acknowledging MEV now while the market is still evolving at the infrastructure and application layers is critical. Existential risks like a centralized block production supply chain lurk but can be avoided by raising awareness of cross-domain MEV and testing mitigation strategies in production. Ethereum roll-ups will provide a robust testing ground. The question becomes what tradeoffs are you willing to make and how fast can you execute?

We believe awareness and understanding of this topic is critical for any market participant looking to build blockchain-based solutions or transact on public blockchains. Ultimately, composable blockchains that prioritize mitigating the negative externalities of MEV will reduce existential risk for their own chains, contribute to broader cross-domain MEV protection and provide anti-fragile, censorship resistant public blockchains that mass adoption can more safely take place on.