MEV in a Proof of Stake World: The Fundamental Shift in Value Distribution
From Silent Conspiracy to Community Dispensation
MEV is one of the more controversial topics within the crypto community, yet, depending who you ask, you will get many different answers to the question “What is MEV?” In this article we will shed light on crypto’s “hidden tax”, dive deeper into how the Ethereum MEV stakeholder landscape changed post-Merge, and how everyday users can now be beneficiaries, not just victims of MEV.
What is MEV?
An acronym for Maximal Extractable Value, MEV, in its simplest form, is any strategy used to capture or extract value on-chain. It encompasses a range of activities including arbitrage, lending liquidations, frontrunning and backrunning, among others. Many forms of MEV require transaction blocks to be reordered to achieve the strategy’s purpose.
Much MEV can be considered benign and may even provide a positive service to the crypto ecosystem. DEX arbitrage, for example, reduces the spread of token prices across multiple exchanges, creating a more efficient market for all participants.
There are also forms of MEV, such as sandwich attacks (a common strategy that incorporates frontrunning), that undeniably have a negative impact on the space and are widely considered harmful to the ecosystem. Thus, the perception of MEV is often negative and associated with the negative aspects of the ecosystem.
MEV, infamously referred to as Ethereum’s dark forest, was initially a fringe topic within crypto, but in 2021 it had its moment of crypto mainstream narrative, even attracting attention from traditional media outlets.
Many MEV-focused projects, including Eden Network and our friends at Manifold Finance, enjoyed the spotlight for the moment, but a tale as old as time, the popular narrative shifted towards something different.
Since the sector cooled down, there have been many interesting developments, much of it around Ethereum’s move to Proof of Stake (PoS). One rarely discussed aspect is the shift in MEV profit distribution, and how everyday users can now share in the takings.
MEV Before The Merge — A Silent Conspiracy
Before the shift to PoS, when Ethereum still ran on Proof of Work (PoW), MEV was an acronym for Miner Extractable Value, representing the important role that miners played in the value capture.
On PoW, specialized MEV searchers would scour the public transaction pool looking for opportunities to extract value. Once an opportunity was spotted, the searcher submitted the transaction bundle to miners, they included a tip to encourage miners to select their bundle first, then the block was mined.
The proceeds of the reordered transaction bundle were kept by the MEV searcher, except for the miner tip, which could still be quite lucrative.
In 2021 alone, over $250 million in MEV was extracted from traders, and other sources estimate that nearly $700 million has been extracted lifetime. This hidden tax on crypto users has been extremely lucrative for a select group of searchers and miners.
Post-Merge MEV — Spreading the Wealth
The transition to PoS altered more than just the MEV acronym, it also created a seismic shift in the stakeholders who could now benefit from its distribution. The shift in consensus mechanism has fundamentally changed the MEV landscape, enabling average users in the crypto community to benefit from it.
In PoS, validators take the place of miners, and token delegation through staking is a crucial component of consensus. The more tokens that are staked, the stronger the security of the chain. Stakers receive rewards for locking their tokens and, as validators play a crucial role in MEV extraction, stakers also become stakeholders in this process. Thus, the staking community has the potential to financially benefit from MEV, in the form of a share of rewards from their chosen validator.
As on PoW, MEV searchers still scan the transaction pool, but with some key differences. They now utilize new intermediaries — block builders and relays (part of proposer/builder separation) — to present their transaction bundles to validators who agree to validate blocks that include MEV.
The searchers still offer a financial incentive to validate their proposed bundles, and validators typically distribute a portion of the remuneration to their stakers. Block builders and/or relays may also impose a fee on the overall MEV block value, further distributing the earnings.
While malicious MEV and the hidden trader tax will continue to exist, there is no doubt that a more equitable distribution of MEV profits is a positive development for the ecosystem.
At time of writing, approximately 90% of validators are running mev-boost, and the estimated total value of MEV extraction since The Merge is reported to be 36,400 ETH (~$59.78 million). Although only a portion of this is expected to be distributed to stakers, it is noteworthy to consider that in a still nascent space, and amidst a volatile market environment, this is a promising start.
Eden Network’s in-house builder and relay have been live on Ethereum since The Merge, and have consistently ranked amongst the top relays by block reward, regularly reaching 3x the network average. We are pleased to be contributing to the redistribution of MEV proceeds to users, and further illuminating the dark forest.
