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Flashbots: Frontrunning the MEV Crisis

Flashbots is a research and development organization formed to mitigate the negative externalities and existential risks posed by miner-extractable value (MEV) to smart-contract blockchains. We propose a permissionless, transparent, and fair ecosystem for MEV extraction to reinforce the Ethereum ideals.

What is MEV

Miner extractable value (MEV) is a measure devised to study consensus security by modeling the profit a miner (or validator, sequencer, or other privileged protocol actor) can make through their ability to arbitrarily include, exclude, or re-order transactions from the blocks they produce. MEV includes both ‘conventional’ profits from transaction fees and block rewards, and ‘unconventional’ profits from transaction reordering, transaction insertion, and transaction censorship within the block a miner is producing.

The MEV Crisis

Transactors on Ethereum express their willingness to pay for inclusion in a block through their transaction’s gas price, and therefore through the transaction fee they indicate they are willing to pay miners. Miners, as economically rational actors, pick the transactions with the highest gas price and order them by gas spend in the block they are producing. The financial system being built on Ethereum creates many ‘pure’ profit opportunities such as liquidations and arbitrages of many kinds. However, these opportunities are finite and episodic, and as such, traders compete to claim them. Right now, this competition is primarily expressed either via frontrunning, or via backrunning:

  • Steadily increasing contract interactions (ie. there are more complex transactions on Ethereum than before which increases the absolute amount of MEV up for grabs.)
  • Token market cap exceeding ETH market cap (ie. MEV revenue in ERC-20 tokens is starting to compete with regular transaction fees paid in ETH.)
  • Transaction fees exceeding block rewards (ie. transaction fees have reached unprecedented levels partly due to traders pushing the gas prices up when competing for trading opportunities. It is a clue that MEV-related revenue may surpass block reward for miners.)
  • Adoption of generalized frontrunners (ie. an indicator of increased sophistication in MEV extraction.)
  • Adoption of permissioned mempools (ie. another indicator of such sophistication)

Frontrunning the MEV crisis

Illuminate the Dark Forest

MEV is currently opaque to users of Ethereum. It requires significant data analysis and in-depth knowledge of smart contracts to understand as it involves transactions with complex, sometimes obfuscated, logic and adversarial games played on several meta-levels (users, traders, generalized frontrunners, miners).

Democratize Extraction

MEV Extraction could likely go in a direction where it is centralized to a few players, for instance by being limited to permissioned dark transaction pools that have access to significant hashrate, or through unilateral off-chain deals between large traders and miners.

Distribute Benefits

MEV involves the entire Ethereum ecosystem, from miners, traders, DeFi developers, and, most importantly, Ethereum users. Our preliminary research shows MEV extraction currently disproportionately benefits traders and miners. As MEV extraction continues to grow in scale, we anticipate there will be a need for ~some~ value redistribution towards users and towards system stability

Our Public Commitments

Flashbots arose from the MEV Pi-Rate Ship, a neutral, chain-agnostic, interdisciplinary research collective that supports MEV-related theoretical and empirical research. As an open research organization, we commit today and in the future, to:

  • Preserving the core values of Ethereum in what we create, i.e. openness, permisionlessness, decentralization, against the coming MEV crisis.
  • Making our research and core Flashbots infrastructure code open source for any community member to contribute to and benefit from.
  • Creating sustainable alignment across key actors of the ecosystem by taking into account the needs of users, miners, developers, node operators, public infrastructure operators and developers, contract/dapp devs, and ecosystem researchers.
  • Contributing to open-ended ethical research questions in the MEV space, 100% in the public domain.

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Flashbots is a research and development organization formed to mitigate the negative externalities and existential risks posed by Maximal Extractable Value (MEV) to smart-contract blockchains.

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