Flashbots: What will the future market for MEV look like?

Establishing an effective and democratized MEV market is crucial to Ethereum and even the entire cryptocurrency ecosystem. As a community member of Ethereum and a supporter of Flashbots, Smrti Lab translated Flashbots’ latest thinking on the MEV market. Smrti Lab is a crypto native, research type venture studio established by DeFi degens.

About the design of the MEV market

The core of each blockchain is how it allocates space within a block. With the activation of EIP1559, Ethereum will usher in a historical change in the allocation of block space, which will directly determine whether a transaction can be included in a block. However, EIP-1559 does not affect the ability of miners to reorder, insert, or review transactions, so it does not affect MEV (Maximum Extractable Value) to a large extent. 

Flashbots has long been committed to designing a sustainable incentive system for all stakeholders of Ethereum, including users, arbitrage robots, Dapps, and the guardians of the Ethereum network (now and in the future): miners and validators. The core of this goal is to design a democratic and efficient transaction ordering market, that is, MEV auction rules. So far, Flashbots has successfully achieved this goal on Ethereum through our Alpha product. 

In view of the major changes in the pricing rules of the Ethereum block space today, and the evolution of Ethereum block producers from the role of “miners” to “validators” in the near future, we would like to share how Flashbots designed the MEV trading market considerate.

The changing role of Ethereum block producers

On today’s Ethereum, the core of mining is to create the most profitable block, verify the block through proof of work and broadcast it on the network. Before the establishment of a fair and effective MEV market, creating the most profitable blocks was mainly based on the gas price for transaction sorting. Miners have little room for profit optimization in optimizing transaction sequencing, so they mainly focus on more profitable network-level optimization. 

Nowadays, MEV transactions captured by arbitrage or clearing robots are common on the Ethereum network, and the work of miners has undergone major changes. In order to generate the most profitable block, in addition to the competition at the proof-of-work level, miners now need to find the optimal order of transactions within the block to pack the block with the highest total MEV value. Ordering transactions dominated by MEV value is much more complicated than ordering transactions according to the established gas price, because users are willing to pay a premium for their preferences, and miners also need to judge the order of transactions that maximize benefits, so it’s for users and miners The service that provides sorting optimization to reach consensus came into being. And due to the widespread use of this service, even before EIP-1559, MEV revenue now accounts for a large portion of miners’ revenue. 

The most important thing for the security of the Ethereum network is to ensure that all miners, big or small, have a fair chance to build blocks that maximize their benefits. Otherwise, large miners will be able to use their resources more than other miners to optimize their MEV extraction strategy. In turn, more revenue from MEV can be used for growth and further consolidate their dominant position in the network. 

Flashbots believes that separating the “proposing block” party from the “building block” party is an ideal way to build a sustainable and secure blockchain network (because an over-centralized system of block producers is obviously It is unsustainable and requires sufficient competition to ensure the maximum profit of block producers). Instead of letting block proposers create MEV optimized blocks themselves, they should rely on specialized third-party markets that build blocks for them in exchange for fees. The role of the block proposer is to select the block with the highest income. This algorithm is even simpler than sorting by gas price. Block producers can also participate as proposers and builders at the same time, which allows them to get value from proposing blocks for themselves and others.

The ideal state of the MEV market

Based on the aforementioned market structure, how can we sustainably coordinate the interests of all stakeholders? Flashbots evaluates the MEV market with the following dimensions:

Efficient:

The system should provide maximum value* for block producers, transaction senders and the entire Ethereum ecosystem*. It should avoid the waste of network resources caused by failed transactions on the chain, and prevent stakeholders from falling into a negative-sum game cycle, and by doing so, ensure that block producers can obtain the most profitable blocks, especially with Any non-open MEV solutions compete because they are not universally available and may compromise fairness. Fairness and openness are the prerequisites for ensuring the efficiency of the MEV market.

Avoid value capture:

The system should avoid unnecessary introduction and minimize the value capture mechanism that participants solidify. A MEV market with built-in tokens is a solution that failed here: those schemes that use special tokens to allocate MEV, that is, for example, if the number of tokens is large, it is unacceptable to determine which transactions are ranked first. . Because the value is captured by these tokens (instead of being directly obtained by the packager in the form of revenue). And such governance tokens are [generally risky]. This risk may be tolerable for the application, but if the DAO of token governance is used to control the threshold of the basic layer transaction on the chain, then the powerful economic participants who control its governance can use this power to extract Value, censor transactions, and even use them to monopolize MEV revenue to promote other miners to participate in hostile soft forks.

No permission required:

Anyone should be able to participate in the MEV market. Doing so will maximize the income of market participants and enable the market to resist shocks most steadily in the long run. If needed for anti-spam purposes, you can consider adding an encryption economic model, but you should avoid centralized (even managed by DAO) whitelists to the greatest extent. And in the Ethereum system, ether should be the preferred accounting unit, because it avoids placing power in the hands of a small group of people to the greatest extent.

privacy:

The MEV market should provide participants with the right to privacy in transactions until their transactions are successfully listed on the chain. Privacy can help inspire more competitive trading strategies and achieve more effective price discovery. Arbitrage robots can guarantee that their strategies will not be preemptively run or split by block producers. In turn, this will maintain incentives for permissionless innovation (such as more searcher strategies) and will generate more revenue for searchers and miners. In addition, a system where block producers cannot see or change transactions before being included on the chain will further ensure their role as neutral participants in the network. This is critical in light of the recent high level of attention to the regulatory status of block producers. We believe in a solution that uses cryptography to protect the privacy of market participants, such as [MEV-SGX](https://ethresear.ch/t/mev-sgx-a-sealed-bid-mev-auction-design /9677) [Combined with](https://www.youtube.com /watch?v=GzuyOYiuipg) a scheme that guides the separation of block proposers and builders through economic models] can satisfy all these attributes. We encourage the community to cooperate with us as we seek to further explain how such solutions work in practice and evaluate alternatives that can also achieve these features.

in conclusion 

For the above reasons, Flashbots believes that the establishment of a democratic and efficient MEV market is essential to the cryptocurrency world. At the same time, we believe that only by establishing on an open field can the above ideal state be reached as far as possible. This is why we regularly hold public meetings hosted by independent third parties, such as [MEV Roasts], and make our ideas public in the community. This is why we need feedback from multiple stakeholders as a core part of the development process.

Finally, we believe that we need to be cautious about sudden changes to the MEV market without careful consideration and research. We invite all members of the cryptocurrency community to join us in complying with these standards, and encourage all members of the community to participate in existing and new designs to help Ethereum achieve an ideal future that is efficient, permission-free, capture-free, and privacy.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/flashbots-what-will-the-future-market-for-mev-look-like/
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