The flow of value in the miner’s value ecosystem

Miner Extractable Value (MEV) is the foundation of permissionless distributed systems and cannot be eliminated.

The market structure of MEVs is dynamic and complex, but the participants who profit from it in a proof-of-work (PoW) network are exclusively miners and searchers.

MEV has historically been a balance between these two entities. For any given opportunity, the searcher performs the task of technically optimizing a set of transactions and evaluating game theory with miners who choose to include their attempts among several competitors to share a certain percentage of the potential profit. Note that both profits paid to miners and profits withdrawn by searchers are classified as MEVs.

However, in a proof-of-stake (PoS) system, the market structure of MEVs is completely different for two key reasons. First, participating consensus stake pools allow the profits generated by searcher activity to be redistributed to the consortium of individual stakers. Second, the role of miners is naturally divided into two different roles: validator (or block proposer) and block builder.

Integrated and modular MEV infrastructure

In a PoS network, there are four important players in the MEV:

  1. Stake Pool – Stake pools aggregate L1 tokens from various stakers and delegate them to validators involved in block production (e.g., Lido, Gito, Marinade, Coinbase Stake Pool)
  2. Searchers – bots or individuals that identify and try to capture on-chain monetization opportunities (e.g. Solana and Ethereum dashboards)
  3. Block builder – the entity that builds and sorts transactions in a block (e.g., Jito block engine, Flashbots MEV-Boost)
  4. Validator (block proposer) – Validator or full node who votes with their stake in the consensus to propose a block for verification by other nodes in the network. Services such as staking, fiction, chorus one, staking facility operation block proposer.

In this ecosystem of participants, the central point of leverage is the stake pool (or more accurately, the individual stakers that make up the consortium), as stake ultimately grants validators the right to produce blocks. Validators need stake to maximize revenue, and the market for aggregating stake is highly competitive.

In order for equity pools to effectively aggregate equity, they must offer stakers a competitive reward rate. Historically, staking benefits have been fixed as a function of protocol emissions, and validators will compete on fees. Today, the number of on-chain activities has increased, as have the opportunities for differentiation between stake pools. Stake pools can now compete in a few main ways:

  1. Base emissions from production blocks
  2. Fees or lack thereof
  3. The share of MEV extracted

In order for the staking pool to provide a competitive rate of return, the staking pool must delegate to validators who are building the most profitable blocks and ensure that these profits are shared with their stakers. If validators are inefficient in extracting MEVs or choose to keep their own extracted MEVs, the stake pool will quickly reallocate their stake elsewhere.

Searchers are always looking for opportunities on-chain or interacting with decentralized order flow markets (e.g., DF streams). When searchers discover the MEV opportunity they want to win, they use the block builder-backed relay to submit their thoughtfully optimized transactions. They also include tips from validators (a fraction of the expected profit), which increases their success rate. In a world where stake pools have the most influence, these tips must be shared back to the stake pool at least in part so that they can distribute competitive rewards to stakers.

Therefore, stake pools effectively require validators to acquire blocks from the most efficient block builders in order to maximize the revenue of the stakers who make up the stake pool. Block builders are also incentivized to build the most profitable blocks because they want more validators to include their blocks, which increases their success rate and potential MEV revenue percentage.

The dominant stake pools in the proof-of-stake network offer liquid equity derivatives (e.g., stETH from Lido, cbETH for Coinbase) that represent 1:1 claims to the original staked assets and accumulate all staking rewards. Collateralized derivatives are motivated by improving capital efficiency and equity allocation.

Until recently, these ecosystem participants worked together as modular MEV infrastructure providers. However, as MEV capture opportunities increase, we expect MEV infrastructure to consolidate to improve value capture at every touchpoint along the value chain.


MEV value accumulation

The market structure of MEVs in a proof-of-stake system suggests that value will accumulate at two tiers: first, through stake pools versus stakers, and second, infrastructure providers that facilitate the extraction and redistribution of MEVs. The more tightly integrated each component of an MEV infrastructure, the more effective the system will be in terms of value capture.

Where the agreement cannot capture value, the DAO manages risk, and we believe that state and risk management are necessary to drive sustainable value in any agreement. An integrated MEV system manages risk across every layer of intermediation between searchers, stake pools, validators, and block builders.

For stakers, they manage risk by offering a higher than market return on stake. For searchers, by providing a high probability of transaction confirmation. For validators, incremental revenue is provided for block proposals through delegation of stake. For block builders, incremental revenue is provided with a higher probability of block inclusion.

An integrated MEV system improves conditions for all participants in the value chain. They have a fairly strong position over any of the modular players in the system and can therefore deliver significant returns on scale.

Posted by:CoinYuppie,Reprinted with attribution to:
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