Illuminating the Dark Forest: Unveiling the Mysteries of MEV

With the surge of activities on the Ethereum chain and the evolution of its infrastructure, MEV has been regarded as one of the most dangerous aspects of the Ethereum ecosystem, directly impacting users' on-chain financial activity returns and experiences. This article aims to analyze the centralization and trust issues brought about by this mechanism, starting from the block generation mechanism of Ethereum 2.0 and the proposer-builder separation (PBS) technology evolution, and its contradiction with the decentralized values of Ethereum.

The intensification of on-chain MEV is a double-edged sword, with positive effects such as reducing DEX price discrepancies and assisting in liquidation trades, as well as negative impacts like harming users through sandwich trading. Therefore, solutions to MEV are more about mitigating negative effects rather than completely eliminating them. In the process of exploring ways to alleviate the negative impact of MEV and address the current issues with third-party trust middleware Relayer, there are mainly three types of measures: improvements in auction mechanisms, consensus layer enhancements, and application layer upgrades. These measures will impact the MEV landscape to varying degrees, but some solutions do not fundamentally resolve the issue of users encountering sandwich attacks, as user transactions remain public. Therefore, there is a need to introduce more privacy pool technologies to protect the optional privacy of user transactions, and these MEV solutions are worth attempting in combination.

In addition, as an unavoidable byproduct of mechanism design, MEV will become more complex in the future. We also discussed in the text the potential additional MEV technical challenges and opportunities that may arise under the implementation of new transaction types such as Layer 2 architecture and EIP-4337 account abstraction.

In conclusion, we hope to explore potential solutions to mitigate the negative impacts of MEV through this article, and to provide a comprehensive understanding of the pros and cons of current MEV solutions, not only to illuminate the dark forest for users but also to guide industry researchers in further studying MEV.

Ethereum 2.0

Since The Merge, Ethereum has adopted a POS mechanism to ensure network security, abandoning computation-intensive competition for block production and instead adopting proof of stake. After the merge, Ethereum is divided into an execution layer and a consensus layer. Block production has also changed, with each Epoch representing a POS cycle, divided into 32 Slots, with each Slot equivalent to a 12-second block time unit.

The network randomly selects a validator committee in each Epoch, from which a block proposer is randomly chosen. The proposer needs to package transactions and sort them for executing the generated block, while other committee members are responsible for supervision and voting. The committee is re-selected after each Epoch and has a time limit to ensure efficiency. Payload refers to the execution load, that is, the state changes of transactions, which can be seen as part of executing the block. The block proposer will implement the execution load and propose the block.

PBS Architecture

In fact, when validators are selected as block proposers, they often lack the motivation to execute the Payload, as this requires significant computational power. The original idea was to achieve decentralized transaction ordering through the election of a decentralized committee, but validators tend to outsource this part of the work and focus on proposing blocks. This led to the concept of PBS, which separates block proposing and building. Proposers are only responsible for validating blocks and do not participate in building. This separation facilitates an open market where block proposers can obtain blocks from builders. Builders compete to construct blocks and offer the highest fees to proposers, known as "block auctions."

PBS(Proposer Builder Separate)The sealed first auction model process is as follows: Users submit transactions to the public Mempool through RPC proxies, multiple Builders find the best transaction ordering to generate the maximum profit block (Profit = transaction fee Base + Priority + MEV), and then interact with the Proposer through the MEV-Boost Relayer. The Relayer acts as an intermediary, Builders submit bids to it, and the Relayer submits multiple block headers and bids to the Proposer, who usually selects the block with the highest bid. The Relayer implements the MEVBoost specification, which standardizes the bidding interaction between Builders and Proposers. The entire process is information-closed, and the Relayer only submits block headers to the Proposer, ensuring the Proposer's censorship resistance.

Participants and Game Theory Under PBS

The main participants include Builder, Relayer, Proposer, and MEVbot(Searcher).

Builder

The Builder is responsible for constructing block content, and has an advantage in bidding when using MEV-Boost, as it supports Gas Fees and MEV revenue. Builders can directly review user and Searcher transactions, which has been controversial, especially after the US government announced OFAC, leading to many Builders participating in OFAC compliance. Although the recent proportion of block reviews has decreased, Builders still have a direct impact on transaction reviews.

Currently, the share of the Builder market is gradually expanding for the unreviewed beaverbuild.org, all oriented towards profit.

Searcher

Maximizing profits requires cooperation between Searchers and Builders. Searchers often collaborate with specific Builders to form Dark Pools or Private Pools, where Searcher transactions are only visible to specific Builders. Theoretically, if a Builder acts maliciously or censors, the Searcher can choose other Builders, leading to a decrease in market share for the malicious Builder. Therefore, Builders will consider the implicit costs of acting maliciously. MEV profits can even reach twice the daily Gas profits during significant market fluctuations.

Searcher is divided into two main categories: CEX-DEX( off-chain) arbitrage and pure on-chain( DEX, mezzanine, and liquidation). Currently, Wintermute holds the largest market share in CEX-DEX arbitrage trading. Pure on-chain MEV opportunities are showing a trend towards studio-based models, with jaredfromsubway.eth capturing a market share of 37.2%, excelling at sandwich attacks on Ethereum users, and once becoming the user with the highest gas consumption on-chain. Due to the close relationship between Searchers and Builders, many Searchers only send order flow to the top three Builders to maintain ecological influence and avoid small Builders splitting order flow, which could lead to strategy failure.

Relayer

The Relayer is responsible for assembling the auction, acting as an intermediary to submit the block header and bidding price to the Proposer. At this point, the Proposer is unaware of the details of the block transactions. Once the Proposer selects and signs the block header, the Relayer releases the complete transaction details to the Proposer. The Relayer, as a third party with no economic incentives, gains significant trust; the Builder relies on the Proposer's quotes, and the Proposer relies on the Relayer's quotes and block content. Historically, there was an incident where an Ultrasound Relayer vulnerability allowed the Proposer to extract over $20 million in MEV. Although the vulnerability can be patched, the Relayer itself may still act maliciously to steal MEV.

Currently, the market share of pure MAX Profit Builders has been gradually expanding since the Merge, indicating that MEV cannot be artificially controlled by Builders in a free market. Relayers face the issue of lack of economic incentives, and Blocknative has withdrawn from Relayer development. Ethereum's reliance on third parties to provide PBS is not a long-term solution, and the community is exploring incorporating PBS at the protocol level.

Proposer

Proposers are randomly selected from validators and have the ability to execute load, but tend to outsource. This can easily lead to vertical collaboration between Builders and Proposers, while MEV-boost's Relayers hope to act as intermediaries to reduce direct communication. Currently, mining pools serve as validator pools, but both mining pools and LSD validator pools exhibit strong scale effects, especially with the emergence of LSD enhancing capital efficiency, leading to a trend of centralization in validator pools.

Lido currently holds 28.7% of the market share, followed by Coinbase and Ether.fi in second and third place. In the past, when MEV-BOOST PBS was not implemented, Proposers were responsible for executing the Builder task ( and the execution load ), but most Proposers abandoned their sorting execution capabilities because the heavy computation would severely impact verification performance, so it was better to outsource the execution load to let third parties auction the blocks.

User

Users are in the weakest position in the entire architecture, with transactions being placed in the Mempool for MEV bots to profit from, but these profits do not flow to the users. However, there are also positive effects, such as in DEX, where large market fluctuations or when user trading volume exceeds liquidity, MEV bots mitigate slippage and price differences through arbitrage. Thus, MEV has both positive and negative externalities that need to be discussed separately.

To avoid user transactions being harmed by MEV bots, many RPC node providers can help users place transactions in a non-public Mempool. One new method is to compensate users for MEV profits through OFA(Order Flow Auction), where OFA RPC operators collaborate with Searchers to auction user orders to Searchers, maximize MEV, and have the orders included in blocks, with Searchers returning a portion of the profits to users.

Currently, the proportion of users using private order flow is low, about 10%, mainly due to the high cost of user education, making it difficult to popularize MEV knowledge and countermeasures, and the operations are complex. Optimizing the user experience requires users to be more passive rather than actively accepting.

Summary

Under the current PBS architecture, after the introduction of the MEV-BOOST specification, the profit-maximizing sealed-bid auction mechanism has led to a gradual cooperation and trust between Builders and Searchers, with a clear trend of centralization. POS has also led to the centralization of Validators, and the entire MEV industry chain has become centralized, introducing multi-party trust issues. This clearly contradicts the vision of decentralization and trustlessness that Ethereum advocates. The Ethereum community is discussing three proposals to mitigate centralization:

1. Regarding the bundling of Builders and Searchers in a centralized manner: The SUAVE technology proposed by Flashbot improves transaction transparency, lowers the trust threshold of Searchers towards Builders, and encourages Searchers to send order flows to all Builders.

2. For Relayer Trust: Use Enshrined PBS to replace the current PBS scheme, eliminating the reliance on Relayers.

3. Addressing Validator Centralization: adopting decentralized AVS, such as SSV, Lido has already partnered with them.

Current Status of MEV

Currently, the main on-chain MEV includes arbitrage, sandwich attacks, liquidations, etc. Arbitrage profits are the highest, with MEV bots able to record a profit of 2.6 million dollars in the past 30 days. The average profit of a sandwich attack transaction is 0.8 dollars, and the total profit from sandwich attacks on the Ethereum chain in the past 30 days is approximately 880,000 dollars.

MEV has both positive and negative external effects. The positive aspects include reducing price discrepancies between DEXs and assisting DeFi protocols in liquidating collateral, among others. The negative primarily involves sandwich trading against users, resulting in a loss of some profits. Under the current on-chain fee mechanism, although Ethereum has implemented a Gas Fees smoothing mechanism, when on-chain arbitrage opportunities increase, trading by MEV bots alongside users can still lead to a spike in short-term Gas Fees, affecting users' economics and experience.

In addition to the MEV and centralization issues brought by the PBS and POS architectures, the migration of Ethereum to Layer 2 has also generated cross-chain MEV problems between Layer 2s.

Potential MEV Complexity in Layer2 Architecture Design

In the future, large-scale on-chain arbitrage activities will shift towards more complex and technically demanding multi-chain cross-chain MEV. Currently, there is limited research on cross-chain MEV, but some countermeasures have been proposed, mainly aimed at improving Layer 2 sequencers. Cross-chain bridges are essential products for cross-chain interactions between Layer 2s. Searchers can help alleviate fragmented liquidity between Layer 2s, but the current effectiveness is not significant, mainly due to the need for improvements in cross-chain bridge experience and security, and the different finality of different bridges complicates strategy customization, resulting in a high threshold for cross-layer 2 cross-chain operations.

Potential MEV of EIP-4337

EIP-4337 introduces account abstraction and new transaction types, which will also significantly change the MEV landscape. The new User Operation transaction type in ERC-4337 enters the Mempool, from which Bundlers seek and package it into normal transactions. Once a user transaction enters the public pool, it will be monitored by Searchers. Bundlers are similar to Builders and can collaborate with Searchers to reorder User Operations to obtain MEV. The specifications for User Operations may vary across different chains, further