Ethereum’s move from Proof of Work (PoW) to a Proof of Stake (PoS) consensus system has slashed its energy usage. It has also boosted profits for stakeholders and validators in its network. A major source of those profits is a controversial algorithmic practice called Miner Extractable Value (MEV). MEV bots employ questionable and illegal tactics to boost validator revenues and profits at the cost of Ethereum’s users.
During the blockchain’s transition to PoS, MEV use inflated rewards at validators to attract investor money into its ecosystem. After the Shapella upgrade, however, MEV strategies have disconnected validator rewards from the blockchain’s true economics. The use of MEV bots at validators is also a red flag for regulators because the practices used by these bots, such as front running user transactions, are illegal.
As Ethereum moves towards the next phase of its evolution, it might be time to eliminate the use of MEVs on its platform.
How MEV Use Distorts Validator Incentives
There are two main incentives for validators to participate in Ethereum’s network and bolster its security. The first one is the rewards handed out in the form of tokens to validators involved in proposing and attesting transactions in its network. As the price of ether appreciates, validator operators can sell the tokens for a profit in crypto markets.
Fees from transactions occurring on Ethereum’s blockchain are another important incentive because they are a source of revenue. Validators receive the base fee and additional tips charged by the blockchain to commit transactions.
MEVs distort these incentives. Typically, validators choose transactions with large tips to increase their revenue. But tips and transaction fees are not important for a validator running MEV bots. Instead, they prefer transactions that move markets because they can multiply profits by front running such transactions.
Thus, they will select user transactions with significant order amounts, but with a low tip, and front run it with another transaction of their own. Or an MEV bot can conduct a sandwich attack on a user transaction, by placing bogus orders before and after it, to inflate transaction fees for the user.
That is not all. The use of MEV bots can also result in congestion on Ethereum’s network because searchers – the systems responsible for searching out transactions from Ethereum’s memory pool – may end up competing against MEV bots for lucrative transactions. A result of the ensuing congestion and volatility will be high gas fees for users. It has happened earlier during the Otherdeed sale by Yuga Labs.
The Case Against MEVs
In the regulated world of mainstream trading, MEV practices would be illegal because they encourage validator profits at the expense of users. According to previous estimates, Ethereum users have suffered $617 million in losses since 2021 to MEV bots.
Where did this money go? It was redistributed to validators, staking services and their investors. [Some decentralized autonomous organizations (DAOs) that govern staking services provide users with claims on cash flow and the underlying tokens themselves].
Services that staked the most ether on Ethereum’s blockchain have minted profits by using MEV bots. It is not surprising that Lido, the biggest staking platform for Ethereum in existence today, is able to offer yields that surpass those of the blockchain itself using MEV strategies. Lido’s governance token, LDO, has jumped since the beginning of this year and venture capitalists are fighting to get in on its game.
Censorship Resistance and Centralization
Lido’s case also illustrates another consequence of including MEV bots in validator operations. They encourage centralization of Ethereum’s ecosystem.
While the blockchain’s proponents claim that a PoS network is decentralized, the fact of the matter is that the entity controlling the biggest number of validators – and, by extension, the maximum amount of staked ether in its network – controls the block production process. MEV strategies encourage companies to stack up on validators to maximize revenues and profits.
Related to the centralization problem is that of censorship resistance. The MEV supply chain includes relays. These are used to transport blocks from builders, systems that assemble transaction blocks, to proposers or validators that sign off on the completed block. The use of relays can become a single point of failure for transactions.
That failure can also compromise neutrality. For example, Flashbots, which accounts for 60% of all block relays right now, took the lead in implementing OFAC sanctions after the Treasury department sanctioned crypto mixing service Tornado Cash. As an aside, Flashbots was seeking to raise $30 million to $50 million at a $1 billion valuation earlier this year, another example of the centralized profits the pervade a supposedly decentralized ecosystem.
Are MEVs Necessary?
Given the numerous problems associated with the use of MEVs, one may question their utility in Ethereum. But the blockchain’s developer community is unwilling to discard the MEV golden goose because it provides profits and incentives for validators to participate in a network that is still under construction. They are suggesting improvements to ameliorate its ill-effects and integrate it into Ethereum’s workings. Some of those improvements involve tradeoffs between validator profits and the blockchain’s overall resilience.
It might be a better idea to reframe the discussion around MEV. The leitmotif to Ethereum’s progress has been its goal of becoming a hub for global financial applications. For that to happen, its network must be cheap and scalable to process large amounts of data. Therefore, recent upgrades to the network have focused on achieving that goal.
MEVs do not contribute towards Ethereum’s future ambitions. As regulation comes calling for crypto, MEVs have become part of the unwanted baggage that the blockchain has saddled onto its back to please investors. It is time for Ethereum to lighten that load and get rid of MEVs on its platform.