From MEV to MEV-BOOST: Whether the “invisible tax” remained in Ethereum after The Merge

The maximum extracted cost (MEV) has not gone away after the largest Ethereum update The Merge and the transfer of the second in capitalization of cryptocurrency to Proof-OF-STAKE. A modified MEV-BOOST system has appeared, adapted for this algorithm.

FORKLOG figured out the features of a new decision, the scale of its adoption and influence on the market.

• The efforts of the organization Flashbots contributed to the democratization of MEV capacities, a decrease in gas value, increase the privacy of operations and increase the income of the network participants.
• MEV-BOOST relay censors the majority of transactions that potentially do not meet the requirements of the regulators.
• Some market experts are concerned about the dominance of the Flashbots system, which is not fully decentralized and involves a certain degree of trust.

Simple words about MEV

By the most extracted cost (Maximal Extractable Value) implies a profit that miners or validators can get due to the ability to arbitrarily include, exclude transactions or change their order before approving a new block in the network.

“If the blockchain is complex with the participation of Betting systems, decentralized exchanges or liquidation processes, using these systems, the parties can receive an additional reward,” the BitMex Research blog says.

As a simplest example, researchers provide the purchase of a token market on a decentralized exchange, which arises for arbitration. The first to be able to perform the appropriate operation receives a significant reward. In the traditional financial system, a similar process is called Frontranding.

Those who find opportunities for obtaining the maximum extracted cost and produce transactions based on them, are called “Searchers”.

According to analysts, arbitration operations generate more than 90% of the MEV income related.

For these purposes, most market participants use the largest Ethereum ecosystem Noniswap Non -Kastodial Exchange.

We will analyze a generalized example in which the Ethereum user will exchange 10,000 USDC for ETH at a price of $ 2000 per muna for DEX in the USDC/ETH liquidity bullet. This is what happens after placing an exchange application:

• Special bots work in the mempula, which monitor unconfirmed transactions and collect various data from Defi applications, including liquidity prices and volumes;
• Having noticed the user’s intention about buying ETH, the bots initiate an operation that will increase the price right before the user transaction execution. For example, the bot can add https://gagarin.news/news/the-japanese-government-will-review-the-foreign-exchange-law-to-close-backdoors-for-sanctions-evasion/ more stablecoins to the USDC/ETH liquidity to increase the price of cryptocurrency;
• Thus, the expected price of $ 2000 for ETH, which the user was counting on, will change on conditional $ 2500 per coin. The transaction will be made: instead of 5 ETH, the user will receive 4 ETH. The profit of the initiator of this MEV operation will be 1 ETH minus the expenses for the commission.

There are much more complex strategies for obtaining the maximum extracted cost:

• backranning;
• Sandwich Atak;
• Liquidation;
• “Uncle Bandit attack” (Uncle Bandit Attack);
• “Time Bandit Attack).

Since MEV leads to an increase in commissions for the user, it is also called an “invisible tax”, which is characteristic not only for Ethereum.

Thus, MEV is a significant phenomenon in the ecosystem, which also affects transaction commissions. The factor of the maximum extracted cost became especially clearly expressed in 2021.

“When the seekers saw MEV strategies of other seekers in the transaction membrane, they instantly copied them with a higher gas commission. Resorting to the tactics of scorched land, the seekers competed among themselves for MEV capacities. As a result, commissions for all Ethereum users were rapidly growing, ”Bitmex Research analysts explained.

According to them, instead of transferring MEV transactions to an open mempoule, seekers began to privately send them to miners. This helped to avoid the “race” leading to raising fees for many users.

However, they emphasized in Bitmex Research, this approach is associated with the potential centralization of mining.

“It is easy to understand why such a system can lead to the appearance of one dominant creator of blocks. This in the future can cross out all the key characteristics of Ethereum, because the miner-monopolist is able to censor transactions, ”analysts said.

MEV-BOOST

The largest update in Ethereum – The Merge – did not put the end of MEV at all. A modified MEV-BOOST system has appeared, adapted for the Proof-OF-Stake (POS) algorithm.

A few days after the upgrade, the developer Elias Simom analyzed the first ~ 24,000 Ethereum blocks. He came to the conclusion that 18% of them were generated using the maximum extracted cost, providing the validators with an additional remuneration for the stake.

We looked at the first ~ 24k Blocks Post -merge and Compared the Performance of Block Proposers that Running Mev-BOST VS that that arnette.

Thanks to MEV-BOOST, the validators using it were able to get 122% more profit. The blocks formed by them contained 41.4% more transactions.

In addition to this, MEV-BOOST made it possible to exclude empty and missed blocks. Among the validators who did not use this functionality, the analyst found them 1.2% and 1.5% of cases, respectively.

The modified system was created by the aforementioned Flashbots. According to developers, MEV-Boost should resist the negative effects of the maximum extracted cost in Ethereum ecosystem.

“As in the case of MEV-GETH, MEV-BOOST allows POS-vodators to transmit the release of blocks for outsourcing. However, the current design of the new solution has some differences: Builder API, creators of blocks, escrow and validators, ”Alchemy researchers explained.

Builder API – The modified version of the Engine API used by the Beacon Chain NODS to connect customers responsible for creating blocks, as well as consensus customers offering blocks.

The creators of the blocks (Builders) “invest in specialized equipment necessary for resource -intensive production of blocks”. Receiving transactions from seekers, they “form the most profitable block using various strategies”.

Retransels (Relayers) check the blocks before transferring them to the validators. They also protect the network from spam and evaluate the cost of MEV knowledge.

Escrow receives the contents of the block from the relay, ensuring the availability of data for the validator.

“Retransels must also trust the escrow so that they do not disclose data to the validator before signing,” Alchemy explained.

In the architecture of MEV-BOOST Validator – participant of stakeing on the Beacon Chain network, selected to offer a block for a particular slot. It interacts with the relay to obtain the most profitable block headline, confirming the latter through the signature.

After adding the block to the chain, the validator receives transaction commissions and “tips” in the form of the maximum extracted cost.

Absolute leadership in MEV belongs to Flashbots (share 81.98%).

The schedule below illustrates the amount of the accumulated outcome transferred to the validators from the largest MEV-boost service. As of 11.ten.2022 The indicator exceeds 8700 ETH.

The following chart shows that the number of validators registered for interaction with Flashbots is growing steadily.

The share of blocks “missed” through the largest ranger has already exceeded 42%. Other The diagram means other MEV-BOOST services, as well as “ordinary” blocks from Ethereum membrails.

The remaining “part of the pie” – a little less than 20% in MEV – falls on six other relayers:

• Bloxroute Max Profit;
• Blocknative;
• Bloxroute Ethical;
• Manifold;
• Bloxroute Regulated;
• Eden.

Some, including Bloxrute Regulated, censor certain transactions in accordance with the requirements of OFAC . For example, related to the popular mixer Tornado Cash.

By mid -October, the share of blocks that satisfy the requirements of the regulators exceeded 50%.

According to the observations of the researcher, Tony Warstetter, for almost two weeks after activating The Merge, not a single transaction associated with Tornado Cash has passed through a relay from Flashbots.

Data Shows That The Flashbots Mev-Boost Relay (Same for the Flashbots Builders) is censoring @tornadocash Transactions.
SINCE THE MERGE, Not A SINGLEL TRANSACTIONTING WITH the TornAdo Contracts Has Been Includ in Their Mev-BOSTEDD BLOCKS. /1 pic.Twitter.COM/C1FBVOLCCX

– Toni Wahrstätter (@nero_eth) September 27, 2022

According to Blocknative forecasts, over time, different types of blocks will appear in Ethereum:

• with the maximum number of MEV transactions;
• with MEV only for charitable purposes;
• with certain gas prices;
• streamlined in time;
• auctioned;
• with censorship;
• Without censorship.

It is also expected that due to the specifics of the “era” (the procedures for selecting validators and the creation of a new block), MEV operators will know in advance which validators will offer the next block. This can lead to the appearance of completely new, long -term strategies.

MEV-BOOST advantages and disadvantages

Alchemy experts list the following positive aspects of MEV-BOOST:

• democratization of MEV capacities, including solo-stones available;
• reduction in gas value;
• Increasing the level of privacy for Ethereum users.

According to them, the maximum extracted cost can lead to the emergence of permissional-membranes or to an increase in the popularity of offchain operations between traders and manufacturers of blocks. This is a potential threat of Ethereum decentralization. MEV-BOOST solves the problem by democratizing access to the system.

In addition, large and highly profitable stake pools can reinvest profit from the maximum extracted cost, “to use even more MEV capacities”.

“With such a scenario, under pressure, solo-stickers will probably be. They will have incentives for joining large pools to maximize income. This is important because after The Merge the rewards for the block decreased, and MEV has become a significant part of the reward of the validators, ”the researchers shared his thoughts.

Alchemy emphasized that when using MEV-BOOST, any validator gets access to the most extracted cost. At the same time, large staying pools have no levers for monopolization.

As already mentioned, MEV pushes up transaction commissions upwards through operations in the gas auction market conducted by participants in the Defi segment (in particular, trading bots). The MEV-Boost contribution to the solution of this problem is to transfer such auctions to offchain.

“Ethereum users, especially Defi participants, also benefit from increased privacy of transactions. The use of MEV-BOOST is perhaps the safest (and legitimate) way of leaving the Dark Forest, which is called public membrails in colloquial, ”the researchers said.

The second in capitalization of cryptocurrency is approaching Proposer-Builder Separation (PBS), which is an important step towards the implementation of Dankharding.

“The maximum extracted cost gives validators and miners incentives for the reorganization of Ethereum, the implementation of“ Uncle Bandita attacks ”and the implementation of offchain operations with traders. PBS was created to reduce the effect of MEV on the safety of consensus levels, ”Alchemy analysts explained.

According to them, Flashbots MEV-BOOST can be considered as Proposer-Builder Separation at the protocol level.

In a conversation with Coindesk, Warstetter noted the following:

“Flashbots did a great job to take control. She also opened the source code of the MEV-BOOST software before The Merge, allowing competitors to enter the market for creating blocks. It is important to emphasize that Flashbots definitely fights on the right side. “.

The use of a new solution significantly increases the yield of validators.

“This can increase the remuneration by 75.3% or give APR by 12.86% instead of 7.35% with ETH stake,” the organization’s website says.

However, BitMex researchers are convinced that the Flashbots system needs deep processing, since it involves a certain degree of trust.

“She still cannot be considered fully decentralized or permissionless. The relay works as a trusted escrow between the offering [validator] and the creator of the blocks. In this role, he can influence both sides, ”the organization’s website explains.

Drawing an analogy with LIDO, some market participants say that the system is a Tao that strives to get rid of centralized components.

“What, in fact, reached Flashbots – sacrificing decentralization when MEV mining, it provided an open part instead of a closed system. Such a compromise seems justified, ”Bitmex researchers shared thoughts.

conclusions

The volume of the maximum extracted cost continues to grow against the background of the development of the Defi segment.

The organization Flashbots has done a huge job. Her efforts contributed to a decrease in the average cost of gas, increasing the transparency and democratization of MEV capacities. However, some community members are worried that a small number of relaying trust in the segment are prevailing in the segment.

Obviously, the MEV capacities will remain in the future, especially against the background of the coming bull market. The latter will come sooner or later, reviving activity in the segment of decentralized finance.

Read the FORKLOG Bitcoin News in our Telegram-cryptocurrency news, courses and analytics.