Illuminating the Dark Forest: Unveiling the Mystery of MEV

With the surge of on-chain activities and the evolution and enrichment of on-chain infrastructure, on-chain MEV has always been regarded as the most dangerous part of Ethereum's dark forest, which directly leads to profit losses and degraded user experiences in users' on-chain financial activities. The goal of this article, "Illuminating the Dark Forest," is to focus on analyzing the inherent centralization and trust issues brought by this mechanism, based on the block generation mechanism of Ethereum 2.0 and the technical evolution of proposer-builder separation (PBS), which is in stark contrast to Ethereum's values.

The intensification of on-chain MEV is indeed a double-edged sword, with both positive and negative externalities. Positive aspects include reducing price discrepancies on DEXs and aiding in the liquidation of trades; negative aspects include the harm of sandwich trading to users. Therefore, solutions to MEV are more about mitigating negative externalities rather than eliminating them entirely. In our exploration of mechanisms to alleviate the negative externalities of MEV and address current issues with third-party trust middleware Relayers, we primarily categorize measures into three types: improvements to the auction mechanism, enhancements to the consensus layer, and upgrades to the application layer. Each of these improvements will affect the modern landscape of MEV to varying degrees, but some solutions do not fundamentally resolve the issue of sandwich attacks faced by users, as user transactions still reside in the public pool. Therefore, it is necessary to introduce more privacy pool technologies to protect the optional privacy of user transactions, and these MEV solutions are worth trying to combine.

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

Finally, we hope to explore potential solutions to mitigate the negative externalities of MEV with this article, and to provide a comprehensive understanding of the pros and cons of current MEV solutions, not only to illuminate the dark forest in which users find themselves in the future, but also to shed light on the dark forest for researchers in the industry to further study MEV.

Ethereum 2.0

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

Validator Proposed Block Diagram

The entire network will randomly select a committee from validators in each Epoch. The proposer of a block is randomly chosen from the committee set, and the block proposer needs to package the transactions and execute them in order to finally produce a block. Other committee validators will supervise this process and then vote for the block. This committee will be re-selected after each Epoch. At the same time, certain operational time limits are imposed to ensure the efficiency of block generation and voting. Here, we standardize the terminology for readers: Payload refers to the execution load, meaning the state changes of transactions, which can be viewed as part of the execution of a block. The block proposer will implement the execution load ( Execution Payload, which is the implementation of the state changes of transaction results ) and the block proposal.

PBS Architecture

In fact, when validators are selected to become block proposers, proposers often lack the motivation to execute the payload, which involves sorting and executing transactions, because this requires a lot of computational power to perform state changes. The original thought was that if we incorporate execution load into a decentralized committee election, then transaction sorting and so on would become decentralized matters. However, validators seem to naturally want to delegate this part to third parties, while the proposer focuses on proposing blocks. This led to the concept of PBS, which separates block proposing and building, with node proposers only responsible for validating blocks and not participating in block construction. The separation between proposers and builders promotes an open market where block proposers can obtain blocks from block builders. These builders compete with each other to construct blocks and offer the highest fees to proposers, which we call "block auctions."

PBS Flowchart

We briefly introduce the entire PBS( Proposer Builder Separate) sealed first auction model. When users submit transactions through the RPC proxy, the RPC acts like a node, submitting the transactions to the public Mempool. Multiple Builders find the most suitable transactions to sort in order to generate a profit-maximizing block(. Profit maximization refers to transaction fees Base + Priority + MEV). Then, multiple Builders interact with the Proposer through a trading platform Relayer, which serves as a bridge for interaction between multiple Builders and the Proposer. Builders submit bids to the Relayer, and the Relayer submits multiple block headers and corresponding bids to the Proposer, who generally adopts the highest bid block. Among these, the Relayer will implement norms, which is a technical specification for regulating the bidding interactions between Builders and Proposers. In this process, all information is sealed; the Relayer will only submit block headers to the Proposer, thus ensuring that the Proposer has censorship resistance.

Various Participants and Games under PBS

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

) Builder

The Builder is mainly responsible for constructing block content. After using related technologies, it holds a more advantageous position in bidding, as it not only supports Gas Fees but also MEV profits. Builders can directly review transactions between users and searchers, which has always been a point of criticism, especially after the U.S. government announced OFAC. A large number of Builders participated in OFAC Compliant. Compared to the beginning, although the proportion of blocks reviewed has decreased recently, we can see that during the block construction process, Builders have a direct impact on the review of transactions.

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OFAC compliance block ratio, source: MEV Watch

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Builder market share, source: MEV Watch

From the current market share of Builders, some purely unregulated Builds are gradually expanding their market share, all driven by profit.

) searcher

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The ratio of MEV earnings to Gas Fees earnings, source of the graph: mevboost

Essentially, the work of profit maximization requires collaboration between seekers and Builders. Seekers often work with specific Builders, leading to the formation of a Dark Pool or Private Pool, where the trades of seekers are only visible to specific Builders. Some Builders then obtain maximized profit MEV trades and bid for block space. Theoretically, if Builders act maliciously or censor, seekers can choose other Builders, which would gradually reduce the market share of the Builders. Therefore, constrained by seekers, Builders often consider the implicit costs of acting maliciously. The image above shows the MEV and daily Gas revenue situation, where it can be seen that the MEV revenue contributed by seekers can be as much as twice the daily Gas revenue, especially during significant price fluctuations.

For searchers, it is divided into CEX-DEX) off-chain( arbitrage and two major categories of DEX, mezzanine, and liquidation) pure on-chain(.

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Search engine market share, source of the chart: Searcherbuilder

Currently, a certain company occupies the largest market share in CEX --- DEX arbitrage trading.

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Searcher market share, source of the image: Searcherbuilder

For pure on-chain MEV opportunities, there is a trend towards gradually forming studios, among which a certain address occupies an astonishing 37.2% market share, excelling at sandwich attacks on Ethereum chain users, and at one point became the highest gas-consuming user on the chain, consuming about 1.5% of the total gas for an entire day. From February 2023 to June 2024, this bot incurred a total expenditure of 76,916 ETH, which, based on the value at the time of executing these transactions, is equivalent to approximately $175 million. Due to the close connection between searchers and Builders, in practice, many searchers send their order flow to the top three Builders; in fact, it could have broadcasted to all Builders, but some smaller Builders may split the searchers' order flow, leading to the ineffectiveness of the searchers' MEV strategies and thus causing a risk of losses. Furthermore, binding Builders can help maintain their influence within the ecosystem.

) Relayer

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Relay market share, source of the chart: mevboost

The Relayer is responsible for aggregating bids and then acts as an intermediary to submit the block header and the bidding price of the block to the Proposer, who at this point is unaware of the transaction details within the block. Once the Proposer selects and signs the block header, the Relayer releases all transaction content to the Proposer. We can see that the Relayer acts as a third party without economic incentives, gaining significant trust; Builders rely on the Proposer for pricing, while the Proposer relies on the Relayer's prices and block content. Historically, similar issues have occurred, where a certain Relayer had a potential vulnerability that allowed the Proposer to extract over $20 million in MEV. Although these vulnerabilities can be patched, the Relayer itself can still choose to act maliciously and steal MEV.

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Market Share Trend Chart, Source: mevboost

The above chart shows the market share of Relayers. We can see that the market share of Builders running purely on MAX Profit has gradually expanded since the Merge. Therefore, in a free market, it is impossible to artificially control MEV through Builders.

At the same time, Relayers also face a problem of lacking economic incentives. As a result, a certain company has also withdrawn from the research and development of Relayers. Currently, Relayers rely on the proposed specifications for construction, and Ethereum relies on third parties to provide PBS, which is not a long-term solution. Therefore, the Ethereum community is also exploring the integration of PBS at the protocol level.

) Proposer

For the Proposer, an algorithm is used to randomly select a committee from all validators, and a block proposer is chosen in each slot. The block proposer has the capability to execute the load, but since proposers naturally want to outsource this part, it can easily lead to vertical cooperation between Builders and Proposers. The related Relayers hope to act as intermediaries in this manner to reduce the collusion caused by direct communication between the two. Currently, we are in a situation where mining pools serve as validator pools, but these mining pools and LSD validator pools have strong economies of scale, especially with the emergence of LSD, which releases the potential of staked tokens, enhances capital efficiency, and influences the underlying DEFI components, leading to a more centralized trend in validator pools.

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Validator market share, source of the image: mevboost

A certain project currently occupies about 28.7% of the market share, with other exchanges ranking second and third. In the past, it did not actively engage in...