The script direction of MEV: Stalemate, Ceasefire, or Will It Continue to Write an Endless Legend?

Source: doseofdefi.substack.com

Written by: Chris Powers, Core Contributor at DXdao

Translated by: Perry Wang, ChainNews

The rise of Miner Extractable Value (MEV) is shaking the foundations of the Ethereum community, with some now calling it a "crisis." While there is some truth to the increasingly concerning situation, it should not be surprising.

After all, MEV is a downstream product of the growth of decentralized finance (DeFi). As more financial activities are traded on Ethereum, more arbitrage and liquidation opportunities arise.

Therefore, as long as we expect DeFi to one day become the driving engine of the global financial system, MEV will increase with the growth of market size. Given this relationship, the urgency of addressing MEV and its impacts is becoming more pressing.

What is most concerning is that this impact is also expanding. MEV arises from the increasing economic value transfer on Ethereum. Before the rise of MEV activities, blockchain miners were incentivized through protocol-inherent rewards: earning newly issued block rewards or transaction fees paid by users.

The rise of MEV has created another layer of incentives for miners— or more accurately, block producers— which is a more profitable layer. But ultimately, these miners need the mining industry to survive; would they really engage in self-destructive behavior for quick profits?

Crisis

MEV has been a hot topic of discussion for the past few years, and in the last six months, the DeFi world has felt its impact even more strongly. However, in recent weeks, a more extreme MEV vulnerability, particularly the threat of block reorganization (reorg) or time-bandit attacks, has left the Ethereum community quite uneasy.

The community's main concern is that if miners can reorder transactions to extract value, a theoretical MEV opportunity could arise that offers very tempting profits, enough to cover the hash power investment required for a reorg. The Block wrote an excellent explanation about the reorg drama:

In short, miners could potentially see profitable transactions in a new block and then go back to the chain to reorganize the block before the transaction occurred, creating a new sequence—replacing the original transaction with their own, thus taking the profits. This is also known as a "time-bandit attack," as it resembles a time travel scenario on the blockchain.

This potential threat has long loomed over all blockchains—double spending. However, due to the rapid growth of DeFi and the enormous value of transactions, it now seems to pose an existential threat to Ethereum (and public chains).

Clearly, this severely undermines confidence in Ethereum's security and censorship resistance. It would deal a significant blow to the process of large capital pools entering the crypto space.

More than five years ago, the community was still hearing about DAO block rollbacks, but if the miners powering the network could completely manipulate the market, there would be no more shocking news than this.

Current concerns are so strong that many in the Ethereum community have begun to distance themselves from those suggesting the development of software to find MEV opportunities across blocks. Flashbots has explicitly stated its opposition, as have major mining pools and prominent searchers (developers of MEV bot software).

Meanwhile, Ethereum co-founder Vitalik wrote an article last week discussing how Ethereum's shift to a Proof of Stake (PoS) consensus mechanism would mitigate these attacks by introducing finality. Days after the article was published, the EIP-3675 proposal appeared on Ethereum's GitHub, marking the long-awaited transition to the PoS consensus mechanism, commonly referred to as "the merge."

The ETH2 beacon chain has been operational since December 2020. However, due to the community's growing concerns about reorgs and the potential disasters they could bring to stability, the merge, expected to occur within six months, is likely to accelerate. Given the dangerous implications of new MEV reorg software, the Ethereum community needs to rise up to ensure its immutability.

All of this seems like the end of a chapter, but perhaps it is merely the first act of the MEV saga.

Among all the concerns, several key facts seem to stand out:

1. MEV is foundational; networks with economic value transfer will always experience value leakage.

2. The public mempool is dead; savvy traders will connect directly with miners.

3. This emerging model has become a massive black box for fair value distribution, shaking the transparency and permissionless nature of blockchains.

4. MEV leaves everyone dumbfounded, but the likelihood of reorgs is low—because miners would not engage in self-destructive behavior.

The Role of Flashbots

Flashbots is at the core of the MEV story. One of its founders, Phil Daian, first discovered MEV in a pioneering paper in 2019, where he coined the term to describe the front-running activities on Ethereum DEXs.

Flashbots self-identifies as "a research and development organization aimed at mitigating the negative externalities and existential risks posed by MEV."

Flashbots recognized early on that the Ethereum network was being clogged by bots competing for liquidation or arbitrage opportunities through priority gas auctions (PGA).

Before Flashbots, if searchers discovered an on-chain opportunity, setting high gas fees was the only way to ensure that arbitrage transactions went through, leading to high gas prices for everyone on the network.

Then, Flashbots emerged, inserting itself between searchers and miners. Miners run MEV-GETH, a fork of the standard GETH client that has an independent communication and payment network connecting miners and searchers. Searchers do not send MEV opportunities to the public mempool in the form of high gas fees; instead, they send transactions to Flashbots, which connects them to miners running MEV-GETH. For each MEV opportunity, searchers attach a certain percentage of the MEV profit, which is distributed between miners and searchers.

Out of Sight, Out of Mind

The design of Flashbots bypasses the public mempool, where most users' transactions land in Ethereum blocks. This approach alleviates network congestion and lowers gas prices, as the highest gas fee transactions are being rerouted through Flashbots. Both miners and searchers benefit, while the gas paid by the remaining users in Ethereum decreases. In short, a win-win positive-sum game.

This model has seen significant development; MEV-GETH mining software is now run by nearly 70% of the Ethereum network's hash power. This means Flashbots occupies an extremely important position, bridging the fastest trading bots on Ethereum and the miners powering the network.

So far, Flashbots has done well in limiting MEV and has become a phenomenal educational resource in the industry. Other decentralized applications (DApps) and protocols also contribute to limiting MEV. Each on-chain transaction submitted through the public mempool triggers an opportunity for front-running, back-running, or sandwich attacks.

Gradually, DApps like Archerswap allow traders to bypass the mempool and send transactions directly to miners, similar to Robinhood's payment for order flow (PFOF) system. Other options aim to maintain permissionless public transaction submissions but rely on some type of fair ordering system. Examples include Gnosis's batch auctions and Chainlink/Arbitrum's fair sequencing network.

However, the question of how to "democratize MEV extraction" remains unanswered, although Optimism hopes to auction it to "fund public goods." Identifying and redirecting high-value network traffic currently benefits DeFi and Ethereum, but what rules will govern this new network? Will it become a dark pool for liquidity?

Trust and Reputation: The Cornerstones of DeFi Scaling

The MEV crisis and the diplomatic truce it has fostered demonstrate the extent to which DeFi and Ethereum have scaled. The market capitalization of Ethereum and ERC20 tokens has approached $500 billion, with investors, traders, and miners extracting billions of dollars in revenue each year. Many have become extraordinarily wealthy or gained investments from seeing further development opportunities in Ethereum and DeFi. No one wants to kill the golden goose.

More importantly, the success of DeFi has made the main participants in this saga—miners, developers, Flashbots, and their VC investors—well-known figures in the real world, no longer anonymous. These crypto giants will not engage in destructive activities that disrupt the industry; in fact, they will act swiftly to defend DeFi.

Ethereum is fortunate that the beacon chain has been running for nearly eight months without major incidents, and the transition to PoS seems imminent. MEV reorganization is much easier in PoW than in PoS.

If the Ethereum merge proceeds quickly and avoids reorganization, the questions of how to limit MEV and democratize MEV distribution will still exist, but their urgency will not be as pressing as it has been in recent months. Given the Ethereum community's unanimous rejection of reorganization, how it will address the maintenance of permissionless and fair access to the network will be a point of long-term interest.