In-depth Study: The Past, Present, and Future of MEV

Original Title: 《Extractable Value》

Author: Amber Group

Compiled by: Guo Qianwen, ChainCatcher

Introduction

In the early 19th century, Mayer Rothschild (note: one of the most influential merchants in history, "the father of international finance") expanded his business from Frankfurt, establishing branches in London, Paris, Vienna, and Naples with his five sons. They built an information network, using carrier pigeons, messengers, and chartered ships to transmit information across Europe faster than anyone else. Through this network, the Rothschild family was able to obtain news and information quicker than anyone else and profit from arbitrage and transactions using that information. It is well-known that Nathan Rothschild learned of Napoleon's defeat at Waterloo a full 36 hours before the official messenger in London.

Information holds value in all markets. There is fierce competition among people to gain priority access to information. Even today, in traditional markets, high-frequency trading firms and hedge funds spend billions of dollars on launch towers and cables around the world in an arms race to gain a millisecond advantage in information.

The crypto world is no exception. On-chain, the competition for priority access to order flow and order rights is intensifying. The concept of "Maximal Extractable Value" (MEV) has emerged from a niche topic to the forefront of almost all crypto protocols. We see an increasing number of discussions within the community about the impact of MEV on protocol transparency, sustainability, decentralization, security, censorship resistance, and valuation.

In this report, we will discuss several key topics surrounding MEV. We will first introduce what MEV is and why it is important. Then, we will explain why we believe MEV is foundational and how to weigh MEV. We will also summarize the current state of MEV and some of the key players in the field. Finally, we will discuss future trends and some open questions.

Key Points:

• Understanding MEV is important. MEV affects security, stability, and user experience. It is also a key component of the appreciation of blockchain tokens. Most importantly, it impacts two fundamental properties of blockchain networks: decentralization and censorship resistance.
• MEV is foundational. There are some solutions that can mitigate certain forms of MEV. However, a certain amount of MEV will always exist. Blockchain networks, as smart contract platforms, inherently possess the advantages of being unrestricted and permissionless, but they are also cursed by MEV. Protocols and applications need to carefully consider how to weigh MEV when dealing with it.
• We estimate that in PoW Ethereum, since 2020, MEV has contributed at least 8% of total miner revenue. The competition to capture MEV opportunities in major categories—arbitrage, liquidation, and sandwich attacks—is exceptionally fierce and dominated by a few searchers.
• Although cross-chain MEV currently has a negligible impact, it could become a highly concentrated force affecting the development of all blockchains. MEV is also an increasingly growing threat to the stability of blockchain networks in the long run.
• We foresee scenarios in the future where payment for order flow (PFOF) or transaction flow auctions will return a certain amount of MEV to users. In these scenarios, the most likely path is to further concentrate block builders and reduce validator yield, but more research is needed to achieve these goals.

Memory Pool

Daian et al. first defined MEV in a groundbreaking report. The researchers discovered and studied multiple bots on Ethereum that compete with each other for priority ordering and detailed their impact on the blockchain. The paper also introduced the definition of MEV for the first time, which is "the total amount that Ethereum miners can extract from transaction manipulation within a given timeframe, which may include the transaction value of multiple blocks."

Lifecycle of Ethereum Transactions

Suppose Joe wants to swap 100 ETH for USDC on a decentralized exchange. He navigates to Uniswap's frontend and connects his MetaMask wallet. He specifies the input for the transaction: 1000 ETH for 1.3 million USDC, with a slippage tolerance of 1.0%, and then signs the transaction.

His transaction is first sent through MetaMask's default RPC endpoint to Infura. Infura propagates this request to other nodes in the Ethereum network, which then propagate it similarly to the nodes they are connected to.

Each validator has its own memory pool, which is a database of pending transactions maintained by each validator. They build transaction blocks based on their own memory pools. Typically, these transactions are sorted by gas fees. Alternatively, validators can run custom software to sort transactions based on their own rules and logic.

Every 12 seconds, a random Ethereum validator is selected to build and propose a transaction block. The proposer broadcasts the newly created block to the network. A committee composed of other validators is randomly selected to determine the validity of the block and to attest to it. Once transactions are submitted, they are removed from the node's memory pool.

How MEV is Generated

Everyone can view the memory pool. Since Joe's transaction is publicly submitted, it creates several potential profit opportunities:

Sandwich: Joe's ETH to USDC transaction has an unusually large 1% slippage tolerance. While he hopes to receive 1.3 million dollars, he signals to the world that he would accept 1.287 million dollars. Other entities monitoring the memory pool can see Joe's stance and attempt to execute a "sandwich attack," giving Joe the worst execution price to gain risk-free profit. They sell ETH ahead of Joe (jumping in front of his transaction), allowing Joe to sell at his defined minimum, and then buy back ETH at a relatively cheap price to realize profit.

Arbitrage: After Joe's transaction, a temporary price discrepancy will appear between the ETH-USDC pairs on Uniswap and other DEXs. Bots continuously search for these discrepancies and will automatically execute arbitrage (backrunning his transaction) to gain risk-free profits.

Privileged validators are better positioned to capture these profits. Ethereum's consensus protocol only enforces the protocol at the block level, allowing validators to choose which transactions occur within each block. Therefore, validators can decide which transactions to include and the order in which these transactions are executed.

For example, suppose there is a $100 arbitrage profit to be made through a DEX. Alice can submit a transaction attempting to profit from it, paying a $1 transaction fee. However, the memory pool is visible to everyone. Bob sees Alice's transaction in the memory pool, replicates her transaction, and proposes to pay a $2 fee. Others may rush in as well.

Without regulation, users will be dynamically incentivized to create off-chain agreements with validators/miners to ensure their transactions are included or can be ordered. Alternatively, validators/miners themselves can submit and prioritize their own transactions to capture the entire $100 arbitrage profit.

Thus, the term "Maximal Extractable Value" emerged, abbreviated as MEV. Historically, this term was referred to as "Miner Extractable Value," but it also applies to Ethereum's transition to PoS and the PoS-based blockchain market.

MEV Supply Chain

From the lifecycle of MEV above, we can summarize the MEV supply chain:

• Users: Anyone who wants to express and submit ideas to change the state of the blockchain.
• Wallets/Applications: User interfaces that convert user ideas into blockchain transactions.
• Searchers: Entities that monitor the memory pool and submit transactions to extract MEV.
• Builders: Entities that aggregate transactions from various sources to create a complete block, ideally one that maximizes returns.
• Validators: Entities that fulfill consensus duties, such as proposing and attesting to blocks.

Definition of MEV

The latest definition of MEV in PoS blockchains is:

The total value that validators can extract across blocks (or a series of blocks) given the environmental state and all available operations.

Validators typically cannot change the state of their environment, including blockchain rules, smart contract code on the blockchain, the set of transactions in their memory pool, etc.

Executable operations include reordering, censoring, and inserting transactions. They can also incorporate more niche strategies, such as changing block timestamps, manipulating "randomness," executing other validators, etc.

Types of MEV

The three largest and most competitive MEV revenue pools are arbitrage, liquidation, and sandwich attacks.

Arbitrage

Arbitrage is the largest source of MEV revenue. Arbitrage is considered MEV because ordering is crucial here.

Arbitrage transactions occur in all markets. Traders in traditional markets face some risks of inventory shortages or timing choices, but many MEV transactions can be automated: either all desired transactions proceed smoothly, yielding risk-free profits, or all transactions fail. Atomic arbitrage allows searchers to operate with minimal capital on hand in certain cases. However, classic statistical arbitrage trades, such as price arbitrage between CEX and DEX, also carry inventory and timing risks.

Competition for atomic arbitrage is exceptionally fierce. Arbitrage requires:

1) Running optimized hardware and software to quickly find opportunities among thousands of token pairs.

2) Submitting extremely efficient transactions to minimize gas fees. This phenomenon is known as "Gas golfing," allowing MEV searchers to bid on transactions.

Liquidation

Currency markets like Aave, Compound, and Maker allow users to deposit some assets as collateral and borrow other assets. As the value of collateral assets fluctuates, users' borrowing capacity also fluctuates.

If a borrower exceeds their budget limit, these protocols rely on market participants to liquidate the borrower, but for a fee. To incentivize liquidation, the protocol charges the borrower a liquidation fee and pays a portion of that fee to the liquidator.

This is where the opportunity for MEV lies. Searchers compete to monitor all borrowers' positions and try to be the first to liquidate a position, thereby earning the liquidation fee for themselves.

Like arbitrage, liquidation events are highly competitive. During sharp market downturns, competition to liquidate borrowers leads to exorbitant gas fees. Similarly, searchers who can optimize code are more competitive and can bid for liquidations.

Sandwich Attacks

Transactions on the blockchain do not occur immediately. When users send swap transactions, they define an acceptable percentage change in price ("slippage"), which may occur while the submitted transaction waits to be processed.

If users set their slippage too high for their transactions, a "sandwich attack" can occur. Searchers exploit these mistakes by first pushing the user's transaction to the highest acceptable slippage, causing the transaction to occur at an unfavorable price. They then execute the user's transaction, further moving the price. After that, the searcher backruns the transaction, netting a profit.

For example, suppose a searcher pays 4 ETH in gas and priority fees, with a risk-free profit of 3 ETH.

A user wants to swap 1000 WETH for USDC with a 1% slippage tolerance. The searcher sees the transaction in the public memory pool, creates a front-running and back-running transaction bundle, and sends it to the validator via an MEV bot.

Sandwich attacks rely more on transaction ordering privileges. If any part of the sandwich attack fails to execute, the searcher will incur losses.

As the name suggests, sandwich attacks are viewed as malicious MEV and are criticized by most of the crypto community. Arbitrage and liquidation activities can be either malicious or benign, but sandwich attacks are mostly seen as pure value extraction. Some searchers even publicly declare that they will not engage in sandwich attacks to avoid criticism and backlash.

Long Tail MEV

Long tail MEV opportunities abound. For example:

Apecoin Airdrop: Yuga Labs decided to airdrop tokens to BAYC holders. NFTX is an application that marks NFTs as fungible tokens. An MEV searcher bought all the fungible BAYC tokens with NFTX, exchanged the entire pool for a real NFT, claimed the Apecoin airdrop, and then resupplied the NFTX pool. This allowed the bot to earn approximately 61,000 APE, worth about $278,000 at the time. The bot paid $310 in gas fees.

User Error: A user accidentally marked an EtherRock NFT at 444 gwei instead of 444 ETH, and a bot immediately sniped it, selling it for 234 ETH—around $600,000 at the time.

1inch Leftover Tokens: 1inch occasionally leaves small amounts of tokens in its router contracts for various reasons. A programmed MEV bot scans this router contract for profit.

MEV is Important

Understanding MEV is important. MEV affects security, stability, and user experience. It is also a key component of the appreciation of blockchain tokens. Most importantly, it impacts two fundamental properties of blockchain networks: decentralization and censorship resistance.

Negative Externalities of MEV

Activities related to MEV generate negative externalities. For example, without an effective fee market, competition for MEV may lead to Priority Gas Auctions (PGAs, sometimes referred to as Probability Gas Auctions). During PGAs, searchers and bots strategically set their gas fees to compete with each other to have their transactions included before (or after) certain transactions. This leads to:

• Network congestion, which may cause other transactions to get stuck or dropped by the network.
• High and unstable fees, making it difficult for other crypto users to participate and putting less savvy participants at a disadvantage.
• Failed bids that unnecessarily consume block space (failed transactions also consume block space).

A typical case is Yuga Lab's Otherdeed land sale. Due to the auction format, transaction fees skyrocketed to absurd levels as bidders scrambled to get their transactions included in a block. Several users bid over 2 ETH in fees, only to have their transactions fail. Other users were unable to access Ethereum for hours due to high prices and had to wait for the sale to end.

PGAs also lead to an arms race regarding latency, as searchers with lower latency are more likely to win bids. With the emergence of flashbots and other memory services, the frequency of PGAs on Ethereum has decreased. However, they still frequently occur on high-throughput, low-fee chains like BNB Chain, Polygon sidechains, Aurora, and others.

MEV Undermines Network Stability

More broadly, MEV significantly alters the incentives for stakeholders in blockchain networks. If the value is high enough, MEV rewards can encourage validators and miners to engage in malicious activities, such as executing reorganization attempts. In fact, some code previously released by communities allowed Ethereum miners to reorganize the Ethereum network to capture prior MEV revenue. At that time, Ethereum's social layer acted to prevent this implementation by miners.

However, this threat has appeared on other blockchains. On Avalanche, any validator could propose a block. After a validator proposed a block containing meaningful MEV rewards, another validator could publish a longer blockchain to "steal" the MEV. Thus, a reorganization race emerged. Clearly, this reduces the usability of the blockchain platform. Even today, other blockchains experience deep reorganizations almost daily, likely driven by MEV.

In addition to reorganizations, MEV also encourages spam transactions on high-throughput blockchains, leading to fee market failures. For example, spam transactions caused a downtime for Solana earlier this year. Due to the high volume of economic activity on Solana, low transaction fees, and searchers being unable to pay for transaction order preferences, searchers were incentivized to send a large number of transactions to validators to extract MEV, effectively conducting a DOS attack.

MEV is a Centralized Force

MEV is a centralized force across the entire blockchain.

Block producers can extract MEV in two ways: either they capture MEV themselves, or they sell the reordering rights to others.

The first scenario is highly concentrated at the validator level. Compared to individual validators, specialized block producers are more effective at capturing MEV. Specialization can yield higher returns—professionals can better invest in infrastructure and human capital to capture MEV optimally. They can also better ensure exclusive order flow, giving them more transactions to build blocks, or collaborate with searchers to gain exclusive access to MEV bundles. Additionally, larger market-cap institutions can adopt capital-intensive MEV strategies (such as cross-chain MEV).

Thus, vertical integration (acquiring and operating their own searchers) and horizontal mergers (combining different MEV search strategies) are likely to emerge.

In this case, specialized validators will gradually gain a larger share of their own profits. Furthermore, if delegation within the protocol is allowed (i.e., users can delegate their tokens to other validators), other users will also be incentivized to delegate their tokens to these validators, further strengthening their leading position.

In the second scenario, if block producers cannot effectively run MEV strategies themselves, they can sell the reordering rights to others. Ethereum's roadmap effectively plans to separate block producers from block builders to reflect this. This shifts the centralized force of MEV from validators to block builders. However, finding the optimal solution for this structure still requires addressing some issues.

Moreover, in both cases, MEV rewards are highly variable. This dynamic favors large institutions and validator pools that can adjust MEV rewards, as most users prefer stable and predictable income.

MEV profits may grow super-linearly. The extraction of MEV within a single block is linearly proportional to the network's hash power. Beyond that, as network advantages grow, the potential to capture multi-block MEV also increases.

MEV Contributes to Economic Security

MEV revenue increases the security budget of blockchains, but value needs to be extracted to maintain blockchain security. Both benevolent and malevolent actors should attempt to extract as much MEV as possible. Otherwise, the remaining MEV will subsidize malicious actors attacking the protocol.

This is not to say that blockchains should blindly increase MEV on the platform to enhance economic security. As mentioned above, many types of MEV degrade user experience. If this type of MEV continues to increase, users will abandon the network, reducing fees and economic security. Nevertheless, a certain amount of MEV is inevitable, resulting from user activity.

A well-designed blockchain should democratize MEV extraction, allowing each validator to extract MEV at roughly the same rate. As Chitra and Kulkarni pointed out, MEV redistribution systems also help enhance economic security. Efforts should also be made to make it easier for new players to enter the field, fostering competition rather than oligopoly.

MEV Reduces Costs

MEV can also lower costs for users. For example, users conducting swap transactions on DEXs rely on arbitrageurs to ensure that prices on DEXs align with those on CEXs. In fact, a type of MEV called JIT liquidity has improved traders' execution prices.

MEV also helps maintain algorithmic stability, limiting the amount of bad debt on money market protocols, and achieving unique DeFi designs (e.g., Primitive's RMM, Opyn's Squeeth).

MEV Creates Token Value

Validators earn income from issuance rewards, base transaction fees, and MEV/priority fees. Issuance rewards effectively redistribute ownership from passive holders to stakeholders. Base transaction fees are largely very low, tending towards zero.

Therefore, we believe the long-term value of L1/L2 tokens lies in monetary premiums (like BTC, ETH) and/or MEV. Fundamentally, blockchains sell block space. Larger MEV opportunities imply greater demand for block space.

Thus, platforms need to carefully consider how to create and capture MEV to prevent it from leaking to other entities.

Below, we list some design examples of current protocols capturing and internalizing MEV:

Optimism: Conducting MEV auctions. Optimism is an Ethereum L2. Currently, it operates a centralized sequencer to determine transaction order flow. According to recent news, its goal is to run MEV auctions, auctioning off the rights to reorder transactions within an N-block window to the highest bidder. The excess profits from these auctions will be used for protocol development through retrospective public goods funding.

Aurora: Managing and internalizing MEV order flow. Aurora is an EVM implemented as a smart contract on NEAR. Aurora previously offered zero-fee transactions but was later hit by spam transactions. Aurora recently announced an MEV project to manage MEV flow to reduce spam transactions and incentives for Sybil attacks. They are collaborating with Kolibr.io to create an open and competitive market for order flow, checking for MEV opportunities before transactions move to the public memory pool.

Osmosis: Minimizing and capturing MEV. Osmosis is a Cosmos DeFi application chain designed to reduce MEV over the long term through threshold encryption. It also aims to implement a system that allows Osmosis to capture "MEV itself"—such as arbitrage after large trades—redirecting profits to Osmosis stakeholders.

Cosmos: Creating a cross-chain block space market. Cosmos is the internet of blockchains, creating the backbone for several important blockchains, including BSC, Polygon, and Cronos. However, a common criticism is that the native token ATOM does not capture value from Cosmos's contributions. Recently, [tg1][tg2]. One proposal includes an inter-chain scheduler that creates a cross-chain block space market, generating revenue from cross-chain MEV activities.

MEV Will Increase

MEV will grow with complexity, and we expect MEV to increase exponentially over the next decade.

Even just on Ethereum, due to the growth of new protocols and primitives, MEV has seen a step change since the release of Flash Boys 2.0. The rise of entirely new asset classes (NFTs) and various financial experiments associated with them have also greatly expanded the mediums through which MEV can arise.

This trend is bound to continue. Blockchain networks, as smart contract platforms, inherently possess the advantages of being unrestricted and permissionless, but they are also cursed by MEV.

MEV has existed independently on each chain. However, because different blockchains have different trust assumptions, there will always be additional MEV at the boundaries.

To better understand MEV dynamics, it is necessary to break down blockchains into three fundamental elements:

Virtual Machine: The virtual machine determines the dimensions—what the protocol can do: from extremely limited to Turing complete. As mentioned, greater complexity creates a wider vector for MEV. Allowing any developer to deploy smart contracts worth billions of dollars is both a blessing and a curse.

Consensus Mechanism: A fundamental feature of blockchains is reaching consensus on valid transactions and their execution order. Cryptographic records are meant to prove that transactions are valid and show us the state of the world. However, many people are simultaneously trying to change the status quo of the world. There will be users who have preferences for the world they propose and are willing to spend money to obtain those preferences.

Block Space Market: Block space is limited. The market needs to allocate block space effectively. Due to the factors mentioned above, if the market is poorly designed, users will turn to off-chain orders.

We believe that as long as blockchains allow anyone to deploy smart contracts and transfer value, MEV will manifest.

Therefore, we believe that rather than considering how to eliminate MEV, it is better to consider how to weigh MEV across these three dimensions. Below, we will detail some considerations for each factor.

Block Space Market

Perhaps the most easily achievable goal is to design a suitable block space market. Minor design changes can lead to significant changes in user experience and externalities.

Consider how different designs play out during major market events, such as a hot crypto sell-off or a popular NFT minting. In these events, order preference is paramount.

Most markets without effective auction mechanisms encourage entities to continuously send transactions to the blockchain, where winning an MEV opportunity can generate millions of dollars in profits, and transactions on-chain are ordered on a "first-come, first-served" basis, prompting searchers to send thousands of transactions to validators without hesitation to gain profits.

Consensus Mechanism

One of the better solutions to reduce toxic MEV is a cryptographic memory pool, though how to effectively achieve this remains controversial.

A key trade-off here is latency. Committee cryptography is bandwidth-intensive, especially for large and decentralized committees. Even using trusted hardware like SGX can introduce additional latency to the system. These systems also introduce greater complexity, technical risks, and additional trust assumptions for the protocol.

Other considerations for consensus mechanisms include:

• Implementing Single Secret Leader Election to prevent DOS attacks incentivized by MEV.
• Single-slot finality (S. medium time to finality V.S. probabilistic finality).
• Reflecting the separation of builders and proposers in the protocol itself (e.g., Ethereum's proposer-builder separation).
• Virtual Machine
• Limiting the functionality of the virtual machine reduces MEV. For example, the Bitcoin network is quite limited in what it can do and the breadth of its applications, resulting in minimal MEV on the platform.
• Developers can also decide to create a permissioned platform, allowing the blockchain to focus on specific verticals, helping to manage user experience. For example, Osmosis and Sei are blockchains designed for DeFi. Developers need to submit proposals and gain approval before deploying smart contracts, significantly reducing the likelihood of MEV occurring.

Current State of MEV

Flashbots are continuously shaping the MEV situation on Ethereum. Not long ago, after the U.S. Treasury sanctioned the Tornado Cash smart contract and related addresses, the crypto community has been working to address its role in order flow and block building.

Origins

Flashbots is a research organization founded in July 2020, aimed at mitigating the negative externalities of MEV.

They launched "MEV-geth" in 2021, creating an off-chain private transaction pool for Ethereum and a sealed block space auction. This allows searchers to create and send "bundles" of transactions. Bundles allow searchers to describe the conditions under which a set of transactions should be executed. Notably, they have atomicity: either all transactions go through, or none do. This is particularly advantageous for certain types of transactions (e.g., sandwich attacks).

Searchers send the bundles to a Flashbots relayer for validation and to mitigate DOS attacks. The effective bundles are then sent to miners, who can evaluate the bundles they receive and create the most profitable block.

The advantages of this architecture include:

Privacy—transactions are only publicly disclosed after being included in a block. Failed transactions are not disclosed. They also do not require fees. Thus, searchers are more confident in capturing MEV without the risk of other bots identifying and front-running opportunities.

Efficiency—this design creates an efficient market for MEV opportunities. Bidding for the most obvious MEV opportunities will be fierce, but will not consume unnecessary resources on-chain. New entrants can freely enter the market to exploit long-tail or niche opportunities.

An important point to note is that this design is not a trustless solution. Relayers and miners can see the bundles submitted by searchers. They may steal the bundles (which has allegedly happened). However, this architecture also maintains reputation, making the system as robust as possible.

MEV in PoW

From January 2020 until the merge, Flashbots earned approximately $675 million in gross MEV from arbitrage and liquidation of certain DeFi protocols. This figure should be considered a lower estimate of MEV, excluding sandwich attacks, NFT MEV opportunities, long-tail DeFi activities, etc. It also only accounts for Flashbots data, but searchers can also use other solutions.

Additionally, Chorus One estimates that since August 2020, profits from sandwich transactions have approached $1 billion. During the same period, Messari estimates that total revenue for Ethereum miners was around $28.9 billion.

This indicates that from 2020 to the merge, MEV contributed at least 5.8% of total miner revenue.

Elevating MEV in PoS

The design of MEV-geth became ineffective after the merge. In PoW Ethereum, only a few mining pool operators dominated the hash power. Any operator attempting to "cheat" by stealing Flashbots bundles could face penalties. For most miners, losing this business is not worth it.

After the merge, anyone can launch a validator. The previous MEV-geth design cannot function. If you send a bundle to a single validator, they may occasionally be incentivized to capture high-value MEV transactions for themselves. Penalties do not deter their behavior. Furthermore, as mentioned earlier, validators are both builders and proposers, which can lead to centralization—but individual operators are unlikely to be as effective as institutional operators in building optimized blocks.

Thus, after the merge, Flashbots launched the MEV solution "MEV-boost," introducing the concept of specialized "builders." Builders are entities that focus solely on receiving transactions and constructing optimized blocks.

Validators can choose to receive complete blocks from builders via relayers and earn rewards. These blocks are invisible—validators do not see the transactions until they are sent to the network, and if they attempt to steal MEV, they will face penalties.

Ultimately, this architecture mitigates the centralized impact of MEV on validators, pushing centralization towards block builders.

Censorship and Filtering

This new architecture introduces new points of censorship. Only a few entities operate relayers and builders, some of which must comply with local regulators. Notably, some relayers and builders (including Flashbots itself) filter out OFAC-approved addresses. They will not include any transactions interacting with smart contracts or addresses designated by the U.S. Treasury.

In fact, only 3 relayers, accounting for 12.5% of the mev-boost market share, do not censor transactions.

So why has this issue suddenly gained attention? When Ethereum was using PoW, censorship was not widespread because mining pools were their own block builders. Even if Flashbots attempted to censor transactions, these miners could append censored transactions after Flashbots' bundles.

Future Trends and Open Questions

Cross-Chain MEV

Suppose there is a price difference between Uniswap on L1 Ethereum and Uniswap on Arbitrum. ETH is priced at $1400 on Ethereum and $1300 on Arbitrum. How would one arbitrage this?

1. Official Bridge: Buy 1 ETH on Arbitrum and use Arbitrum's official bridge to move ETH to L1 Ethereum, which takes 8 days. Hope that the price does not fluctuate too much by then (or hedge with perpetual futures). Then sell on L1 Ethereum.
2. Third-Party Bridge: Use a third-party bridge to move ETH to L1 Ethereum. This takes 5-20 minutes, depending on the user's prioritization of speed, security, and yield.
3. CEX: Some exchanges directly accept deposits from Arbitrum. The time from deposit to withdrawal is variable but generally ranges from 5-20 minutes.
4. Self-Managed Balance Sheet: Hold a combination of ETH and USDC on both chains and arbitrage between the two chains when opportunities arise. Occasionally rebalance to ensure sufficient inventory on both chains.

Clearly, option 4 almost always allows for profit. However, this strategy is also the most capital-intensive choice, favoring professional market makers and institutions.

In fact, this dynamic stimulates connections across multiple chains. Cross-chain MEV execution is a probabilistic event, where an institution can set up validators across multiple chains to minimize risk and capture MEV more effectively.

Multi-Block MEV

Due to power limitations, multi-block MEV was previously unfeasible on Ethereum, as no one knew in advance who the next proposer would be.

However, after the merge, anyone knows who will propose the next 32 blocks within an epoch. Currently, there are over 445,000 active validators, and it seems unlikely that a single validator will be selected to propose multiple blocks within an epoch, let alone multiple consecutive blocks. However, multiple validators often exist under a single entity or pool. Just Bitcoin Base controls 13% of active validators—this gives them about a 39% chance of consecutively proposing at least 2 blocks.

Perhaps the greatest threat posed by multi-block MEV is the manipulation of TWAP price oracles, thereby exploiting money market protocols. While this is not the primary threat, the risk of such attacks increases when TVL returns.

But this is just a possibility; we have not yet seen multi-block MEV motivated in this way, especially sustained over several blocks. Five consecutive blocks mean that a single entity could control a full minute of block production on Ethereum.

PFOF and Transaction Flow Auctions

User intent and transaction flow are the primary sources of MEV. Therefore, we can imagine a scenario where wallets or applications auction their transaction flow to builders. Wallets, applications, and infrastructure providers are in a favorable position to benefit from aggregating and auctioning order flow, thereby generating revenue.

Conclusion

The outlook seems quite bleak—the market structure of cryptocurrencies is trending towards traditional finance: transactions enter a black box managed by privileged intermediaries, with results displayed from the other end.

Fortunately, we see more and more people engaging with MEV, discussing what is fair, researching appropriate market designs, and implementing comprehensive supply chain solutions to mitigate EV.

This is a long report, and we have only scratched the surface of MEV. Therefore, we list some references below for readers interested in delving deeper into certain topics:

Flash Boys 2.0 --- Daian et al.: Seminal report investigating MEV and its impact on Ethereum

Ethereum is a Dark Forest --- Paradigm: Riveting first-hand account of avoiding generalized frontrunners on Ethereum

Ethereum Blockspace --- Who Gets What and Why --- Paradigm: First principles based approach to understanding blockspace markets and MEV

MEV … wat do? --- Phil Daian: Arguing why MEV is fundamental and how to manage MEV

MEV Manifesto --- Delphi Digital: Deep dive into MEV design and solutions on Ethereum

Optimism's MEVA Proposal: Optimism's original proposal of MEV auctions on L2

MEVA (What is it good for?) --- Ed Felten: Argument for why MEV Auctions are harmful to user experience and makes centralization worse

Formalization of Cross-Domain MEV --- Obadia et al.: Investigation and formalization of cross-domain MEV