Overview of Block Space Market Structure: Exploring MEV Situations in Ethereum, Solana, and Cosmos Ecosystems

Written by: Natalie Mullins

Compiled by: Deep Tide TechFlow

So far, the topic of MEV has largely focused on Ethereum. However, this article will explore MEV in the Solana and Cosmos ecosystems. It will highlight various approaches to addressing the challenges of MEV and related incentive adjustments, including a comparative analysis of trade-offs. By broadening the scope, we can learn from the various practices in operation to better anticipate potential issues and ultimately design better solutions.

ETH

The rise of financial applications on Ethereum has catalyzed broader research and understanding around MEV. The groundbreaking Flashboys 2.0 paper published in 2019 not only coined the term "MEV" but also elucidated the specific manifestations of this phenomenon on-chain. This was our first exposure to concepts like Priority Gas Auctions (PGAs) and searchers. Shortly thereafter, Flashbots was established to address many of the incentive alignment challenges associated with MEV. They initially proposed three core goals to strive for:

1. Illuminate the dark forest

2. Democratize value extraction

3. Distribute benefits

Since then, their two main product launches have achieved over 90% network adoption, and it can be fairly said that these goals have evolved into guiding principles that have significantly influenced the development of Ethereum's blockspace market.

Core Products of Flashbots

• Flashbots Auction (mev-geth + mev-relay) creates a private transaction pool and off-chain sealed bid auction. This allows searchers to express more nuanced preferences for tx ordering in a bundled form, and bids to be included at the top of blocks without clogging Ethereum's public mempool due to failed arbitrage attempts, which significantly raises Gas fees.

• Flashbots Protect is an RPC endpoint that can be added to consumer wallets like MetaMask. This extends the benefits of the product to regular users.

• MEV-Boost was designed to meet the Ethereum Merge, as MEV is expected to become an increasingly centralized force in proof of stake. It is the first implementation of proposer-builder separation (PBS), aimed at creating a more decentralized and competitive block-building market by separating the roles of block builders and block proposers.

• MEV-Share (unreleased) outlines the design of a protocol that privately and permissionlessly matches transactions from users, wallets, and/or applications with searchers. Accessing order flow in a decentralized manner and introducing the concept of programmable privacy are key long-term goals of this protocol.

• SUAVE (unreleased) is an upcoming version aimed at addressing (1) monopolized order flow and (2) the remaining centralized weight of cross-domain MEV. Details on this project are scarce, but it appears that SUAVE will serve as a decentralized mempool and ordering layer for the EVM ecosystem. It will adopt an encrypted mempool and introduce new participants to the MEV supply chain: executors—who will compete to provide the best execution for users.

Solana

Like Ethereum, the growth of financial activity on Solana has attracted MEV activity, beginning to degrade the end-user experience. However, unlike Ethereum, where Gas fees have become very expensive, Solana's issues stem from the following factors:

(1) Extremely low Gas fees.

(2) Lack of a fee market.

(3) Lack of an optimal transaction propagation protocol that does not provide many options for preventing network spam.

During periods of market volatility or popular on-chain events (like NFT mints), the volume of spam transactions sent to the network can sometimes be so large that it leads to network outages.

Some may wonder why the Flashbots product suite cannot simply be repurposed for Solana. It is important to consider that Solana's architectural design is fundamentally different from Ethereum's, necessitating a unique approach. Key differences include Solana's speed (block time of 400 milliseconds), unique data propagation protocol, transaction forwarding without a mempool, native fee markets, and parallel transaction processing.

In 2022, Jito Labs intervened, adopting a Solana-specific approach to provide the much-needed MEV infrastructure. Like Flashbots, they initially considered several key goals:

1. Minimize the negative externalities of MEV

2. Prevent centralization

3. Distribute MEV rewards

Core Products of Jito Labs

Since then, Jito has been the dominant MEV solution provider on Solana, releasing several products, including:

• Jito-Solana is the first third-party Solana client optimized for efficient MEV extraction. Similar to mev-geth, it supports transaction batching and can seamlessly collaborate with Jito Relayer and Jito Block Engine.

• Relayer is designed to provide a layer of protection for validators between their TPU (Transaction Processing Unit) and network spam. Validators can run their own Relayer or use a version hosted by Jito Labs.

• Block Engine is essentially a high-performance block builder—it conducts sealed bid auctions for block space and forwards the most profitable transaction bundles to the current leader for immediate execution. The Block Engine is also globally distributed to provide low-latency open access.

Searcher Tools:

• Jito Mempool -- Although Solana does not have a traditional mempool, it allows searchers to subscribe to "interested accounts" and automatically extract MEV from their transactions using bundles, enabling a more proactive search approach.

• ShredStream -- Running on the Jito-Solana client, it sends shards directly to the locally connected block engine, allowing searchers to access shards forwarded by the leader and reducing latency by hundreds of milliseconds. (Shards are fragments of a block (the smallest unit) that are continuously emitted as validators produce blocks. They are distributed across the network based on staking weight shuffling, so servers with higher weights may receive shards faster, which can provide a meaningful advantage in high-frequency trading).

• MEV payments and distribution enable validators to seamlessly distribute MEV rewards to their staking positions in the form of airdrops.

Chorus One is one of the largest node operators across all major cryptocurrency ecosystems and recently released a white paper outlining a prototype for Solana-MEV. This is a modified client designed to further decentralize validator extraction without adding unnecessary latency to the system. This client will make it easy for validators to check for potential MEV opportunities after each batch of user transactions and insert their own transactions to capture value.

Cosmos

While it can be argued that Cosmos has the most rudimentary DeFi ecosystem, it is poised to become a fertile ground for blockspace market design and cross-domain MEV experimentation.

Unlike Ethereum, where trading and lending volumes have reached billions of dollars, and Solana, which is dominated by low-latency financial applications, Cosmos seems to be making slow progress on MEV.

There are many possible reasons for this, but the most obvious explanation is that the Tendermint client defaults to FIFO (first-in, first-out) ordering and lacks financial activity.

It wasn't until the launch of Osmosis at the end of 2021, and even until the collapse of Terra in May 2022, that people began to notice and measure meaningful amounts of MEV captured in the Cosmos ecosystem. Combining these events with bear market conditions like fee crashes makes it easy to understand why validators began considering other options to try to remain profitable.

As a result, some native Cosmos MEV solution providers have begun to enter the space, the most notable being Skip Protocol and Mekatek.

Core Products of Mekatek

• Zenith aims to create an open market for block building in Cosmos. Searchers can submit transaction bundles and compete for priority within blocks, while validators can outsource block building to Zenith and sell their block space for maximum profit.

Core Products of Skip Protocol

• Mev-Tendermint is a modified version of Tendermint that allows validators to accept transaction bundles and introduces sealed bid auctions for inclusion at the top of blocks (Skip does not build entire blocks, only the top).

• Skip-Select brings Cosmos sovereignty to MEV by allowing fully configurable, governance-driven block space auctions. It enables validators to easily decide how to allocate MEV rewards, what percentage of a given block's build should be outsourced to Skip, whether to protect blocks from front-running/sandwiching effects, and more. Skip-Select also lays the groundwork for future on-chain governance to vote on and implement protocol-level MEV preferences, facilitated by Cosmos SDK and ABCI++ (Application Blockchain Interface).

• Skip Secure is very similar to Flashbots Protect—a private transaction RPC that end users and frontends can utilize for private execution.

• Proto-Rev can be considered Skip's most exciting product—a customizable module for incorporating certain MEV preferences into the core protocol. The first implementation of Proto-rev is designed to help Osmosis internally capture some meaningful arbitrage-based MEV rewards, but the service will be offered on a per-chain basis.

While there is limited public information about the project, FairBlock is building an IBE-based solution (Identity-Based Encryption) to address MEV-related challenges. The team plans to leverage the Interchain Security of Cosmos Hub for their consumer chain, which will be used to manage and distribute validator decryption keys.

Key Points

• Success of PBS—The concept of Proposer-Builder Separation (PBS) has spread beyond the Ethereum ecosystem, with certain versions now existing in the Cosmos and Solana ecosystems;

• The latency war—Due to Solana's network architecture issues, Jito Labs has taken a latency-sensitive approach to MEV extraction, providing an advantage to users running servers or validators outside the U.S. or Europe;

• Enshrined Solutions—Due to the Cosmos community's level of sovereignty and autonomy over its tech stack, it is generally easier to embed MEV solutions (like PBS) into core protocols. This is for many reasons, including that while Cosmos governance is often challenging, it can be done on-chain without considering how changes will affect other applications. Technically, innovations in the latest versions of ABCI++ allow for new possibilities in how Cosmos-based applications communicate directly with the consensus layer, such as enabling threshold encryption;

• Cross-domain MEV—As Flashbots noted in the SUAVE manual, incentives for capturing cross-domain MEV are likely to increase in the coming years and may pose validation threats to various ecosystem economic security models. Since Cosmos is built for cross-chain, it may be exposed to the centralizing forces of cross-domain MEV, with some large entities already operating validators across multiple Cosmos chains, which, if left unchecked, could lead to a world where only a few capital-rich validators control meaningful staking shares across various chains.