Flashbots launches MEV-Share protocol: The era of MEV profits for Ethereum users has arrived

Author: Daniel Li, CoinVoice

In the blockchain field, the issue of Maximal Extractable Value (MEV) has received significant attention. MEV is a means of profiting by optimizing the order of transactions during the block construction process. While MEV brings substantial profits, these gains primarily flow to MEV searchers and block builders, leaving Ethereum users, wallets, and DApps unable to share in these profits.

To address this issue, the Ethereum infrastructure service Flashbots recently launched a beta version of the MEV-Share protocol, aimed at distributing a portion of MEV profits to users in the Ethereum ecosystem, achieving transparency and fair distribution of earnings. This marks the transition of MEV shared profits from theory to practice, heralding the era of MEV earnings for Ethereum users.

The Dark Forest of Blockchain MEV and Its Solutions

Blockchain surpasses most systems in the world due to its transparency and traceability, but there exists an invisible game behind it. Among many games, MEV is undoubtedly the most concerning one. Initially, MEV was seen as the behavior of opportunistic traders imposing abusive extra taxes on users, but it has now become ubiquitous and has evolved into a general term for on-chain arbitrage trading. Arbitrage, liquidation, front-running, sandwich attacks, and back-running are currently popular MEV attack strategies. These attack strategies have varying degrees of impact on the usability of Ethereum, with some potentially posing existential risks.

MEV is like a dark forest, where searchers and block builders (miners) lurk in the shadows, preying on unsuspecting users/traders. Malicious MEV triggers harms such as market unfairness, network security issues, privacy breaches, and increased costs. With the rapid development of DeFi applications, the MEV problem has become increasingly prominent, leading more institutions to focus on it and attempt to mitigate the negative impacts of MEV. The main current solutions include:

MEV Auctions (MEVA)

MEVA is a solution based on an auction mechanism, aimed at alleviating the MEV problem through a bidding process. Validators can bid on the transactions they intend to package, with the highest bid being prioritized. This method can effectively reduce network congestion caused by bidding.

Advantages: The implementation of MEVA is relatively simple, requiring no major changes to existing consensus protocols, while effectively reducing network congestion caused by bidding.

Disadvantages: MEVA carries certain centralization risks, as smaller sorters may attempt to collude with larger ones, leading to a more centralized consensus. Additionally, since MEV is harvested by the winning bidder, the mining rewards that other sorters should have received will be compensated by users, resulting in higher costs for users.

Fair Sequencing Service (FSS)

FSS attempts to provide sequencing fairness and reduce the MEV problem by implementing sequencing between the memory pool and relay contracts. FSS requires participants to jointly maintain a sequencer to ensure that transactions are sequenced fairly in the memory pool.

Advantages: FSS can provide a more reliable mechanism for sequencing fairness and is highly compatible with existing consensus architectures.

Disadvantages: FSS may introduce the risk of oracle collusion and could increase user costs, as incentives for oracle providers may incur additional expenses.

Randomization of Transaction Order

Randomization of transaction order is a simple solution to reduce MEV by randomizing the order of transactions when packaging them. This method can decrease MEV since multiple transaction bundles need to be submitted to have a chance of extracting the expected MEV.

Advantages: Randomization of transaction order can reduce MEV and is relatively simple to implement.

Disadvantages: This method may increase the cost of executing MEV, as multiple transaction bundles need to be submitted to achieve the expected MEV.

Threshold Encryption

Threshold encryption can provide strong privacy for transactions and has the potential to eliminate a significant amount of MEV. Threshold encryption can split transactions into multiple parts and distribute these parts to multiple validators for processing. Only when all validators have completed their parts can the transaction be reassembled and broadcast to the network.

Advantages: Threshold encryption can provide strong privacy for transactions and has the potential to eliminate a significant amount of MEV.

Disadvantages: Threshold encryption introduces complex validation procedures and requires a large number of validators, which may not be feasible.

MEV-Geth

MEV-Geth is a solution targeting the MEV problem, which reduces the influence of validators or miners on transaction ordering by modifying the code of the Ethereum client Geth, thereby decreasing the risk of MEV attacks.

Advantages: MEV-Geth improves the transaction ordering algorithm, reduces the risk of MEV attacks, and enhances network security.

Disadvantages: MEV-Geth can only be implemented on the Geth client and requires modifications to the Ethereum client Geth's code, resulting in higher development and maintenance costs.

Currently, most MEV protocol designs focus on addressing predatory MEV issues, aiming to establish a market-oriented and fair MEV market. However, there is still no specific solution for the distribution of interests among traders, miners, and searchers involved in the MEV problem. Recently, Flashbots launched the MEV-Share beta, which precisely fills this gap. The core idea of MEV-Share is to view MEV as a public resource, allowing miners, searchers, and traders to share MEV profits through a reasonable profit distribution mechanism while ensuring the privacy of user transactions in block space. This promotes the marketization, standardization, trustworthiness, privacy, and decentralization of MEV. Although MEV-Share is still in the beta stage, it is expected to become one of the important solutions to the MEV problem in the future.

MEV-Share's Win-Win Model to Solve the Trader "Sandwiched" Problem

MEV-Share is a new decentralized transaction execution mechanism launched by Flashbots that can effectively solve the trader "sandwiched" problem. In traditional transaction execution mechanisms, traders often face the risk of being "sandwiched," where their transactions may be prioritized or not executed by malicious validators, leading to unfair outcomes or results that do not align with the traders' intentions. MEV-Share introduces programmable privacy and a competitive order flow auction mechanism, enabling collaboration and optimization between traders and searchers, thus achieving a win-win situation.

First, MEV-Share accurately selects which transaction data to hide and display through programmable privacy, allowing traders to control their privacy information. Additionally, searchers bid in the competitive order flow auction to gain execution rights for user private transactions. By selectively disclosing transaction data, traders can help searchers better optimize their bids, resulting in higher fees. This competitive order flow auction mechanism fosters competition among searchers, thereby increasing traders' profits.

Second, MEV-Share introduces a new entity called the Matchmaker. The Matchmaker can match user-submitted transactions with MEV searchers' transaction bundles, allowing searchers to further optimize their MEV capture efforts. After users submit transactions to the Matchmaker, it selectively shares some transaction information with searchers, who listen for and receive new event streams through SSE endpoints. Subsequently, searchers propose transactions to the Matchmaker, bundling them with user transactions. Currently, Flashbots only supports backruns, which bundle user transactions with each valid searcher's backrun transaction and forward them to block builders. Block builders will select the winning transaction bundle and return a portion of the profits from the searchers' backrun transactions to users.

Third, MEV-Share also supports collaboration and optimization between traders and searchers. By keeping transactions confidential, traders can now negotiate MEV bargains for them without allowing searchers to compete. Programmable information sharing enables collaboration and optimization. This mechanism fosters positive interactions between searchers and traders, achieving a win-win situation.

By introducing programmable privacy and a competitive order flow auction mechanism, MEV-Share further optimizes and improves the shared MEV profit scheme. Programmable privacy allows traders to hide transaction information within encrypted smart contracts, protecting their privacy and security. The competitive order flow auction mechanism allows searchers to offer higher bids during the auction process to acquire transaction flow, maximizing the interests of both traders and searchers.

The win-win model of MEV-Share not only increases traders' profits but also strengthens the stability and sustainability of the entire ecosystem. By reducing the occurrence of malicious MEV, MEV-Share protects the security and stability of the blockchain ecosystem. At the same time, MEV-Share provides new ideas and directions for the development of the blockchain ecosystem, encouraging more participants to join the shared MEV profit scheme and collectively promote the innovation and application of blockchain technology.

What Impact Does the MEV-Share Protocol Bring to the Ethereum Ecosystem?

MEV is not a new concept; research on MEV emerged as early as 2019, when some blockchain researchers began exploring the predictability and manipulability of blockchain transaction sequences and the impact of this manipulability on the blockchain market. However, during the market boom, most people were busy profiting from MEV, and many issues were overshadowed by the market's enthusiasm. Currently, influenced by the cryptocurrency market, on-chain financial activities have slowed down, and people are beginning to refocus on the impact of the MEV issue on market fairness and sustainability.

As a non-profit organization operating on the Ethereum network, Flashbots has been dedicated to solving the MEV problem and providing a safer and fairer transaction execution mechanism for users in the Ethereum ecosystem. As early as 2021, Flashbots launched the MEV-Boost protocol, which improves transaction execution efficiency and security by allowing transaction builders and validators to share MEV profits. The MEV-Share protocol was developed based on the MEV-Boost protocol, and compared to MEV-Boost, MEV-Share further includes transaction users in the distribution of MEV profits, achieving a fairer distribution. Currently, MEV-Share is still in the testing phase, but its impact on the Ethereum ecosystem will be significant.

The introduction of the MEV-Share protocol will have several impacts on the Ethereum ecosystem:

(1) Improving Transaction Efficiency and Fairness: Traditional transaction execution mechanisms carry the risk of being sandwiched, where traders' transactions may be prioritized or not executed by malicious validators, leading to unfair outcomes or results that do not align with traders' intentions. MEV-Share minimizes the risk of being sandwiched and improves transaction efficiency and fairness through programmable privacy and competitive order flow auction mechanisms.

(2) Reducing the Impact of MEV: MEV is a significant issue in the Ethereum ecosystem, potentially threatening the usability and security of the Ethereum network. MEV-Share can incorporate the value of MEV into the network through competitive order flow auction mechanisms, thereby reducing the impact of MEV.

(3) Enhancing Ordinary Users' Profits and Participation: In traditional blockchain transactions, ordinary users often find it difficult to share in the value of MEV. The MEV-Share protocol enables ordinary users to share in MEV profits through a transparent MEV profit distribution mechanism, and they can earn more by providing liquidity and other services. This will enhance ordinary users' profits and participation, promoting a fairer and more sustainable development of the Ethereum ecosystem.

(4) Promoting Innovation in the Ethereum Ecosystem: As a new decentralized transaction execution mechanism, MEV-Share can provide more possibilities for innovation in the Ethereum ecosystem. For example, MEV-Share can offer more efficient and fair trading mechanisms for decentralized exchanges and provide safer and more reliable trading mechanisms for other DeFi applications.

(5) Increasing the Overall Competitiveness of the Ethereum Network: With the emergence of MEV-Share, more traders and searchers will choose to conduct transactions and searches on the Ethereum network, thereby increasing the overall competitiveness of the Ethereum network. This will help attract more users and developers, promoting the development of the Ethereum ecosystem.

Conclusion

Most MEV protocols currently on the market focus solely on addressing predatory MEV issues, while the MEV-Share protocol not only addresses this problem but also better distributes the interests of users, miners, and searchers through a transparent MEV profit distribution mechanism, enhancing market transparency and sustainability. Furthermore, the protocol promotes the integration of validators and traders, reducing the negative impact of MEV on the market. Although the MEV-Share protocol is still in the testing phase, it has successfully introduced a shared profit mechanism into the Ethereum ecosystem, opening the door to MEV profits for a large number of ordinary users. This has significant implications for achieving fairness and sustainable development in the Ethereum ecosystem.