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 loss and degradation of user experience 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 about 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 the values of Ethereum.

The exacerbation of on-chain MEV is indeed a double-edged sword, having both positive and negative externalities. The positive aspects include reducing price discrepancies on DEXs and assisting in trade settlement; the negative aspects include harm to users from sandwich trading. Therefore, solutions to MEV are more about alleviating negative externalities rather than eradicating them completely. In our exploration of mechanisms to alleviate the negative externalities of MEV and solve the current issues with third-party trust middleware Relayers, we mainly categorize measures into three types: improvements in auction mechanisms, consensus layer improvements, and application layer improvements. Each of these three improvements will have varying degrees of impact on the modern landscape of MEV, but some solutions do not fundamentally address the issue of sandwich attacks that users face. User transactions remain in the public pool, so it is necessary to introduce more privacy pool technologies to protect the optional privacy of user transactions. These MEV solutions are worth combining and experimenting with.

In addition, as an unavoidable byproduct of mechanism design, MEV will become even more complex in the future. We also explored in the text the potential technical challenges and opportunities of 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 through this article, and to provide a comprehensive understanding of the pros and cons of current MEV solutions, not only to illuminate the dark forest where users find themselves in the future, but also to light the way for industry researchers to further investigate the dark forest of MEV.

Ethereum 2.0

Since The Merge, Ethereum has adopted the PoS mechanism to ensure the security of the network, while abandoning computationally intensive competition in block production, instead opting for proof of stake. After the merge, Ethereum was divided into the execution layer and the consensus layer. The entire block production has also changed; each Epoch represents a PoS cycle, and each Epoch is divided into 32 Slots, with each Slot corresponding to a block generation time unit of 12 seconds.

Validator Proposed Block Diagram

The entire network will randomly select a committee from the validators during each Epoch. The proposer of the block is randomly chosen from the committee members, and this block proposer needs to package the transactions and order them to produce a final block. Other committee validators will supervise this process and then vote for the block. Additionally, this committee will be reselected after each Epoch. There is also a certain operational time limit imposed to ensure the efficiency of block generation and voting. Here, we standardize the terminology for the readers: Payload refers to the execution load, which means changes in the status of transactions and can be seen as part of the execution of the block. The block proposer will implement the execution load ( Execution Payload, which is the implementation of the status change of the transaction results ) and the block proposal.

PBS Architecture

In fact, when validators are selected to become block proposers, the proposer often lacks the motivation to execute the Payload, which means sorting and executing transactions, because this requires a lot of computational power to execute state changes. The original thought was that if we elected a decentralized committee, and included the execution load in it, then transaction sorting and so on would become decentralized matters. However, validators seem to inherently want to delegate this part to a third party, while they focus on proposing blocks. This led to the concept of PBS (Proposer/Builder Separation), which separates block proposing and building, with proposers only responsible for validating blocks without 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 the proposers, which we refer to as "block auctions."

PBS flowchart illustration

Let us briefly introduce the entire PBS( Proposer Builder Separate) sealed first auction model. When users submit transactions through RPC agents, RPC is equivalent to running a node, submitting transactions to the public Mempool. Multiple Builders find the most suitable transactions to sort and generate a profit-maximizing block(, where profit maximization refers to transaction fees Base + Priority + MEV). Then, multiple Builders interact with the Proposer through the MEV-Boost Relayer. The Relayer serves as a bridge for interaction between multiple Builders and the Proposer, as Builders submit bids to the Relayer, which then submits multiple block headers and corresponding bids to the Proposer. The Proposer generally adopts the block with the highest bid. Among them, the Relayer implements the MEV-Boost specification, which is a technical specification proposed by Flashbots on how to standardize the bidding interaction between Builders and Proposers. In this process, all information is sealed; the Relayer only submits block headers to the Proposer, ensuring that the Proposer has censorship resistance.

Various Participants and Game Theory under PBS

Its main participants include Builder, Relayer, Proposer, MEVbot(Searcher).

Builder

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

OFAC Compliance Block Ratio, Source: MEV Watch

Builder market share, source of the chart: MEV Watch

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

Searcher

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

Essentially, profit maximization requires cooperation between Searchers and Builders. Searchers often collaborate with specific Builders, which creates a Dark Pool or Private Pool where Searcher transactions are only visible to certain Builders. Some Builders can then obtain maximized profit through MEV transactions, subsequently bidding for block space. Theoretically, if Builders engage in malicious activities or censorship, Searchers can choose other Builders, which would gradually reduce the market share of the Builders. Therefore, constrained by Searchers, Builders often consider the implicit costs of malicious behavior. The above figure shows the MEV and daily Gas revenue situation, indicating that the MEV revenue contributed by Searchers can even be twice the daily Gas revenue when market fluctuations are significant.

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

Searcher market share, source of the image: Searcherbuilder

Currently, some exchanges occupy the largest market share in CEX - DEX arbitrage trading.

Searcher market share, source of the chart: Searcherbuilder

For purely on-chain MEV opportunities, there is a trend towards gradually forming studios, among which certain Searchers occupy an astonishing 37.2% market share, excelling at sandwich attacks on Ethereum chain users, once becoming the highest gas-consuming user on-chain, consuming about 1.5% of the total gas in an entire day. From February 2023 to June 2024, this bot spent a total of 76,916 ETH, which, based on the value at the time of executing these transactions, is equivalent to approximately 175 million dollars. Due to the close connection between Searchers and Builders, in practice, many Searchers send their order flow to the top three Builders, while they could actually broadcast to all Builders. However, some smaller Builders may split the Searchers' order flow, leading to the failure of the Searchers' MEV strategies and thus resulting in the risk of losses. Additionally, binding with Builders can help maintain their influence within the ecosystem.

Relayer

Relay market share, source of the image: mevboost

Relayer is responsible for aggregating bids and then acts as an intermediary to submit the block header and the auction block price to the Proposer, who at this time does not know the details of the transactions in the block. Once the Proposer selects and signs the block header, the Relayer will release all transaction contents to the Proposer. We find that the Relayer, acting as a third party without economic incentives, has gained significant trust, with the Builder relying on the Proposer for bids, and the Proposer relying on the Relayer's bids and block content. Historically, similar issues have occurred, with Ultrasound Relayer having 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.

Market Share Trend Chart, Source: mevboost

The above image shows the market share situation of Relayer. 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, which is the lack of economic incentives. Therefore, some companies have also withdrawn from Relayer research and development. Currently, Relayers rely on the MEVBoost specifications proposed by certain companies to build, and Ethereum relies on third parties to provide PBS, which is not a long-term solution. Therefore, the Ethereum community is also exploring the incorporation of PBS at the protocol level.

Proposer

For the Proposer, it is necessary to randomly select a group of committees among all validators using an algorithm, and to choose a block proposer in each slot. The block proposer itself has the capacity to execute the load, but since proposers inherently want to outsource this part, it can easily lead to vertical cooperation between Builders and Proposers. The Relayer of MEV-boost hopes to act as an intermediary in this manner, reducing the vertical cooperation collusion brought about by direct communication between the two. Currently, both mining pools and LSD validator pools are acting as validator pools, but these mining pools and LSD validator pools have strong economies of scale, especially with the emergence of LSD, which unleashes the potential of staked tokens, enhances capital efficiency, and due to the influence of the underlying DEFI building blocks, the validator pool is also in a more centralized trend.

Validator market share, source: mevboost

A certain institution currently occupies about 28.7% of the market share.