Miner Extractable Value (MEV): A Fundamental Risk
Miner Extractable Value (MEV) represents a significant risk for blockchain-based systems. Originally, the incentives for miners or other consensus participants deciding transaction ordering were straightforward: they earn revenue based on block subsidies and fees paid by users for transaction confirmations. However, as blockchain technology has evolved, new sources of revenue have emerged.
Increased complexity benefits miners
Complex contracts and protocols now exist that facilitate the creation of, and exchange between, different blockchain-hosted assets. Miners, who decide which transactions are accepted into the blocks, have preferential access to these contracts and protocols. This circumstance, while lucrative for miners, can create centralization pressures and pose a threat to censorship resistance.
Ethereum: A Case Study of MEV Challenges
Ethereum offers a clear example of the MEV issue due to the high complexity of contracts deployed on its network. This has resulted in a significant amount of MEV, prompting the development of strategies to address the problem.
Proposer Builder Separation
The concept of Proposer Builder Separation (PBS) was devised to reduce the centralization risks of MEV. Under PBS, Builders create block templates, while Proposers (miners/stakers) choose the most profitable block template. This separation is meant to protect miners/stakers from centralization pressures. However, in reality, a limited number of competitive Builders exist, and their decisions can effectively impose censorship on every miner/staker that chooses to use their block templates.
MEVpool: A Proposed Solution to Censorship Risk
The MEVpool proposal is designed to amend the PBS proposal for Bitcoin to better address the risk of censorship. The main difference between PBS and MEVpool is that miners still construct the final block template themselves in MEVpool, outsourcing only the task of selecting the subset of transactions that optimize MEV extraction.
Marketplace relays
Under MEVpool, marketplace relays would host orderbooks where MEV extractors can post their proposed transactions and the fees they will pay to miners for including them in a block. These marketplaces would also support sealed or unsealed orders, with the transaction details in sealed requests remaining hidden until the block is mined.
Trusted Execution Environment
A Trusted Execution Environment (TEE) can be employed to handle the construction of block templates and the management of encrypted sealed bids. This approach requires all involved parties to trust the TEE’s security.
The MEV Challenge: A Comprehensive Solution Needed
While MEVpool can potentially mitigate some of the worst effects of MEV, it’s not a comprehensive solution. It doesn’t fully remove centralization risks and pressures, but it can alleviate them in certain areas. Ultimately, a comprehensive solution to the MEV issue will require more than just a bandaid fix.
