Due to the unique architecture of blockchains, block proposers can insert, censor, or sort user transactions in a way that extracts value from each block before it's added to the blockchain.
These manipulations, called MEV or Maximum Extractable Value, come in various forms. The most common are arbitrage¹, liquidations², NFT mints³, and sandwiching⁴. Arbitrage involves exploiting price differences for the same asset across markets. Liquidations occur in lending protocols when a borrower’s collateral drops in value, allowing others to buy it at a discount. NFT mints can be profitable when high-demand NFTs are resold after minting.
Most types of MEV can benefit the ecosystem by helping with price discovery (arbitrage) or preventing lending protocols from accruing bad debt (liquidations). However, sandwiching is different. It involves an attacker front-running a user’s trade on a DEX and selling immediately for a profit. This harms the ecosystem by forcing users to pay a consistently worse price.
Solana's MEV landscape differs from Ethereum's due to its high speed, low latency, lack of a public mempool, and unique transaction processing. Without a public mempool for viewing unconfirmed transactions, MEV searchers (actors specializing in finding MEV opportunities⁵) send transactions to RPC nodes directly, which then forward them to validators. This setup enables searchers to work with RPC providers to submit a specifically ordered selection of transactions.
Moreover, the searchers don't know the leader's geographical location, so they send multiple transactions through various RPC nodes to improve their chances of being first. This spams the network as they compete to extract MEV—if you're first, you win.
Jito
A key addition to the Solana MEV landscape is Jito, who released a fork for the Solana Labs client. On a high level, the Jito client enables searchers to tip validators to include a bundle of transactions in the order that extracts the most value for the searcher. The validators can then share the revenue from the tips with their delegators.
These revenues are substantial. Currently, the Jito-Solana client operates on 80% of validators and generates thousands of SOL daily in tips from searchers. However, searchers keep a portion of each tip, so the total tip amounts don’t reveal the full MEV picture. Moreover, the atomic arbitrage market is considerable, and as we’ll explore later, Jito's tips don’t give an accurate estimate of the atomic MEV extracted.
Jito⁶ introduced a few new concepts to the Solana MEV landscape:
There’s more to the current MEV landscape on Solana, particularly concerning spam transactions, which largely result from unsuccessful arbitrage attempts, and the various mitigation strategies (such as priority fees, stake-weighted quality of service, and co-location of searchers and nodes). However, since these details are not central to the focus of this article, we will set them aside for now.
It's still early for Solana MEV, and until recently, Jito was the only major solution focused on boosting rewards for delegators. Following the same open-source principles, the Paladin team introduced a validator-level bot⁷ and an accompanying token that accrues value from the MEV collected by the bot.
The main idea behind Paladin is this:
Paladin’s success, therefore, depends on validators choosing honesty over toxic MEV extraction by running the Paladin bot.
Bots like Paladin⁸ operate at the validator level, enabling them to capitalize on opportunities that arise after Jito bundles and other transactions are sent to the validator for inclusion in a block.
In this scenario, once the bot assesses the impact of the transactions and bundles, it inserts its transactions into the block. The bot doesn’t front-run the submitted transactions but leverages the price changes that result after each shred is executed.
Paladin can also extract MEV through DEX-CEX arbitrage and optimize routes for swaps made via DEX aggregators. However, these features are currently not used in practice, so we only briefly mention them. Since the bot is a public good, the community can contribute by adding features like NFT minting or liquidation support in the future.
The PAL token is where 10% of the value extracted by the bot in SOL gets accumulated. Paladin will go live at TGE, which will airdrop the entire supply of 1 billion PAL in the following proportions:
At the architecture level, the MEV extracted by the bot is sent to a smart contract, which then distributes it as follows:
The crucial part of the Paladin architecture is slashing. If the validator misbehaves and extracts MEV through sandwiching, staked PAL holders (other validators and their delegators) can vote to slash the rogue validator. The slashing happens if >50% of the majority is reached and stays at this level for a week. The slashed PAL is burned.
Other actions that could lead to slashing include not running Paladin, using closed-source upgrades, or not participating in slashing votes. This isn't an exhaustive list, as PAL stakers can vote to slash for other reasons at their discretion. While sandwiching is easy to spot, other "misbehaviors" may not be as obvious and would require monitoring tools, potentially leading to enforcement issues.
Unstaking PAL is capped at 5%, and a cooldown period of one month before the next withdrawal can be made.
There are several controversies about Paladin⁹. Here are common criticisms:
Validators Profit Unfairly
This is not true. Palidators (validators running Paladin) receive 90% of the MEV extracted by the bot, which they can redistribute to their delegators while keeping their standard commission. The remaining 10% goes to the PAL token, with 7.5% each going to validators and their stakers. This setup ensures validators don't take a larger share of MEV profits. If a validator doesn’t share the captured MEV, delegators can switch to one with a healthy long-term track record, like Chorus One.
Run Paladin or Die
Validators must run Paladin and avoid toxic MEV extraction or any actions that could undermine their reputation for honesty. Slashing can also occur if validators run closed-source software on top of Paladin. This doesn't mean market participants can't enhance the bot. On the contrary, they are encouraged to do so and can be rewarded in PAL if their improvements are openly available to others.
No Development Post-TGE
After the PAL airdrop, the Paladin team will no longer develop the bot¹⁰. All maintenance and strategy updates will be the community's responsibility from then on. This includes adding new liquidity pools or tokens to identify emerging MEV opportunities. While a fund has been set aside for future development, it is uncertain how long it will last. Development may stall if the incentives dry up.
With the knowledge of how Paladin works, let’s evaluate its target market and assess its performance based on our collected data.
Atomic Arbitrage Market
We will start by analyzing Jito tips paid for atomic arbitrage and compare them to the overall atomic arb market to see how much of the atomic opportunities have been captured through Jito.
We will use data from mid-August 2024¹¹ onward, when the share of Jito tips related to atomic arbitrage rose significantly. We exclude earlier data to avoid bias. Interestingly, this spike happened despite the drop in the total MEV extracted through atomic arbs, indicating increased competition among searchers now willing to share more Jito tips.
Even though tips from atomic arbs have increased compared to the total arb MEV market, they still make up only a small percentage of the total Jito tips paid.
Only 4.25% of the tips searchers paid during the sampled period were from atomic arbs (SOL 10,316 out of SOL 242,754). At a SOL price of $150, this is $1,547,400, while the total atomic MEV extraction reached $6,567,554.
So, only about 23% of the total atomic arbitrage opportunities were shared through Jito! Some striking examples include:
This shows that most on-chain arbitrage MEV is being captured outside of Jito. Unfortunately, this also leads to a high number of failed transactions.
During one of the measured five-day periods, over 1 million arbitrage transactions were made, with 519k of them submitted through the Jupiter aggregator [source]. This led to a significant number of failed transactions because:
The above data shows that Paladin can tap into a sizable on-chain arbitrage market by finding opportunities more efficiently and avoiding failed transactions. This approach would benefit validators by filling blocks with successful transactions and improving the ecosystem by reducing congestion.
The annual atomic arbitrage market is around $42.4 million. With 392 million SOL staked [source] ($58.9 billion at $150 per SOL), this could add about 0.07% APY to validator performance.
Let's dive deeper into the data to see how much market the bot can take.
Distribution and Dataset
The distribution of atomic arb MEV in USD per slot for the data collection period (15 August to 10 October 2024) looks as follows:
The median value is $0.00105 per slot, with atomic arbitrage opportunities occurring in 51.6% of slots.
Paladin operated on our main validator with a 1.15m SOL stake for a week between 4 October and 11 October. Let’s see the atomic arbitrage market opportunities during the bot's operation period:
The median value is $0.00898 per slot, and the chance of atomic arbs is present in 59.47% of slots.
The KS test shows inconsistencies in both datasets, with a positive shift in the distribution, indicating higher values in the second dataset. Therefore, Paladin operated in a more favorable environment, with more significant and more frequent MEV extraction opportunities than the broader measurement period. This is especially clear when you look at the size of Jito tips during our timeframe.
Now, let's look at how Paladin performed in these circumstances.
The median arb profit is $0 per slot, with opportunities taken only in 29.64% of slots.
Here’s a more detailed summary of all three distributions:
As we can see, Paladin underperformed, capturing significantly less MEV and earning less per slot. The bot only managed to capture 15.84% of the total available atomic arbitrage opportunities.
In some of the most striking examples, the bot extracted only 0.00004 SOL (here and here), while the actual extractable value was $127.59, as seen in Tx1, Tx2, Tx3, Tx4, and Tx5.
The reason for failing to extract MEV from the opportunities in the linked transactions is that Paladin doesn’t support the traded token ($MODENG). This is a problem since memecoins are currently driving network activity and will likely contribute the largest share of MEV. These tokens emerge rapidly, requiring frequent updates to routing. One of Paladin's top priorities should be quickly adapting to capture MEV from new memecoins as they arise, and the lack of team involvement in the process is problematic in this context.
Estimated Returns
Now, let’s run a simulation to estimate the returns under different scenarios based on a stake share of 0.3% (Chorus One's share), 1%, and 10%. The returns are capped at 15.8%, which is the portion of opportunities Paladin captured in our data.
The median value for 0.3% of the total stake is around $20k, which matches the annualized value of what Chorus One earned. This increases to about $65k for a validator with 1% of the total stake and exceeds $700k for a hypothetical validator with 10%.
We also ran a simulation to estimate how much Paladin’s performance could improve if it captured 80% of available opportunities for a validator the size of Chorus One across different adoption levels—1%, 10%, 25%, and 50% of total stake using Paladin. At an estimated 1% adoption, our validator earns an additional 0.01% APY from the bot, while the total potential atomic arbitrage could generate 0.07% of the total stake.
The simulation assumes:
And in a more tangible form:
As we see, Paladin could generate a median of additional 0.29% in APY for a validator with 0.03% of the total stake once adoption reaches 50%.
We've been in touch with the Paladin team, who confirmed that a new version of the bot, P3, is in the works. This version will pivot from focusing on the atomic arbitrage market, which they no longer see as substantial enough to prioritize.
Maintenance
The bot has been stable without major issues, but Paladin requires patches to update strategies and fix smaller bugs. Maintaining the bot is also time-consuming for the engineering team, as each patch requires a restart and the process is more complex than anticipated, adding extra overhead.This is a similar problem we faced with our Breaking Bots—maintenance and strategy update costs were high. Eventually, we concluded that the effort was not exactly worth it. With Paladin, however, a whole community could tackle this problem, so things may look different.
Paladin has great potential to boost earnings for validators and stakers by tapping into new opportunities, but it's still in the early stages of development. While our analysis shows that Paladin currently captures only around 15.84% of available atomic arbitrage opportunities, this will likely improve as the bot becomes more optimized and widely adopted. The upside is promising—the total atomic arbitrage market could add 0.07% to a validator’s APY. While capturing all of it is unlikely, even a share of this can lead to solid gains.
That said, there are challenges to address. The bot’s development will shift to the community after the token TGE, raising questions about whether there will be enough resources and motivation for continuous updates. Additionally, maintaining the bot on the validator side can be tricky, as each patch requires a restart, making it time-consuming for validators to run.
At Chorus One, we believe that the long-term health of the Solana ecosystem is paramount. Paladin builds on the same core principles as Jito—to mitigate the toxic MEV and democratize good MEV.
We developed Breaking Bots with these ideas in mind, and we see Paladin as an extension of our efforts. Two solutions are better than one, and Paladin offers an interesting alternative to what exists today. Supporting multiple approaches is a cornerstone of decentralized systems, and we welcome new ideas that build resilience.
While we don't agree with all of Paladin's choices, especially regarding the team's lack of future bot development, we believe its success will benefit the entire ecosystem, and that's why we support it.
That being said, if the core principles Paladin is built on change, or the maintenance costs outweigh the benefits in the mid-term, we will reevaluate our position.
References:
1 You can find an interesting overview of arbitrage MEV here.
2 A detailed analysis of liquidations in DeFi is available in this paper.
3 More about the NFT MEV here.
4 Chorus One also provided an analysis on Solana sandwiching in here.
5 An in-depth write-up on searchers by Blockworks is here.
6 Information based on Jito documentation.
7 At Chorus One, in our “Breaking Bots” paper, we proposed a similar solution. The implementation details are available on GitHub.
8 Information based on series blogposts by the Paladin team.
9 Some of the examples available here, here,
10 Per the blogpost: We’re not a Foundation or Labs — we don’t run any part of Paladin, we don’t develop it, we don’t maintain it…
11 The data used in this section is available here and can be retrieved using these queries.
About Chorus One
Chorus One is one of the largest institutional staking providers globally, operating infrastructure for over 60 Proof-of-Stake (PoS) networks, including Ethereum, Cosmos, Solana, Avalanche, Near, and others. Since 2018, we have been at the forefront of the PoS industry, offering easy-to-use, enterprise-grade staking solutions, conducting industry-leading research, and investing in innovative protocols through Chorus One Ventures. As an ISO 27001 certified provider, Chorus One also offers slashing and double-signing insurance to its institutional clients. For more information, visit chorus.one or follow us on LinkedIn, X (formerly Twitter), and Telegram.
