MEV has become a much-discussed topic in recent years, progressing from a niche area of research to a full-fledged ecosystem and a lucrative source of validator revenue. In the article below, we’ll explore how we leverage MEV to boost staking rewards in Ethereum, what are its implications for stakers, and even understand what exactly is MEV.
First things first, MEV generally stands for “maximum extractable value” and refers to the total amount of economic value that can be gained as a function of the ordering of transactions in a block.
For example, a user may swap a large amount of token A for token B on a decentralized exchange (DEX), affecting the exchange rate between these two assets.
If this rate is then inconsistent with the pricing in the wider market, traders (“searchers”) can take advantage of the imbalance through arbitrage. Intuitively, a trader would be rewarded for committing capital to re-establish efficient pricing.
It is easy to intuit that there are desirable and less desirable forms of MEV.
For example, arbitrages and loan liquidations serve to increase and preserve the integrity of on-chain capital markets. These types of transactions take place after an opportunity has been created, i.e. these are often referred to as “back-running”.
On the flip side, there is a class of transactions characterized as “front-running”. These strategies involve creating or compounding a profit opportunity by submitting a trade before a user transaction hits the chain.
While there are some counter-arguments, most people agree that front-running increases transaction costs for ordinary users, and it is, therefore, less desirable than back-running, which can in theory decrease user transaction costs (e.g. through efficient pricing).
The upshot is that the feasibility of any MEV-type trade is dependent on the ordering of transactions in the block.
Ideally, a searcher would like to trade directly after the opportunity has been created. There are some exceptions to this (i.e. where the opportunity will compound with other transactions), but in any case, there is always an ideal timing for a trade when there’s money on the table. And there are sophisticated actors waiting to exploit these opportunities.
Validators ultimately control the ordering of transactions in a block. As there is always an ideal timing to trade (or the best estimate thereof), searchers are incentivized to bargain with validators to ensure their transactions are placed well.
On Ethereum, this process has been automated via an auction system, spearheaded by the Flashbots team. In this post-Merge, Proof-of-Stake Ethereum world, the main tool to perform these auctions is called “mev-boost”. This is a private communication channel between searchers and validators, which allows the efficient pricing of a block. As a result of this, validators receive “tips” for proposing the most price-efficient block, on a secure commit-reveal scheme.
We have created some tools to decode MEV and ‘mev-boost’ transactions under Proof-of-Stake Ethereum, check our Dune Analytics dashboard.
The higher the network penetration score of an individual validator or group of validators (known or unknown), the more chances it will get to propose blocks, and consequently benefit from a block price auction, which is often a matter of luck. Validators under these conditions are also more likely to be present when particularly lucrative opportunities occur, and so luck turns into opportunity.
This means that a large validator set working together is more likely to generate smooth staking returns, versus a small validator with more irregular windfalls.
For stakers, this process results in additional rewards that are immediately accessible on the Execution Layer of the network — responsible validators share a portion of MEV rewards with stakers.
Volatile markets generate more MEV opportunities through collective price discovery, and various inefficiencies which reveal themselves in unusual conditions. For example, more liquidations if the ETH price drops significantly below what market participants expect.
Therefore, you can expect your staking rewards to go up in conditions of uncertainty.
Profits from on-chain trading can be enormous. For example, the all-time largest MEV arbitrage on Ethereum in June 2022 yielded a gross profit of 2518.5 ETH; of this sum, 74.52 ETH went to the block proposer.
A well-thought-out MEV strategy can boost your staking returns significantly. For example, in March 2023, up to 15% of validator revenues have been derived from MEV so far. At Chorus One, we have experimented with different mev-boost setups and relayers, always working on tweaking our strategy to reach higher levels of efficiency. Moreover, we only charge a small staking commission on all returns, allowing you to keep the vast majority of MEV rewards your validator generates. We wrote about how we view MEV and our policies here: Chorus One’s MEV Policy: Transparency, Sustainability, Reward Optimization.
Optimization of MEV rewards coupled with our performant infrastructure and round-the-clock supervision allows us to deliver highly competitive returns to our delegators, sometimes exceeding other validators by up to 30%. Don’t take our word for it, real-time statistics can be accessed via Rated.
Chorus One is a leading advocate for MEV transparency and efficiency. Our team has been at the forefront of MEV research, actively developing solutions to support the nascent yet rapidly evolving MEV landscape. We have executed MEV-type transactions on both Solana and Cosmos, and our recent release of an open-source MEV-client on Solana demonstrates our commitment to advancing the space. Additionally, our expertise in the MEV domain has been recognized with a grant from dYdX to produce a comprehensive report on MEV for their v4 platform.
Reach out to us at sales@chorus.one to understand more about how our MEV-enabled infrastructure can help you earn superior returns.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 35+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
For more information, please visit chorus.one
