Chorus One is proud to introduce our new research effort, fueled by a grant from dYdX, that examines the implications of Maximum Extractable Value (MEV) within the context of dYdX v4 from a validator's perspective. This comprehensive analysis presents the first-ever exploration of mitigating negative MEV externalities in a fully decentralized, validator-driven order book. Additionally, it delves into the uncharted territory of cross-domain arbitrage involving a fully decentralized in-validator order book and other venues.
This paper, marking a significant milestone in exploring MEV dynamics, identifies factors that influence undesirable MEV extraction, and proposes concrete strategies to level the playing field in derivative trading by counteracting such behavior.
dYdX v4 signifies a transformative phase in the evolution of the dYdX protocol. It embraces a fully decentralized derivatives exchange built on a central limit order book (CLOB). Unlike previous iterations, which combined smart contracts with centralized services, v4 employs a decentralized off-chain order book and a high-performance matching engine. This architecture, powered by the CometBFT consensus and Cosmos SDK, strives to achieve scalability alongside decentralization while allowing community-driven protocol development.
This transition signifies a substantial shift, as v4 introduces the industry's first truly decentralized perpetual futures exchange. Validators will manage the order books, with meticulous steps taken to ensure fair and trustless trading through effective negative MEV mitigation.
Set against the backdrop of this pivotal upgrade, our paper serves a crucial purpose by shedding light on the complexities of mitigating bad MEV on dYdX v4, thus equipping the community with the resources needed to navigate the upcoming transition. By providing comprehensive insights, our analysis aids in anticipating the impact of MEV on the new chain and trading experience, as well as the wider Cosmos ecosystem, ultimately fostering informed decision-making.
Our analysis uncovers pivotal insights that reverberate across the ecosystem:
Finally, our research extends beyond insights to practical solutions for mitigating validator-driven MEV risks. We propose that such MEV might manifest through partnerships between trading firms and market makers, favoring those with established advantages. We underscore the risks associated with harmful MEV, including asymmetric risk for delegators. Even in optimistic scenarios, potential revenue from partnerships may not fully offset these risks. To address this, we suggest a combination of measures including potential penalties and flexible unbonding periods for re-delegation to ethical actors, aiming to effectively manage validator-driven MEV risks.
At Chorus One, we leverage a sophisticated and ethical set of MEV strategies to optimize our validators' performance and continuously monitor progress. Backed by in-house experts and extensive research, we deploy various infrastructural solutions such as relay optimization, latency games, and investing in robust machines to improve our MEV performance. Learn more about Chorus One's winning MEV strategies by reading our recent blog.
For a comprehensive exploration of our research on MEV implications within dYdX v4, we invite you to read the full research paper here.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ 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.
The staking economy is a thriving industry, offering over $12 billion in rewards, with $600 million attributed to Maximal Extractable Value (MEV). At Chorus One, we deeply recognize the significance of MEV for both validators and investors, which has fueled our commitment to continuously optimize our infrastructure to ideally integrate with the Ethereum MEV pipeline.
MEV serves as a gateway for validators to maximize the value extracted from transactions within a block. As early as 2019, the research paper "Flash Boys 2.0," authored by Ari Juels and Lorenz Breidenbach, shed light on its real-world impact, particularly in decentralized exchanges and user experiences. The cumulative value of MEV extracted on Ethereum alone surpassed $78 million in early 2021 and has skyrocketed to an astonishing $600 million in 2023.
MEV has become a cornerstone of Chorus One's research efforts. As one of the earliest and most influential contributors to MEV research, we conduct in-house studies and experiments to optimize MEV yield. Notably, we were commissioned by dYdX to produce an upcoming in-depth report on MEV within dYdX V4, and released the first public tracker of (pre-protorev) MEV on Osmosis (@chorusonemev). Furthermore, we have developed a customized version of the Solana client to capture MEV opportunities on the Solana network.
To achieve the highest possible MEV yield, employing effective infrastructure strategies is paramount. At Chorus One, we conduct a series of experiments to identify the most efficient combination of strategies, aiming to optimize our MEV performance. Below, we delve into the fundamentals of MEV extraction, exploring the solutions we implement to improve our performance.
In general, MEV empowers block producers to rearrange, include, or exclude transactions, providing advantages that can impact users. However, there is a subtle distinction in how MEV operates on Ethereum compared to other blockchain networks.
On Ethereum, the process involves a 'block builder' constructing the block, which is then passed on to a 'relay' before being proposed by a validator. This Proposer-Builder Separation (PBS) introduces a separation between the block producer and the proposer. As an Ethereum validator, Chorus One focuses on optimizing MEV rewards by fine-tuning our interaction with relays.
Conversely, on most other chains, validators themselves build the block and have the freedom to prioritize transaction sorting to maximize MEV rewards.
We continuously optimize our infrastructure to capture the highest possible MEV rewards.
The following graph illustrates our performance over the last 60 days. Over this time period, Chorus One nodes have captured close to 13.8% more MEV rewards per validator (ETH) when compared to the weighted industry average, observed on Lido.
*Please note that this is a snapshot, and that MEV rewards fluctuate as a function of variance and market conditions. Please visit Rated Network to view the latest figures.
This process of continuous infrastructure optimization highlights the significance of employing a combination of well-established best practices to achieve higher MEV rewards. By utilizing specific methods in tandem, validators can effectively maximize their MEV yield. More on this below.
Before diving into Chorus One's approach, we briefly explore the process of extracting MEV. It involves key players with distinct roles:
Block Producers: They create blocks of transactions on the blockchain, deciding which transactions to include and their order.
Relays: A relayer is an entity responsible for checking blocks before passing them to the block producers. The relay confirms the builder blocks for validity and estimate the MEV-related value of each block. By tweaking how block producers/validators interface with relays, they can add value by optimizing MEV rewards.
Searchers: These individuals or automated bots constantly monitor the blockchain, searching for profitable opportunities to manipulate transaction order and earn additional profits through MEV.
DApps and Protocol Developers: Decentralized applications (DApps) and the developers who create rules for block producers support MEV extraction. DApps create opportunities for MEV extraction through their design, while protocol developers establish rules that enable block producers to capture MEV.
In simpler terms, block producers create blocks,relays check the blocks, searchers seek ways to profit by manipulating transaction order, and DApps and protocol developers provide the framework and incentives for MEV extraction.
Validators often employ similar solutions to increase rewards and actively seek optimization opportunities. For instance, MEV-Boost, an implementation of proposer-builder separation (PBS) developed by Flashbots for Ethereum, enables validators to maximize staking rewards by selling block space to builders in an open market.
MEV-Boost is free, open-source, and neutral software designed to democratize MEV while minimizing associated negative implications, such as consensus-layer security risks, centralization, or the risk of searchers going rogue. For more information on MEV-Boost software, visit https://boost.flashbots.net.
MEV plays a significant role in yield generation on networks like Ethereum, and as a result, our nodes are MEV-boost enabled by default.
With a team of in-house experts, we continuously adjust our infrastructure to optimally integrate with the Ethereum MEV pipeline.
1. Relay Selection
Relays are crucial intermediaries in the MEV extraction process, acting as trusted connectors between block builders and validators. Their primary role is to facilitate seamless data exchange and ensure the selection of the most lucrative bids for validators. We continuously conduct experiments to identify the optimal combination of relays (as shown in the relay market dashboard below) , aiming to establish efficient communication and achieve the highest valid bid submission to validators.
Our approach: By carefully selecting the best relays, we enable our validators to receive winning bids from all connected relays.
2. Latency Games
Exploring the dynamics between builders, relays, and validators is even more interesting with a new dimension: time.
Latency, the delay in data transmission, has gained significant importance for relays and the entire MEV supply chain, leading to notable consequences. It acts as a centralizing force within the MEV supply chain, with relays having shorter latency likely to be more successful in auctions. This preference encourages builders to prioritize sending their blocks to those relays.
Our approach: We optimize our connection to relays when requesting blocks by prioritizing payoff and minimizing the probability of a missed slot.
3. Infrastructure Optimization
On the infrastructure and hardware front, we prioritize optimizing the performance of our validators. Through the strategic selection of hardware, geographical distribution, and client implementation, we ensure that our infrastructure operates at its peak efficiency. This optimization enhances the rewards generated for our customers.
Our approach: We are actively investing in and expanding our infrastructure to further elevate performance and rewards.
TL;DR: More rewards, more revenue.
Through our unique solutions and ongoing research, we continuously push the boundaries to enhance the rewards obtained through MEV. Today, our MEV-boost enabled nodes capture significantly higher APR on staked ETH, surpassing the yield of the average validator.
To learn more about our approach to MEV, visit: https://chorus.one/mev-maximum-extractable-value
To stake with Chorus One, reach out to staking@chorus.one and we'll get back to you.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ 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.
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
The MEV supply chain is critical to the future performance and business models of the Solana network. Solana is in a phase of actively searching for, and ultimately choosing its MEV supply chain. One approach is to replicate the model established on Ethereum, building a searching and block-building marketplace. This path has multiple downsides, such as artificially introducing a global mempool that would increase Solana’s latency, and may also increase the risk of centralization and censorship.
We’re happy to announce that Chorus One has released a whitepaper today where we contrast the most relevant characteristics of Ethereum and Solana; review some of the features of the block-building marketplace model, i.e “flashbots-like model”, and what retrofitting it onto Solana would entail.
Given the particularities of Solana, we also propose an alternative to the block-building marketplace: the solana-mev client. This model allows for decentralized extraction by validators, through a modified Solana validator client, capable of handling MEV opportunities directly in the banking stage of the validator. Along with the whitepaper, Chorus One is also releasing an open-source prototype implementation of the approach detailed inside the whitepaper itself.
The client can be run by any validator. Even small validators or those with no specific expertise can benefit from MEV rewards by choosing to run the solana-mev client. That means the validators will be able to execute MEV strategies as they appear in their slot, in contrast with the current competitive aspect of searching, which results in a few winner bots extracting the value.
The model shrinks the incentive for independent bots to spam the network which ultimately contributes to episodes of intense traffic, as most of them send transactions targeting the same MEV opportunities.
Given that not all MEV strategies can be implemented inside the validator, independent searchers will continue to play a relevant role in the MEV space on Solana. That is guaranteed by their advantage of quickly building and updating sophisticated strategies, as well as expanding their focus to newly deployed programs and pools. This includes long-tail MEV.
In summary, the MEV client enables permissionless and decentralized extraction that benefits the ecosystem through transparent and ethical strategies, as well as increased financial returns for network participants.
For a comprehensive overview of the motivations and the model, please refer to the whitepaper here.
At Chorus One, we pride ourselves in being a full-stack partner to the protocols we choose to operate and support. This goes beyond the highly available infrastructure we provide to secure and maintain networks. It includes assisting in ecosystem-building via our ventures and business development teams, as well as participating in network governance and — most notably — deep research. Since our inception, we have been at the forefront contributing to core topics of interest in Proof-of-Stake such as liquid staking.
In recent months, we have shifted a big part of our research focus onto a complex topic that underpins the core fabric of any crypto protocol: MEV (Maximal Extractable Value). This emerging field deals with the value that can be extracted through reordering transactions in the block production process. (A collection of resources on MEV can be found here).
MEV has become an ubiquitous topic for many ecosystem participants. Primarily being a validator, our position in the network places us at a spot within the MEV supply chain that comes with great power, thus also great responsibility. Generally speaking, our mission is to maximize freedom for crypto users and to contribute to the creation of long-term sustainable, user-owned decentralized network infrastructure. Since MEV is a crucial domain that — if not adequately dealt with — might threaten the mission we are set towards; we recognized that we should leverage our expertise and resources to contribute to the MEV space in a way that ultimately benefits networks and their users.
The goals we want to contribute towards in the MEV space are two-fold. On one hand, we aim to make visible and help minimize extraction of value from users through e.g. front-running, sandwiching, and other exploitative practices. On the other hand, we strive to redistribute revenues from non-exploitative MEV that comes into existence from market inefficiency to our delegators that contribute security to the underlying network.
The rest of this article lays out the core pillars of our approach to MEV providing examples of our existing and planned engagements in the area.
What is MEV and how does it impact networks and their users?
Before deciding how we should engage with MEV, we seek to understand what we are dealing with. We are proponents of the open-source crypto ethos and don’t want to keep the information we are gathering to ourselves, but rather share it with the wider ecosystem. Thus, the first pillar of our MEV policy is Transparency. We are actively researching, building dashboards, and publishing other materials to create a shared understanding and to help lighten up the “dark forest” that is MEV.
Our exemplary work in the MEV Transparency domain: Dune Analytics Ethereum MEV dashboard, MEV Extraction Twitter bot, various MEV-related articles (e.g. our series on MEV on Solana).
How can we help to minimize negative externalities of MEV?
As a result of our research effort, we deeply understand MEV in the context of the ecosystems we are a part of. We recognize that MEV can pose negative externalities to users and ultimately the protocols they are trying to utilize. We are actively engaging to help minimize negative externalities in various ways, depending on how deep our engagement in the respective ecosystem is. This can include creating awareness and participating in the dialogue around MEV, research on related problems, as well as supporting and building solutions seeking to minimize exploitative MEV and to decentralize MEV extraction.
Our work in the Network Sustainability domain: operating and participating in public discourse and communities of block building solutions such as Flashbots, investments in projects seeking to minimize front-running (including e.g. Anoma and Osmosis). We have additional projects in this domain in the pipeline and are looking into operating infrastructure to help decentralize block building and relayer infrastructure.
How can we optimize and distribute MEV rewards to our delegators?
It would be hypocritical to say we are in this for the good of it only. There are clear incentives associated with engaging in MEV. Practically speaking, we are looking to optimize the return we can achieve through MEV and pass it through to our delegators creating a differentiated service while helping to improve network usability, security, and ultimately sustainability via the first two of our MEV pillars (see also Phil Daian’s early post “MEV wat do?” on this topic).
For institutional clients that want to offer staking to their users, we are happy to assist in navigating the space and finding the optimal solutions as part of our white label staking services.
If you are building in the MEV space, are trying to understand how MEV will affect your protocol, or are interested to work with us on research topics, feel free to reach out to us through the appropriate channels:
Research: research@chorus.one
Ventures: ventures@chorus.one
Sales: sales@chorus.one
The Ethereum Merge is one of the most anticipated events in crypto history.
The transition, meant to take Ethereum from its current Proof-of-Work consensus mechanism to a Proof-of-Stake model, has been in the works since Ethereum’s inception. However, it took its first step in December 2020, when the Beacon Chain was successfully launched. And now, with the consensus mechanism running unimpeded for a year and a half and over 13 million staked ETH, developers feel confident enough to move to the second step. This requires joining the consensus layer of the Beacon Chain with the execution state of the main Ethereum chain, the process known as “the Merge”.
This new era to the Ethereum protocol brings better security, greater energy efficiency, and sets the stage for future scaling efforts meant to take Ethereum to the moon.
Chorus One has been closely following the development efforts to bring Proof-of-Stake Ethereum to reality. As a trusted staking provider in the ecosystem, we are participating in testing the Merge at this critical point with our Prater/Goerli nodes ready for transition. We are particularly aware of the risks associated with such a significant change of operations in a blockchain that has captured a major part of the economic activity in the crypto ecosystem. For that reason, our goal remains to support decentralised networks to promote the security and availability of our services, and to increase the rewards of our clients under such a standard.
As we think of the future for both our operations in the Ethereum ecosystem and the existential threats that can compromise the integrity and stability of the network, we have devoted a lot of effort into understanding MEV and clarifying our position towards it.
On our path to support a more decentralised, democratic and fair distribution of MEV rewards for our stakers, we would like to announce our support for MEV-Boost.
Although MEV continues to be a controversial and cutting-edge space for research, we believe that this can be an interim solution as we wait for more sophisticated in-protocol upgrades. On a high level, MEV-Boost is an implementation of proposer-builder separation (PBS) built by the Flashbots team for Proof-of-Stake Ethereum. As a free, open-source and neutral software, we believe it embraces the values of the Ethereum community and can be a valuable asset for all validators, big or small.
By participating in the fair extraction of MEV, we believe we are unlocking the real value of the networks we support, as well as increasing the value of staking to promote higher rates of participation, and an increase in the security of the PoS protocol.
As staking providers, running MEV-Boost allows us to maximize the staking rewards of our clients while protecting Ethereum decentralization, with an estimated increase of 60% in the rewards we can share.
Unlike previous Flashbots’ offerings, this software is compatible with all client implementations of the Ethereum protocol, making it a big step towards further client diversity, a topic that has been the subject of research at Chorus One in the past year.
Finally, we are committed to evaluate and continue to monitor different approaches to our MEV implementations, and to the risks of single-relay and single-block producers, working with different teams to find the most balanced system. Fair MEV extraction continues to be something we iterate on going forward.
In the coming days we will be getting ready to test MEV-Boost on our Goerli infrastructure to best prepare in time for the mainnet Merge. We have been working closely with Flashbots and collaborating with other node operators to ensure that the product is ready and tested by the time it goes live.
MEV is an inevitable part of participating, not only on blockchains, but in all ordered economic systems. Our intent is to be responsible participants of Ethereum and beyond, with MEV research spanning Solana and Cosmos, there is more to come. For the time being, follow our node readiness for MEV-Boost here.
Chorus One is one of the largest staking providers globally. We provide node infrastructure and closely work with over 30 Proof-of-Stake networks.
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Telegram: https://t.me/chorusone
Newsletter: https://substack.chorusone.com
YouTube: https://www.youtube.com/c/ChorusOne
The Ethereum Merge is one of the most anticipated events in crypto history.
The transition, meant to take Ethereum from its current Proof-of-Work consensus mechanism to a Proof-of-Stake model, has been in the works since Ethereum’s inception. However, it took its first step in December 2020, when the Beacon Chain was successfully launched. And now, with the consensus mechanism running unimpeded for a year and a half and over 13 million staked ETH, developers feel confident enough to move to the second step. This requires joining the consensus layer of the Beacon Chain with the execution state of the main Ethereum chain, the process known as “the Merge”.
This new era to the Ethereum protocol brings better security, greater energy efficiency, and sets the stage for future scaling efforts meant to take Ethereum to the moon.
Chorus One has been closely following the development efforts to bring Proof-of-Stake Ethereum to reality. As a trusted staking provider in the ecosystem, we are participating in testing the Merge at this critical point with our Prater/Goerli nodes ready for transition. We are particularly aware of the risks associated with such a significant change of operations in a blockchain that has captured a major part of the economic activity in the crypto ecosystem. For that reason, our goal remains to support decentralised networks to promote the security and availability of our services, and to increase the rewards of our clients under such a standard.
As we think of the future for both our operations in the Ethereum ecosystem and the existential threats that can compromise the integrity and stability of the network, we have devoted a lot of effort into understanding MEV and clarifying our position towards it.
On our path to support a more decentralised, democratic and fair distribution of MEV rewards for our stakers, we would like to announce our support for MEV-Boost.
Although MEV continues to be a controversial and cutting-edge space for research, we believe that this can be an interim solution as we wait for more sophisticated in-protocol upgrades. On a high level, MEV-Boost is an implementation of proposer-builder separation (PBS) built by the Flashbots team for Proof-of-Stake Ethereum. As a free, open-source and neutral software, we believe it embraces the values of the Ethereum community and can be a valuable asset for all validators, big or small.
By participating in the fair extraction of MEV, we believe we are unlocking the real value of the networks we support, as well as increasing the value of staking to promote higher rates of participation, and an increase in the security of the PoS protocol.
As staking providers, running MEV-Boost allows us to maximize the staking rewards of our clients while protecting Ethereum decentralization, with an estimated increase of 60% in the rewards we can share.
Unlike previous Flashbots’ offerings, this software is compatible with all client implementations of the Ethereum protocol, making it a big step towards further client diversity, a topic that has been the subject of research at Chorus One in the past year.
Finally, we are committed to evaluate and continue to monitor different approaches to our MEV implementations, and to the risks of single-relay and single-block producers, working with different teams to find the most balanced system. Fair MEV extraction continues to be something we iterate on going forward.
In the coming days we will be getting ready to test MEV-Boost on our Goerli infrastructure to best prepare in time for the mainnet Merge. We have been working closely with Flashbots and collaborating with other node operators to ensure that the product is ready and tested by the time it goes live.
MEV is an inevitable part of participating, not only on blockchains, but in all ordered economic systems. Our intent is to be responsible participants of Ethereum and beyond, with MEV research spanning Solana and Cosmos, there is more to come. For the time being, follow our node readiness for MEV-Boost here.
Chorus One is one of the largest staking providers globally. We provide node infrastructure and closely work with over 30 Proof-of-Stake networks.
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Telegram: https://t.me/chorusone
Newsletter: https://substack.chorusone.com
YouTube: https://www.youtube.com/c/ChorusOne
Maximum Extractable Value (MEV) represents a fundamental concept in cryptoeconomics, highly affecting permissionless blockchains. MEV is the consequence of the design of protocols and brings with it bad and good externalities. Indeed, not all MEV can be considered benign as some represent an invisible tax on the user, e.g. check out one of our previous articles — Solana MEV Outlook. In general, MEV can also be an incentive for consensus instability, see e.g. the time bandit attack. However, considering all types of MEV as bad externalities is wrong. There exist benign forms of MEV that ensure protocol efficiency, and one prominent example is arbitrage. Let’s imagine that some user swaps a huge amount of token A on a specific AMM (huge with respect to the total amount in the pool) and that this transaction creates a $5,000 arbitrage opportunity. All users that swap tokens in the same pool and same direction will see their output lowered with respect to the actual value. Thus, whoever exploits this MEV opportunity will also bring the market back to parity with the true price. This will make the AMM more efficient without harming its users in the process.
On Solana, MEV still represents a dark forest since no one has pointed a flashlight at it. This is because Solana is a much younger blockchain compared to Ethereum, which can be seen in the lack of products like Flashbots. One project that is moving in this direction is Jito Labs, which recently delivered the first MEV Dashboard for Solana representing an explorer aimed at illuminating MEV — see here for an introduction. However, it is not the only one trying to fulfill this duty. Pointing lights on some Solana Decentralized Exchanges (DEXs) in order to illuminate the dark forest is one of the key objectives at Chorus One. MEV is a consequence that will be a crucial factor for the future of PoS networks and we are continually looking for the best way to ride it. You can explore our Solana MEV dashboard here.
It is important to understand that a simple copy of Flashbots may not be good for Solana, since it represents a drastically different network from Ethereum — and Jito seems to be something intrinsically different. In this article, we are going to assess what are the MEV challenges Solana faces. We’ll also review the status of our internal research regarding MEV.
In Section 2, we’ll analyze the current and future status of MEV on Solana, with a detailed analysis of what we found on-chain in Section 2.1.
In Section 3, we’ll discuss some implications of the current MEV strategies and how these can affect the functionality of a PoS network.
MEV has a specific supply chain, which “describes the chain of activity which helps users transform intentions into finalized state transitions in the presence of MEV ”. However, despite this “universal” definition, MEV on Proof of Stake (PoS) networks is drastically different from what it represents on Proof of Work (PoW) networks. This is for several reasons. For sure, the most important difference relies on the possibility of knowing for sure that a validator will propose a block at some point. Further, validators have delegators and can offer to them a portion of the MEV revenue (e.g. lowering the commission) attracting users to delegate with them. This makes MEV on PoS networks a growing business model, which constitutes one of the building blocks for cryptoeconomic incentives. From one side, we have validators who can use MEV revenue to reduce commission rate — even go to negative values — by returning all incomes to the delegators. On the other side, we have incentives for Layer-1 (L1) blockchains to improve network performance. This is because, if the “scaling problem” is solved by the introduction of L2s, the MEV and transaction (txs) fees are also moved away from the main chain, weakening the L1 business model.
This is exactly what blockchains like Ethereum are facing right now, representing one of the great risks over the next few years. See this Twitter thread for a better understanding of the topic.
But, what is the current status of MEV on Solana? Let’s start from the beginning. Solana does not have a public mempool, meaning that some bad externalities of MEV are very difficult to achieve. However, Solana is not free from them since MEV extraction may produce a bad performance of the network, e.g. spam txs, dropped txs, etc. Indeed, some MEV opportunities only exist if searchers run their own validator, inspect txs that come to them, and run an MEV-extraction code on top of it. Having a high stake and getting access to more MEV opportunities is not an easy task. This dramatically reduces the likelihood of being highly profitable, as the distribution of MEV revenues averages around zero, with a tail towards higher values — see Fig. 2.2.
Note that this is obtained in a specific time window, so it is only representative of the shape of the actual distribution.
Since txs fees on Solana are low and MEV opportunities can bring validators more profit, validators are incentivized to auction off their block space to searchers, or at least some rumors are pointing towards this possibility.
Further, on Solana, fees are currently fixed and cheap, meaning that if there is high competition in a specific market, users face the risk of not getting transactions executed. Since a gas-fee auction is still missing, currently MEV searchers spam transactions to the leader (and following validators in the leader schedule) in the hopes of “winning the battle”.
Lastly, on Solana, MEV competition may incentivize validators to perform denial of service (DoS) attacks on other validators in order to leave the spotted MEV opportunities just there, sitting on the table where they are until the attacker can extract them.
The current status of MEV indicates how bad the problem of blockspace-waste is, which resulted in degraded performance for normal users. At the time of writing, according to what can be found on Jito’s MEV dashboard, we have 12,072,328 successful arbitrages against the 350,179,786 unsuccessful ones in 6 months (i.e. a 3.3% of success rate). If we also include liquidations, the success rate goes down to roughly 3%. The total extracted “good” MEV is around $33M. Of course, this is only a lower-bound since MEV can be created any time a user interacts with a blockchain, and smart contracts enable a functionally infinite number of potential interactions. Thus, it is computationally infeasible to calculate a blockchain’s total potential MEV by brute force. Further, we have some previous analyses that show how a huge amount was extracted during periods of stressful market conditions, e.g. $13M MEV during Wormhole Incident and $43M Total MEV from Luna/ UST Collapse on Solana.
Future Solana improvements aim to introduce several features, forcing current MEV strategies to change. Introducing these new features represents a two-sided coin for MEV searchers. Indeed, some spamming bots would be forced to shut down since the local fee market will make it unprofitable to massively spam txs. However, improving the network means more and more users are attracted to use it. This has the immediate consequence of also increasing the total amount of MEV, allowing the chain of implications to continue by incentivizing competition around MEV and “inviting” new searchers to step in.
One of the main problems that can worsen an AMM’s functionality is pool congestion. This is because if there are too many txs happening on a specific pool, users may experience a worse trade due to pool unbalancing. This is why arbitraging is a sort of service that normalizes DEXs functionality. But, despite the fact that we know MEV is happening on Solana, where are the greatest opportunities? In other words, what are the DEXs with the highest pool congestion, and who is “solving” it? To answer these questions, we built an MEV dashboard on Dune Analytics. This is because, by looking at the exchanged volume, — using Solscan — you can definitely have an idea of where the congestion is, but nothing is clear when the question is if searchers are solving for it.
Our preliminary research shows that in 10 days (from July 16th to July 26th), the paths with the highest extracted MEV on Solana were live on Orca and Raydium with a lower bound of 20,775 USD extracted, see Fig. 2.5. There were 68 MEV extractors on these cross DEXs during the analyzed period, thus not a great number in terms of competition. Fig. 2.6 shows how the extracted revenues are concentrated among a few searchers. Precisely, 5 different accounts extracted 80.1% of the total MEV.
It is worth mentioning that none of the studied DEX combinations show a uniform distribution in terms of MEV opportunities, according to what we show in Fig. 2.2.
If we extend the analysis by looking at the USDC Token Accounts belonging to the most profitable MEV searchers, we have that 7 accounts were able to extract 95.6% of total extracted MEV, see Fig. 2.7. Two of them, GjT…m2P and G9D…y2m, interact with the same smart contract, which may indicate that these two accounts belong to the same user. Since these accounts are in the top 7 accounts, this means that it is likely that only 6 users were able to extract 95.6% of the total extracted MEV.
By deep diving, we also found two accounts interacting with a smart contract with clear reference to Jito, Jito…HoMA, with a total extracted MEV in 10 days of 3,342.30 USDC (at time of writing), over a total of 158,132 USDC extracted — i.e. 2.1% of the total amount.
We already stated that, on PoS networks, MEV can be seen as a business model since validators can share a portion of the extracted amount with their delegators. However, as shown in Sec. 2.1, this sometimes can constitute a deal that does not truly mean high returns. MEV revenues are strongly correlated with market conditions and DEXs’ usage, meaning that we’re unable to estimate a fixed income to share with delegators. Further, if competition does not grow fast, the promise of sharing revenue with delegators may bring a centralization problem.
To assess this statement, let’s try to formulate a “gedanken-experiment”. Imagine that the volume exchanged by DEXs on Solana grows by a factor 30, and assume that there is only one validator extracting MEV and redistributing the revenues to delegators. The implication of the increased volume is that MEV also increases. Indeed, a factor of 30 means that in 30 days the DEX’s volume on Solana is greater than $30B, and assuming that the 0.04% of it is MEV — as it happens on Ethereum — this means more than $144M yearly. The implication of having only one validator playing this game is that the extracted amount also increases, making the delegation to them an appealing deal. We can just think that a validator with ~2% of the total stake can extract an MEV of ~ $2.9M yearly. Once the delegation starts to concentrate around a single validator — the sole player — again we have a boost in MEV revenues, since the leader schedule is “stake-dependent” on Solana. This is because the revenue per block is not uniformly distributed, so a higher stake means an increased likelihood of capturing a rare juicy opportunity, pushing up the median of the extracted MEV. If there is no competition, this gedanken-experiment has a single outcome: concentration of stake — i.e. centralization.
Risks become higher if one considers that at the moment Solana is one of the fastest blockchains and that future development aims to improve this even further. The high number of processed txs per second could pave the way for prop firms to enter the market, meaning that more SOL can be delegated to a single validator — the winner of the MEV war.
This, without any doubt, points toward the necessity of building competitive validators for what regards MEV extraction. Once Jito delivers its third-party client for Solana that’s been optimized for efficient MEV extraction (plus its bundle), the risk of centralization can be mitigated. However, even with decentralized block building, as Flashbots aims to achieve with MEV-boost, we remain still far from a definitive solution. Indeed, such an environment makes it easier for builders to buy the blockspace of all validators and thereby isolate the centralization to the builder layer, see e.g. here. At the moment a decentralized MEV from top to bottom is a chimera. The first step toward this direction would require open-sourcing the MEV-extracting validator, starting collaboration between many validators, in the true spirit of open source. Indeed, it is worth noting that adopting validator products developed — and belonging — to a single entity reduces the problem of stake concentration, but can decrease the network’s censorship resistance. If block production is centralized to a single entity, that may represent an enormous censorship risk, regardless of how many validators participate.
For example, let’s assume that this entity gets adopted by 50% of the stake. Suppose now that this entity is regulated by a specific government, which demands that all transactions are blocked. Then, at best, users would need to get their transactions into the other blocks, but in the worst case, this entity can refuse to include vote transactions that vote on blocks that contain sanctioned transactions. This is a simple example that shows how some MEV strategy outcomes could pave the way for censorship risks.
Before concluding, it is worth mentioning that other possibilities do exist. One of them is to frame MEV-extraction as a service, where it is the protocol itself that takes the MEV and shares the corresponding revenue with protocol-token stakers, see e.g. recent rumors on Osmosis development. Despite this “method” seeming to be less prone to a centralization risk, it remains unclear if the time needed to extract MEV is enough to guarantee the AMM functionality — remember that poor competition means some opportunities may remain there for a “long” time. The outcome is the difficulty of assessing all the details of how this will affect the future of the chain.
This article aims to collect some thoughts on how framing MEV may affect the future of PoS ecosystems, focussing on some of its “bad” consequences. Despite the fast development around this huge and complex topic, we at Chorus One are continuously researching this topic with an eye to the future: the healthiness of all networks is always our first priority.
If you’re interested in framing the topic and require research/advisory services on MEV, you can contact our Research Team at research@chorus.one
