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
We’re very excited to announce that Chorus One is now live on the KYVE Network mainnet.
Kyve aims to revolutionize customized access to on- and off-chain data by providing fast and easy tooling for decentralized data validation, immutability, and retrieval. With these tools, developers, data engineers, and others can easily and reliably access the trustless data they need in order to continue building the future of Web3.
It is a PoS blockchain built with the Cosmos SDK. It has two layers: the Chain Layer and the Protocol Layer, each with its own node infrastructure.
The protocol layer nodes are responsible for collecting data from a data source, bundling and uploading it to any decentralized storage solution, and then validating it, keeping track of which data is truly valid for its users to tap into. This enables KYVE to store any data permanently and in a decentralized manner, creating a Web3 data lake.
Via KYVE, developers first input the desired endpoint from which they would like to fetch data and then fund a pool with $KYVE. Node runners wanting to participate in the protocol will be the ones fetching, bundling, storing, and validating the data to earn $KYVE rewards.
Data pipeline is another way of using KYVE. Through a non-code solution, KYVE data can be imported into any data source supported by Airbyte within just a few clicks. Since KYVE fetches raw data, it allows you to transform it to best fit your use case.
John Letey, Kyve’s co-founder & CTO, joined our podcast and told everything you need to know about Kyve, including some fun facts: John wrote his first program in C++ when he was only 8 years old.
At genesis, inflation was disabled. A governance proposal is currently being voted on to activate inflation with default parameters that were calculated considering the staking ratio at genesis. The goal is to reach an APY of 20%, a reference value influenced by other Cosmos networks.
The project is backed by multiple relevant foundations such as Near, Solana, and Avalanche, to name a few.
To know more about staking $KYVE with Chorus One, click here
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
Withdrawals are imminent. This March, Ethereum will be undergoing its first hard fork of the year, bringing much anticipated withdrawals to the mainnet. As developers move into the final pre-launch sequence, by upgrading the public testnets (first Sepolia, then Goerli), we wanted to get you up to speed on this coming Shapella (Shanghai + Capella) upgrade.
If you look at Ethereum’s Beacon Chain today, the way to participate as a validator means you must send at least 32 ETH to the Deposit Contract, or “stake” your ETH. The Beacon Chain follows the contract, querying for changes so that it can process any new deposits. The entire validator lifecycle consists of different states that determine what you can or can’t do as part of the network.
Ethereum only allows a small number of validators to start or stop validating at a time to maintain the stability of the validator set. Once you are part of the “Active” set, you start accruing rewards by voting (”attesting”) every six minutes with the occasional proposal. The majority of these rewards are added to the balance of the validator.
At any point, you might want to stop validating and take out your ETH, in which case you would want to join the voluntary exit queue. On the other hand, you might have been a validator for some time and want to utilize the excess ETH, considering the average validator balance is ~34 ETH.
Withdrawals close the validator cycle and mark the end of the PoS transition that started with the Merge in September 2022. Before then, the two chains were unaware of each other. Specifically, the Execution Layer didn’t communicate at all with the Beacon Chain until they merged. Withdrawals stand opposite to the deposit process, crediting your ETH from the Beacon Chain on the Execution Layer to finally close the cycle.
There are 2 requirements for withdrawals to be processed:
For every block, the network scans the validator set for the first 16 validators that satisfy those two requirements. Then, those withdrawals get processed as part of the block in a gasless transaction.
According to the most recent estimate, ~300,000 validators are on the old credentials, meaning the majority of validators will need to change them (it involves digging for those mnemonics created over 2 years ago). This change can only be done once.
Chorus One developed a tool called “eth-staking-smith” that enables the user to generate those signed messages and easily update their withdrawal address.
The process after that is fully automatic. Meaning, you don’t have to do anything else to start spending those rewards, they will be credited to the withdrawal address without your intervention. If all of those validators properly change their credentials, a complete run through the active validator set would take about 4 and a half days. Meaning, you can expect to receive your rewards to the withdrawal address in that cadence.
Please check the official ETH Withdrawals FAQ to learn more about withdrawal mechanics and enabling withdrawals for your validator.
We have previously elaborated on why staking is the most attractive risk-adjusted source of yield in crypto. We believe in its force to provide value at the base level to stakers, deliver competitive results and guarantee that networks such as Ethereum continue to operate as the backbone of a decentralized financial system.
However, the inability to withdraw staked assets on Ethereum has been a risk consideration that stakers had to make before committing to the task for the past years. Not anymore. This massive unlocking of liquidity is sure to make big waves in the coming months and impact the staking panorama of Ethereum. Staking has also made the news with the recent news of regulations in the United States. As a non-custodial staking provider, we continue to believe in this thesis.
With an increasing number of ETH being staked post-Merge, along with growing adoption of the Ethereum network and a rising ETH price, we believe that 2023 will be an even stronger year for Ethereum staking post-Shanghai. However, we must get ready for some changes.
We made our bet on the Ethereum staking ecosystem last year, when we finally unveiled OPUS: our API and Portal solution to significantly speed up institutional staking operations.
Since then, we have been working on many exciting features, including enabling MEV rewards, with more in the pipeline to be rolled out in the coming months. We plan to support withdrawals in our infrastructure as soon as it's safe after the upgrade, and we are working to create the simplest staking and unstaking process in the market for all kinds of institutional clients.
We have been testing this process and will continue to do so on the available testnets for increased security. We also provide a suite of options including the mentioned update of validator withdrawals addresses and a full Portal to consult all rewards accumulated.
Reach out to sales@chorus.one to know more about how OPUS can help you start staking or offer staking to your customers with minimal setup.
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
Cryptocurrencies can be used in three kinds of yield-bearing activity. These have cumulative trust assumptions -
We believe staking yield is the most attractive risk-adjusted source of yield in crypto for two reasons:
Proof-of-stake ecosystems do not have an anchor in the real world. This means that the staking yield rate denoted in native terms is completely decoupled from any kind of factor in the wider economy. For staking, endogenous capital (e.g. ETH) is the only factor of production.
This is a difference to proof-of-work (PoW) systems, where electricity and hardware costs serve as an unbridgeable anchor to the real economy, directly affecting a miner’s yield rate. It is also different from most CeFi and DeFi yield sources, which depend more heavily on user activity.
The above implies that staking can be an uncorrelated yield source for two kinds of investors — those that are bullish long-term and denominate their holdings in native units, and those that are hedged against the price risk of the staked asset.
The token price risk may be hedged out through on- or off-chain solutions. The former case has the advantage of transparency, reflected in an improved counterparty risk assessment and iron-clad terms. With some of the largest lending desks in the space embroiled in a liquidity crisis, this is a significant factor. Validators are ideally positioned to execute on-chain hedging, as they directly interface with the staking yield source and thus no custody transfer, i.e. additional risk, is required to interface with a hedging solution.
One increasingly popular on-chain hedging solution is a “staking yield interest rate swap”. This allows validators to swap token-denominated staking yield for a stablecoin, typically USDC, locking in a stable and predictable income for a staking client. The associated risk is very minor as neither the validator nor the swap counterparty takes custody of the principal — the worst case, a counterparty default, would reduce to the price risk on the yield earned on the staked notional. Chorus One can leverage Alkimiya, the leading protocol for on-chain capital markets, to execute this type of hedge.
A second way to hedge is by using the staking yield to finance classic options-based strategies. For example, a zero-cost collar options package may incorporate the staking yield in a way that enables an asymmetric pay-off.
Chorus One is invested in & advises a range of solutions optimizing staking yield for return (i.e. MEV) and risk (i.e. hedging). Reach out to us at sales@chorus.one to learn more about how these can be tailored to fit your use case.
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
