Thread by @christine_dkim

The MEV supply chain on Ethereum is ripe for disruption because of a lack of robust financial incentives. There are a handful of solutions to the MEV problem being worked on for implementation in 2023.

Let's dive in.🤿

galaxy.com/research/white…

Before I get too deep in the weeds about how MEV is extracted on-chain post-Merge, it's worth revisiting the basics of what MEV is and why it exists in the first place. For this, I recommend reading Part 1 of the @glxyresearch MEV series as a refresher:

galaxy.com/research/white…

@glxyresearch As of February 3 2023, roughly 85% of all Ethereum validators are earning MEV through a neutral third-party software known as MEV-Boost.

H/t: @ChainsightLabs

@glxyresearch @ChainsightLabs Third-party builders and relays are new entities in the MEV landscape of Ethereum made possible because of the advent of MEV-Boost software, as well as the open-sourcing of both builder and relay code by the Flashbots team.

@glxyresearch @ChainsightLabs Diving deeper into the competitive dynamics of builders, several builders like Flashbots also operate their own MEV relays, and this despite there being little to no financial incentives for businesses to run their own relays.

@glxyresearch @ChainsightLabs As background, relays are the off-chain marketplaces where builders participate in a blind auction to sell their blocks to validators. Most operators do not earn a revenue from their relay operations.

H/t: @nero_eth

The costs of operating a relay can differ drastically depending on how performant a relay is. For example, relays that are permissionless, opening themselves up to more builders, and therefore, potentially more profitable MEV blocks, need to protect against DoS and spam.

In addition, performant relays that try to minimize the amount of latency when sending blocks to validators on Ethereum must set up multiple servers that can handle variable load conditions and maintain a high bandwidth network.

Based on the costs of running a performant relay that competes with the Flashbots relay, which is operated at zero cost to users, there does not appear to be strong incentives for relay operators to build and maintain performant relays over the long-run.

Competition between relays, much like the competition between builders (which are themselves searchers to an extent), may decline over time and result in centralization.

Ethereum core developers and the Flashbots team view relay censorship as a short-term issue because, even if relay diversification does not improve, there is a plan to remove relays entirely from the MEV supply chain through enshrined PBS.

Only the roadmap to implementing enshrined PBS on Ethereum remains unclear. One of the core challenges of PBS is designing a way to facilitate block auctions in a decentralized way.

H/t: @bertcmiller for the above insight.

In contrast to enshrined PBS, Ethereum developers are considering another possible framework for enabling block auctions in-protocol called protocol-enforced proposer commitments (PEPC).

ethresear.ch/t/unbundling-p…

@bertcmiller In addition there are alternative network-level solutions like the shutterized beacon chain concept that is being spearheaded by the Gnosis team and may see an early implementation on the Gnosis Chain later this year.

H/t: @koeppelmann for the insight🙌

ethresear.ch/t/shutterized-…

@bertcmiller @koeppelmann Outside of relay censorship, there is a concern that block building will become centralized to a few specialized entities.

@bertcmiller @koeppelmann There is ongoing research on how to redesign the core responsibilities of a builder such that multiple builders collaborate to create a single block. Flashbots is actively working on a solution to decentralize the role of block builders through collaborative block building.

@bertcmiller @koeppelmann But today the technical details around how their solution, SUAVE, will work are scant and still actively being researched.

(Head to the Flashbots discussion forums if you want to get involved with that research!)

collective.flashbots.net/t/suave-econom…

@bertcmiller @koeppelmann Closely intertwined with the research highlighted above on mitigating relay and builder centralization, developers are monitoring and discussing solutions for several other areas of MEV such as:
- programmable privacy
- user MEV kickbacks
- cross chain MEV

@bertcmiller @koeppelmann MEV-Boost has enabled the early beginnings of a more decentralized MEV supply chain, where several different entities can participate as a searcher, builder, validator, or relay.

@bertcmiller @koeppelmann However, due to the lack of robust incentives to encourage competition among searchers, builders, and relays, there is a concern that the MEV supply chain becomes dominated by a few knowledgeable stakeholders over the long-term.

@bertcmiller @koeppelmann While Flashbots is spearheading a large portion of the work towards solving the negative externalities of MEV on Ethereum, the open sourcing of MEV infrastructure since the Merge is envisioned to diversify the number of stakeholders involved in solving these issues.

@bertcmiller @koeppelmann For more details about MEV-Boost and the MEV landscape on Ethereum, be sure to check out my latest report on galaxy.com: galaxy.com/research/white…

@bertcmiller @koeppelmann Special thanks to the many wonderful people in the Ethereum ecosystem that helped me with my research for this report, some who are already tagged in this thread, and others like @EigenPhi @bloXrouteLabs @sreeramkannan! 🌟