TL;DR

• MEV (Maximal Extractable Value): Profit earned by manipulating transaction order within a block (inclusion, exclusion, or rearrangement).
• MEV-Smoothing: Restricts the proposer’s discretionary power in PBS (Proposer-Builder Separation) by enforcing fair distribution rules.
• MEV-smoothing mandates validators to choose the block offering the highest MEV, compelling proposers to accept the top bid from builders.
• It redistributes MEV earnings equally among all validators in a slot, rather than concentrating rewards solely on the proposer.

MEV Pursuit Impacts the Transaction Sequencing Ability of Blockchain Systems

To understand MEV-smoothing, it’s essential to first grasp how MEV operates in blockchains:

Source: Bankless, MEV Supply Chain

Key Players in the MEV Ecosystem

• Builders: Construct blocks to maximize MEV for themselves and proposers.
• Proposers/Validators: Ethereum’s proof-of-stake validators adopt the best block built by builders and add it to the blockchain.
• Relays: Trusted intermediaries connecting proposers and builders, coordinating block production while safeguarding MEV integrity.
• Searchers: Utilize advanced algorithms to find and exploit profit opportunities.

Note: Relays are trusted third parties that act as intermediaries, facilitating fair exchange of block space from proposers and transaction sequencing for MEV extraction from builders. Relays protect builders from MEV theft while ensuring proposers validate the integrity of builder-created blocks. They process hundreds of blocks per slot on behalf of proposers and guarantee accurate payments to proposers.

In Ethereum’s PoS model, when MEV operates, the typical transaction sequence is as follows:

1. Users create transactions via dApps and wallets, which are then sent to the Mempool.
2. Searchers run arbitrage bots and package profitable transactions.
3. Transaction bundles are sent to block builders, and builders bid on the transaction bundles and construct blocks.
4. Builders submit the blocks to relays.
5. Relays verify the validity of the blocks and calculate the payment amount for proposers.
6. Relays send a “blinded” block header and payment value to the current slot’s proposer.
7. The proposer evaluates all bids received and signs the blinded header associated with the highest payment.

Returning to the essence of MEV, it works by manipulating transactions through inclusion, exclusion, and resequencing within a block to extract maximum profit. MEV affects transaction sequencing in blockchain systems, determining which transactions enter the mempool, which are included in a block, and ultimately which transactions are confirmed on-chain. This impacts transaction costs, execution outcomes, and the distribution of rewards among participants.

Source: cryptofrens, PATRICK MCCORRY

The fairness of MEV revolves around how the execution order of transactions on the blockchain is determined to ensure all participants have an equitable opportunity to transact. This involves addressing several key questions:

1. Uniform Fees and First-Come-First-Served Principle: Should all users pay the same fees and have their transactions sequenced strictly based on their arrival time? This approach ensures equal participation opportunities for all users but may fail to accommodate the urgency of specific transactions for certain users.
2. Priority and Fee-Based Ordering: Alternatively, should transactions be prioritized and sequenced based on their fees? This allows users willing to pay higher fees to have their transactions processed first, but it may lead to wealthier users or larger transactions gaining undue advantage in securing priority.

The premise of fairness here is that as long as users pay sufficient fees, their transactions can be executed. However, this does not guarantee their transactions will always appear at the top of the order or in a specific position.

The anti-censorship foundation of blockchain networks is built upon the concept of fairness. The ability to transact on the network should depend on a participant’s willingness to pay, without discrimination based on factors such as geographic location, identity, gender, or belief system, nor should it be influenced by external regulatory bodies like the Office of Foreign Assets Control (OFAC).

Source: MEVwatch

As of June 7, nearly 80% of validators complied with OFAC relay censorship at its peak. This number has since dropped to only 37%, meaning that, in theory, every transaction routed through these relays would be subject to OFAC scrutiny.

In blockchain systems, decentralization and censorship resistance are core principles. To build a censorship-resistant system, a robust strategy is required to prevent participants from selectively interfering with user transactions. This involves limiting the discretion of Proposers and Builders in transaction sequencing. While the crList mechanism empowers Proposers to resist censorship by ensuring that Builders include certain transactions, what happens if a Proposer retaliates against Builders, demanding they exclude specific transactions or even collude with them to achieve this goal?

This is where MEV-smoothing comes into play, addressing the issue of Proposer collusion and centralization around high-value blocks to strengthen censorship resistance.

Source: MEV, Four Pillars

MEV-smoothing, first proposed by fradamt, was designed to distribute MEV rewards equally among all Validators participating in a given slot, rather than allowing Proposers to monopolize these rewards. This means Proposers would earn the same as any single committee member, aiming for uniform reward allocation across Validators.

MEV-smoothing: Preventing Proposer Collusion Around High-Value Blocks

MEV-smoothing seeks to reduce disparities in MEV earnings among Validators, thereby preventing Proposers in a PoS system from colluding over high-value blocks. This mechanism enhances censorship resistance and ensures that rewards are proportional to Proposers’ stakes. By promoting fairness, transparency, and stability, MEV-smoothing protects the interests of all participants in the blockchain ecosystem.

Committee-Driven MEV-Smoothing

Before MEV-Smoothing: The relationship between annualized MEV (x-axis) and the number of Validators (y-axis) shows a long-tail distribution.

After MEV-Smoothing: The same relationship reveals a more uniform distribution of profits, highlighting the effectiveness of MEV-smoothing in promoting equity.

Source：notes.ethereum.org

Before implementing MEV-smoothing, the distribution of MEV profits followed a long-tail distribution, where a small number of entities controlled the majority of the resources, while the majority of entities had only a small share. In this scenario, only a few Validators might capture most of the MEV profits, while most would only receive a small portion, and some Validators might not even cover their costs. After applying MEV-smoothing, the distribution of MEV profits became more even. The differences in MEV earnings among Validators decreased, and the reward distribution became fairer.

Validators Must Ensure Proposers Select the Most Profitable Block When Voting

Under MEV-smoothing, Validators must ensure that Proposers choose the most profitable block when voting. This mechanism involves committees to prevent Proposers from privately monopolizing MEV. By assigning Validators to each slot (with each epoch comprising 32 slots, and each slot divided into 64 committees), the mechanism limits Proposer discretion in PBS (Proposer-Builder Separation) by effectively stripping Proposers of their unilateral control.

When voting, Validators are tasked not only with verifying the legality and timeliness of proposed blocks but also with adhering to a new rule: they must vote for the block that yields the highest MEV profits. If a Proposer selects a block with lower MEV profits, it risks rejection due to insufficient votes and forfeits its rewards. This prevents Proposers from prioritizing personal gains at the expense of Validators and ensures a more equitable distribution of benefits.

Source: MEV-smoothing, NIC Lin: Validators vote when they see Proposers select the highest-bidding block.

Source: MEV-smoothing, NIC Lin: Validators refuse to vote when they see Proposers fail to select the highest-bidding block.

MEV-Smoothing Method and Validation Process

In the PBS (Proposer-Builder Separation) world, Proposers are incentivized to accept the Builder’s highest bid because the priority fee represents additional income for them. However, in MEV-smoothing, this incentive is removed since Proposers receive a share of the bids from all participating Validators. Validators must focus on the block construction market, particularly the fees attached to blocks, and only attest to blocks with the highest bid submitted by the Proposer. The goal of MEV-smoothing is to create an efficient market by equalizing MEV profits across all Proposers, thereby eliminating their ability to prioritize specific transactions.

In PBS, Proposers act based on a base fee + priority fee model, favoring the highest bidder and potentially risking censorship. However, under MEV-smoothing, the system ensures that everyone’s profits remain relatively balanced. Proposers must prioritize the highest payment within safe bounds, as taking risks could result in receiving nothing.

Validation Process

Add a condition as part of the attestation that requires the block being proposed to make a payment (p) that is ≥ p_i (the maximal payment; i.e. this block is the highest paying block to the validators and that’s the one being chosen). We’d need a majority of the published attestations for the newly proposed block to become the canonical head of the chain. If they are outnumbered by attestations to the previous head of the chain, the slot should be skipped.

MEV-Smoothing: High Attack Costs, Low Rewards

There is certainly a possibility that a Proposer could accept a bribe to submit a suboptimal block and privately receive out-of-band bribes to cover up their actions. However, since MEV Smoothing only selects the highest-paying block, the opportunity for out-of-band bribes is somewhat reduced.

An out-of-band bribe refers to a bribe given through unofficial channels, typically as part of a private arrangement rather than through legitimate means.

Because MEV-smoothing imposes high attack costs while offering minimal rewards, it assumes that most Validators act honestly. If a majority of Validators were malicious, they could intentionally refuse to vote for a Proposer’s block and then attempt to capture the MEV within it. However, this MEV would still need to be shared among the other Validators, making such behavior unlikely. After all, not everyone is willing to engage in fruitless efforts for little gain.

Summary

Both MEV and MEV-smoothing play crucial roles in blockchain systems. MEV allows participants to extract more profit by decoupling the inclusion and sequecing of transactions. However, the changes in transaction order enabled by MEV can create arbitrage opportunities, leading to unequal profits, which might raise concerns about fairness and the potential impact on certain groups. Whether this is a threat to fairness is open to interpretation.

Given these concerns, MEV-smoothing was introduced to address the imbalance in profits between traders. In the MEV-smoothing mechanism, the MEV of a block is evenly distributed among the committee members and proposers. This means that MEV-smoothing not only reduces the MEV profit disparity among validators and prevents proposers from colluding or concentrating around high-value blocks but also introduces new rules requiring validators to vote for the block with the highest MEV profit. This mechanism helps prevent proposers from choosing lower-profit blocks for personal gain.

However, MEV-smoothing is not a perfect solution and can still be vulnerable to attacks. For instance, proposers might accept bribes to choose a lower-profit block and secretly receive out-of-band bribes to conceal their actions. However, because MEV-smoothing has high attack costs and low rewards, we assume that most validators act honestly. Even if an attack is possible, it would be a bad trade, as the risk outweighs the potential rewards.

In the next article, we will explore how the Mempool in the crypto space helps prevent both proposers and builders from colluding, thereby achieving censorship resistance.

Reference

https://ethresear.ch/t/committee-driven-mev-smoothing/10408

https://www.ethereum.cn/Eth2/committee-driven-mev-smoothing

https://members.delphidigital.io/reports/the-hitchhikers-guide-to-ethereum

https://notes.ethereum.org/cA3EzpNvRBStk1JFLzW8qg

https://foresightnews.pro/article/detail/35540

https://medium.com/taipei-ethereum-meetup/mev-pbs-patches-6a66852a7265

https://ethresear.ch/t/block-builder-centralization/12135

https://www.blocknative.com/blog/mev-smoothing-vs-burning

https://www.jvillella.com/mev-smoothing

https://www.mevwatch.info/

https://www.cryptofrens.info/p/enablement-of-mev-and-the-morhttps://www.bankless.com/mev-eth-burn-ethereum

https://www.bankless.com/mev-eth-burn-ethereum

https://notes.ethereum.org/cA3EzpNvRBStk1JFLzW8qg#Smoothin

Disclaimer:

1. This article is reproduced from [Uncommons], the copyright belongs to the original author [Jocelyn], if you have any objection to the reprint, please contact Gate Learn team, the team will handle it as soon as possible according to relevant procedures.
2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.
3. Other language versions of the article are translated by the Gate Learn team. Unless otherwise stated, the translated article may not be copied, distributed or plagiarized.