Ethereum co-founder Vitalik Buterin recently presented a novel solution to address the issue of Miner Extracted Value (MEV) on the Ethereum network. MEV refers to the practice where block producers maximize their profits by strategically arranging transactions within a block using complex market strategies. Buterin provided an example to illustrate this concept: by employing MEV strategies, the person who successfully adds the next block could manipulate the transactions within the block in such a way that Ether (ETH) purchased at a discount from a decentralized exchange is sold at a higher price on centralized exchanges.
While MEV can be profitable for validators, it also leads to network congestion, increased gas fees, and trading slippage on the Ethereum blockchain. Essentially, it functions as an invisible tax affecting those conducting transactions on the network. Furthermore, MEV has the potential to undermine trust in the network and the consensus mechanism. If network participants observe validators compromising the network’s integrity to maximize profits, they may gradually abandon Ethereum and seek alternative networks without the hidden MEV tax.
Geth core developer Péter Szilágyi criticized this asset arbitrage strategy, arguing that the Ethereum network was inadvertently encouraging such practices rather than actively discouraging them. Buterin took note of this criticism and proposed several solutions to address the issue.
Buterin explained that the traditional approach to tackling MEV involves a combination of MEV quarantine and MEV minimization techniques. MEV minimization entails creating alternative solutions to exchanges like Uniswap and implementing protocol-level controls to reduce the amount of information accessible to MEV developers. While effective, these minimization techniques are complex and costly to implement.
Quarantining, on the other hand, involves separating the validation process from the block’s contents by outsourcing the decision of transaction arrangement to designated builders. This concept, known as proposal/builder separation (PBS), can be successful but carries the risk of increased centralization, as the designated builders have the authority to exclude transactions arbitrarily.
To address this concern, Buterin proposed the use of inclusion lists as a means to prevent builders from excluding transactions. Inclusion lists grant builders the privilege of arranging transactions, but they must include all submitted transactions in each block proposal.
Ultimately, Buterin concluded that resolving the MEV problem will require utilizing minimization and quarantine techniques, implementing inclusion lists, and reducing the requirements to run a node. This approach aims to ensure that Ethereum remains as decentralized and democratic as possible.