Flashbots Poised to Offer MEV to Ordinary Investors

On Wednesday, Flashbots, the leading research team exploring Maximal Extractable Value, outlined a protocol that would let ordinary investors earn a share of the profits generated by the arbitrage bots that quietly reorder blockchain transactions.

Flashbots’ Bert Miller published a draft design for the proposed protocol, called MEV-share, to the team’s discussion forum. The protocol comprises “a permissionless and private matchmaking protocol” connecting users and MEV bot operators (otherwise known as “searchers”).

Aribtrage Techniques

The proposal comes even as U.S. regulators crackdown on all manner of crypto protocols in a push to bring them into the governance regime that’s long ruled the capital markets. Gary Gensler, the chair of the U.S. Securities and Exchange Commission, has said repeatedly that he wants to safeguard retail investors from the pitfalls of cryptocurrency trading.

In any event, the proposed protocol would allow searchers to compete for transactions through an auction process.

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MEV refers to arbitrage techniques used by validators to extract profits by reordering or front-running on-chain transactions. Ethereum users lost more than $655M to MEV searchers in the 24 months ending last September, according to Flashbots.
Miller said individual wallets and dApps may receive a share of the MEV created by their transactions using the protocol. Searchers may also benefit from the opportunity to extract MEV from transactions they otherwise would not be able to access.

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“MEV-Share is designed to hand power back to users – they choose exactly what transaction data to hide and reveal through programmable privacy,” Miller said.

Flashbots will act as “matchmaker” for transactions executed through MEV-Search. The matchmaker will privately simulate users’ transactions for MEV opportunities. It then submits transactions to block builders on the condition that an MEV payment is made to the wallet that executed the transaction.

On the forum, Hasu, a Flashbots researcher, said Flashbots aims to decentralize the role of matchmaker over time.

Stakers

Flashbots launched in December 2020 to develop software designed to illuminate and democratize the extraction of MEV.

Flashbots launched its MEV-Boost software last year ahead of The Merge last September. MEV-Boost allows validators to enjoy a share of the profits generated through MEV, with stakers using the software earning more than double those who do not.

More than 90% of Ethereum blocks were produced by validators currently using MEV-Boost in the last 24 hours, according to MEVWatch.

The U.S. Treasury Department’s sanction of Tornado Cash last August sent shockwaves through the crypto sector, with U.S.-based teams forced to block wallets associated with the crypto mixing service.

Flashbots confirmed that MEV-Boost complies with the sanctions shortly after, open-sourcing the code for its relayer, allowing users to develop code that does not block the sanctioned addresses.

Concerns

Despite Flashbots open-sourcing the code, the number of blocks produced by validators complying with the sanctions soared to a high of 79% on Nov. 21, igniting concerns regarding the susceptibility of Ethereum’s validators to government regulations.

However, the share of Ethereum blocks complying with U.S. sanctions has fallen sharply since, with half of the blocks generated in the past 24 hours accepting transactions from all wallets, and 51% in the last seven days.

Share of Ethereum blocks complying with U.S. Treasury Department Sanctions. Source: MEVWatch