The Evolution of the MEV Landscape One Year After the ETH Merge

In the year following the ETH merge, the market share of MEV-Boost has stabilized at around 90%. Currently, the complexity of MEV has become very high, with non-user roles including Searcher, Builder, Relayer, Validator, and Proposer, among others. They engage in complex games within a 12-second block time to pursue their maximum interests.

This article will compare the changes in profit margins before and after MEV, outline the lifecycle of MEV after the merge, and share some personal insights on cutting-edge issues.

1. MEV profits dropped significantly after the merge.

• The average profit one year before the merge was 22MU/M
• One year after the merge, the average profit is 8.3 MU/M

After excluding hacker events that should not be attributed to MEV, the overall yield has significantly decreased to 62%.

It is important to note that due to differences in statistical methods across platforms, this can only serve as a macro verification and is not absolutely precise. Whether the merge has caused a drastic drop in on-chain MEV profits needs to be analyzed from the MEV processes before and after the merge.

2. Traditional MEV Model

MEV is not solely extracted by miners. Currently, on Ethereum, MEV is mainly captured by DeFi traders through various structural arbitrage trading strategies, with miners merely benefiting indirectly from the transaction fees of these traders.

There are smart hackers on the chain continuously digging for contract vulnerabilities, but they face the dilemma of how to profit from the vulnerabilities without being outpaced. Once a transaction signature enters the Ethereum memory pool, it will be publicly disseminated, and within a few seconds, it may be targeted by countless hunters who will simulate and deduce it again.

The competition in the dark forest goes far beyond this. During the testing of certain blockchain nodes, it was found that a large number of free nodes only accept P2P connections but do not actively transmit TxPool data. These nodes even surrounded the main core block-producing nodes, enhancing the MEV profit margin by controlling the flow of information.

In addition to super nodes, there is a similar competitive landscape around exchange servers. Overall, while there are many hidden competitions in traditional trading, the profit model is relatively clear. After the ETH merge, the complex system architecture quickly disrupted the traditional MEV model, and the head effect became increasingly apparent.

3. MEV Model After the Merge

The ETH merge refers to its consensus mechanism changing from PoW to PoS. This has had a significant impact on MEV:

1. The block interval has become stable, fixed at 12 seconds. This allows the Searcher to accumulate better transaction sequences, but it also intensifies competition.

2. The reduction in validator rewards encourages them to be more willing to accept MEV transaction auctions, leading to MEV reaching a market share of 90% in the short term.

3.1 The Lifecycle of Transactions After the Merge

The merge involves roles such as Searcher, Builder, Relay, Proposer, and Validator, achieving the separation of block production responsibilities and ordering.

The lifecycle of each block is as follows:

1. The Builder receives transactions from various sources and creates blocks.
2. The Builder submits the block to the Relay.
3. Relay verifies the validity of the block and calculates the amount to be paid to the Proposer.
4. Relay sends the transaction sequence package and bid to the Proposer of the current slot.
5. Proposer evaluates all bids and selects the sequence package with the highest yield.
6. The Proposer will send the signed block header back to the Relay.
7. After the block is published, rewards are distributed to the Builder and Proposer through transaction and block rewards.

4. Summary

4.1 The Impact of the Merge on the MEV Ecosystem

The rise of MEV-Boost has reshaped the transaction lifecycle model, splitting it into more refined segments that create competition among participants. Searchers and Builders are in a state of intense internal competition, ultimately leading to order flow supremacy.

Although MEV is not a problem that the ETH merge aims to solve, the enhancement of system game theory combined with various factors ultimately leads to a decrease in the total profit margin of MEV. This is good for users, as the reduction in profits will diminish some of the motivations for on-chain transaction attacks.

4.2 Frontiers of MEV Exploration

• Privacy trading: threshold encryption, delayed encryption, SGX encryption, etc.
• Fair Trading: Fair Sort FSS, Order Flow Auction MEV Auction, MEV-Share, etc.
• Protocol-level improvement of PBS

4.3 Resistance of Ethereum to OFAC Scrutiny

As long as there are relays that comply with local policies, transactions can be ensured to be propagated on-chain at certain times. Even if over 90% of validators review transactions through MEV, censorship-resistant transactions can still be on-chain within an hour.

4.4 Sustainability of the Relay

Relays lacking incentives face sustainability issues, which may lead to strong centralization. In the future, profits may be obtained through MEV-share and MEV Auction, for example, by directly receiving users' privacy transaction requests.

4.5 The Impact of ERC4337 on MEV

The complex mechanism of ERC-4337 will increase MEV difficulty in the short term, but will not hinder the development of MEV in the long term.

4.6 DeFi vs CeFi

DeFi and CeFi each have their advantages and target different audience groups, and will develop individually.

Current Status of MEV in Layer-2

L2s like Optimism and Arbitrum have adopted different approaches to reduce miner MEV, but sidechains that do not interoperate with the Ethereum mainnet still present MEV opportunities.