Foreword

Flashbots is a research and development organization that aims to mitigate the negative impact of MEV on blockchains, specifically Ethereum. Their main goal is to create a permissionless, transparent, and sustainable ecosystem for MEV through products such as MEV-Boost. Future MEV development should focus on cross-chain MEV capture, minimizing value loss, minimizing potential negative impacts on real users of the protocol, and ensuring fair distribution among participants.

Author

Elma Ruan, a senior investment researcher at WJB, has a dual Master’s degree in marketing/finance from an Ivy League school. He has 5 years of experience in WEB3 and is good at DeFi, NFTs, and other tracks. Before entering the crypto industry, he worked as an investment manager for a large securities firm.

1. Research Highlights

1.1 Core Investment Logic

MEV (Miner Extractable Value) is a part of the underlying infrastructure that is closely tied to transactions within a block. It has a high-income potential, with the increase in income correlating proportionally with the complexity of the transaction scenario, while maintaining a relatively low level of risk. Solving the MEV issue is an important part of Ethereum’s roadmap, which aims to ensure reliable, fair, and trustworthy neutral transactions while solving the MEV issue. Future MEV development could focus on cross-chain MEV extraction, minimizing value loss, minimizing potential negative impacts on real users of the protocol, and ensuring fair distribution among participants.

When discussing MEV, we inevitably come across various strategies like frontrunning, sandwich attacks, and transaction tracking. These strategies may bring unfair results to certain participants in the blockchain ecosystem, harming the interests of ordinary users. Flashbots founders believe that MEV is an important issue in the Ethereum ecosystem, which may lead to unfair transactions and market distortions. Therefore, they created the Flashbots project to provide a trusted, neutral communication channel for the Ethereum ecosystem, facilitating private communication between miners and other participants to solve the MEV problem.

The core infrastructure of Flashbots is the relay, whose role is to collect transaction packets from different participant networks and forward them to miners. Relayers can verify the validity of transactions and prevent malicious transactions.Additionally, relays can also help miners better utilize MEV, thereby increasing their profits.

The matching between users and searchers is achieved through the Flashbots service. Users can selectively reveal their transaction information to Flashbots, and searchers bundle and submit these transactions to block builders to construct entire blocks. This facilitates more efficient arbitrage for searchers. If willing, the arbitrageur can share a portion of the MEV profits with the user, achieving a win-win situation. This mechanism can also provide a healthy bidding process for other arbitrageurs, who can obtain profits by bidding higher prices, avoiding transaction failures and excessive gas fees. In addition, by filtering out failed transactions, it reduces space occupation on-chain, thereby alleviating the congestion problem to some extent and achieving a win-win situation.

Overall, it’s beneficial to all parties involved:

Proposers: By working privately with searchers, proposers can get to the front of the queue and gain more benefits.

Searchers: Using Flashbots, they can avoid wasting resources, save costs, and get more trading information.

Traders: When initiating transactions, they can avoid interference from malicious behaviors and reduce losses caused by incorrect operations.

Flashbots: Get exclusive trading information provided by users and searchers, thereby expanding profit margins.

However, Flashbots is not without disadvantages. First, Flashbots’ relays require substantial computing resources and bandwidth, which can cause performance issues. Secondly, Flashbots needs to be supported by sufficient participants; otherwise it may not be effective. This requires Flashbots to establish partnerships with other participants in the Ethereum ecosystem to ensure that Flashbots can be widely used and supported. Finally, although Flashbots is currently a non-profit organization, transactions still need to be submitted to the centralized Flashbots server, which may have some centralization risks.

Viewing from the context of the industry, the rise of Flashbots is a positive signal. With the continuous evolution of the crypto market, the MEV issue has become increasingly severe. Flashbots’ solution provides the Ethereum ecosystem with a viable solution that can help mitigate the negative impacts of MEV issues. The fair and market-oriented nature of MEV provides predictable benefits to the LSD protocol and Ethereum stakers, promoting the growth of Ethereum staking and the adoption of MEV solutions by the LSD protocol. Meanwhile, the fair and market-oriented nature of MEV have also boosted on-chain activity, improved on-chain user experience, and promoted the adoption of MEV products and the demand for Ethereum staking, forming a virtuous cycle. In addition, the market-oriented MEV protocol can better distribute benefits and promote the growth of the overall Ethereum ecosystem.

In the long term, the MEV track has vast prospects. Although it is still in its infancy, head effects have already begun to appear. Flashbots has built the foundation for MEV’s rapid growth and provide many opportunities for future development.

1.2 Valuation

The Flashbots project has been valued at $1 billion. According to The Block, the Ethereum infrastructure service provider completed a $60 million Series B funding in July 2023.

2. Project Overview

2.1 Features and Products

Flashbots’ products mainly include Flashbots Auction, Flashbots Protect, Flashbots Data, MEV-Boost and MEV-Share. Flashbots Auction is a permissionless, transparent and fair ecosystem designed for efficient MEV extraction and frontrunning protection. Flashbots Protect offers a secure, user-friendly way to trade, preventing malicious transactions and allowing users to share MEV. Flashbots Data provides tools for analyzing Ethereum MEV, stored in the Postgres database. MEV-Boost can improve validator efficiency and promote competition and decentralization in Ethereum. MEV-Share is an open-source protocol for users, wallets, and applications to internalize the MEV that their transactions create.

2.2 Major Events and Roadmap

Future Development

SUAVE (Single Unified Auction for Value Expression) is a project that aims to solve the MEV (Miner Extractable Value) issue by building a decentralized sequencing layer. SUAVE consists of three main components: universal preference environment, optimal execution market, and decentralized block building. SUAVE aims to empower users and maximize the decentralization of public blockchains. It is an independent network that serves as a plug-and-play mempool and decentralized block builder for any blockchain. Flashbots is one of the creators of SUAVE. Flashbots clearly stated, in SUAVE’s whitepaper, that they will continue to improve SUAVE and include SUAVE in important future plans.

• Q2 2021: Release the first version of SUAVE, supporting mainstream public chains such as Ethereum and BSC.
• Q3 2021: Support more public chains, including Polygon, Solana, etc.
• Q4 2021: Support cross-chain MEV solutions, and more MEV extraction strategies.
• 2022: Launch the second version of SUAVE, supporting more MEV extraction strategies and higher throughput.
• 2023: Plans to release SUAVE testnet to start testing its new features
• Future: Further improve the security and decentralization of SUAVE and support more public chain and cross-domain solutions.

In addition, SUAVE’s future plans also include cooperation with other MEV-related projects and organizations to promote the development and decentralization of MEV. They also plan to achieve decentralization through community governance to ensure its long-term sustainability and development.

2.3 Team

2.3.1 Overview

According to data from LinkedIn, Flashbots currently has 28 employees, most of whom have a background of computer science, mathematics, psychology and economics. They possess diverse expertise in various technologies and domains, including but not limited to Python, blockchain, machine learning, and C language. Their expertise enables them to tackle complex technical challenges within the Ethereum ecosystem and actively contribute to the research and development of the Flashbots project.

2.3.2 Founders

Philip Daian, Co-founder

Stephane Gosselin, co-founder of Flashbots, resigned from his position in October 2022 due to disagreements with the team over censorship.

Alex Obadia, a former co-founder and top strategic researcher at Flashbots, left Flashbots on June 20, 2023, due to personal reasons.

2.3.3 Core Members

Andrew Miller

Executive Director of Research, Trusted Execution Environments and SUAVE

Miller is best known for his research on cracking Intel’s SGX code. He is also an Associate Director of the Initiative for Cryptocurrencies and Contracts (IC3). He plans to take a temporary leave from his position as an Assistant Professor at the University of Illinois on Electrical and Computer engineering.

Hasu, Flashbots Strategy Lead

Hasu serves as a Strategic Advisor to Lido, a leading protocol for liquid staking, and a Strategic Lead at Flashbots, a research & development group dedicated to protecting public blockchain users from the harmful effects of MEV. He shared that he divides his time about 90% in Flashbots and 10% in Lido. Besides, he also serves as a Research Collaborator at Paradigm, and used to be a Co-founder of Deribit Insights and a Delegate at MakerDAO. He educates and promotes the industry through writing, social media, and podcasts.

2.4 Funding

Founded in 2020, Flashbots has experienced two funding rounds. Its seed round investment came from Paradigm, with the investment amount not disclosed. In 2023, the company underwent a Series B funding, securing a $60 million, with Paradigm being a significant investor.

3. Business Analysis

3.1 Target Audience

Flashbots’ main service targets the following groups of people:

1) Arbitrage & liquidation bots and DeFi Traders: Make profits by finding extractable value on Ethereum, bundling these transactions and submitting them to Flashbots builders.

2) Ethereum dApps with complex functionalities: These dApps utilize Flashbots’ functionalities to optimize the execution of their transactions, enhancing efficiency and revenue.

3) Professional builder organizations: These entities select the most profitable transactions from the transaction bundles sent by searchers, package them into complete blocks, and finally send them to validators through relay. There are currently a small number of builders active in the market, and the top few organizations monopolize the market share.

4) Miners: Validators for ETH2.0, responsible for proposing blocks to the network and adding them to the chain.

5) Ordinary Ethereum users: They can interact directly with Flashbots and execute their transactions through the tools and interfaces provided by Flashbots.

3.2 Business Classifications

Flashbots’ businesses mainly consist of the following:

1) Flashbots Auction: It provides a permissionless, transparent, and fair ecosystem for efficient MEV extraction and frontrunning protection which preserves the ideals of Ethereum. Flashbots Auction provides a private communication channel between Ethereum users and validators to efficiently communicate preferred ordering of transactions within a block.

2) Flashbots Protect: It provides a user-friendly, secure, and powerful trading environment for Ethereum users. It’s configurable, meaning that you can choose which builders to send to and your MEV-Share settings. Besides, it provides a protection mechanism to prevent frontrunning, so that transactions will not be captured by malicious transactions in the public Mempool, and if the transaction creates MEV, users can obtain rewards through MEV-share.

3) Flashbots Data: It provides a tool for Ethereum’s MEV inspection, which can analyze blocks, including data on validator payments, token transfers and profits, swaps and arbitrage. All data is stored in a Postgres database for querying and analysis.

4) MEV-Boost: The main purpose of MEV-Boost is to improve the efficiency of Ethereum validators by accessing a competitive block-building market. MEV-Boost separates the role of proposers from block builders, thereby promoting the decentralization and censorship-resistance for the Ethereum network.

5) MEV-Share: It is an open-source protocol for users, wallets, and applications to internalize the MEV that their transactions create. It is neutral, meaning that any searcher can participate and is not restricted to a single block builder.

To sum up, Flashbots mainly encompasses Flashbots Auction, Flashbots Protect, Flashbots Data, MEV-Boost, and MEV-Share. It aims to improve the efficiency of MEV, protect transaction security, and offer a competitive block-building environment.

3.3 Business Breakdown

Flashbots’ business mainly involves four components: searchers, relays, builders and proposers. They play different roles and hold distinct responsibilities in the process of a single block creation.

Here’s a breakdown of their roles and responsibilities within a single block creation process:

Builders: Builders create blocks by collecting transactions from users, searchers, or other order flows. Their goal is to maximize the MEV of themselves and the proposers and build blocks with the maximal extractable value.

Relays: Relays are trusted third parties that serve as a two-way communication channel connecting proposers with builders. They act as validators, verifying the validity of blocks and calculating the amount to be paid to the proposer.

Proposers: Proposers are PoS Ethereum validators. After receiving the block headers and payment values ​​submitted by relays, they evaluate all received bids and sign the block header linked with the highest payout.

Searchers: Searchers monitor public transaction pools and Flashbots private transaction pools, look for transaction sequences that maximize benefits, and bundle and submit them to builders.

In summary, the whole process is operated as follows: Builders create blocks and submit them to relays, who will verify the validity of the block, calculate the amount to be paid to the proposer, and send the block header and payment value to the current proposer. The proposer evaluates the bids received, signs the block header associated with the highest payout, and sends it to relays. Relays use beacon nodes to publish blocks and return them to the proposer. Finally, rewards are distributed to builders and proposers in the form of transactions within block and block rewards.

1. Flashbots Auction

Flashbots Auction is an open, transparent, and fair ecosystem for auction mechanism, designed for efficient MEV extraction and frontrunning protection, which is in line with the ideals of Ethereum. Flashbots Auction enables Ethereum users and validators to efficiently communicate preferred transaction order within a block through a private communication channel.

Flashbots Auction started with mev-geth and mev-relay. In PoS Ethereum, it is built on MEV-Boost, a program that implements proposer-builder separation for Ethereum.

However, it also exposes a series of negative effects caused by MEV:

1) Inefficient communication between PGA bot operators and PoW miners for transaction order preference leads to network and chain congestion.

Regular Ethereum users bear the loss through high gas fees and scarce blockspace.

2) The MEV extraction poses some threats to the security of the Ethereum consensus. This is primarily due to the potential for chain history reorg to extract past MEV and the centralization of transaction routing for better privacy protection, low latency, and transaction over control.

3) Relevant parties are developing permissioned, exclusive transaction routing infrastructure, which could undermine the neutrality, transparency, decentralization, and fairness of Ethereum. Flashbots Auction, as an open-sourced and democratic choice, aims to counter the above-mentioned negative effects and security threats.

How it works

Flashbots Auction is a system that provides a private transaction pool and a sealed bid blockspace auction mechanism. This system allows block proposers to entrust others to find the optimal block construction in a trustless way.

In a regular Ethereum transaction pool, users would broadcast transactions to the public P2P network and specify a gas price indicating how much they were willing to pay for computation on Ethereum. After receiving the transactions, block builders sort them by gas price, and then use a greedy algorithm to construct a block that aims to maximize the value derived from transaction fees. For your understanding, in computer science, a greedy algorithm involves selecting the path that seems optimal at the moment, with a view to finding the overall optimization. Here, it refers to the block builder using a greedy algorithm to build the block with the highest fee. This mechanism blends English auctions and all-pay auctions, where bids for blockspace are made openly, the highest bidder wins, and all participants bear a cost.

This mechanism comes with the following problems:

1) Open trading pools lead to bidding wars for blockspace, increasing network load and gas price fluctuations. This is not conducive to participants without advanced bidding strategies.

2) All-pay auctions cause unsuccessful bids reverting on-chain, thus wasting blockspace. Additionally, bidders undervalue their bids due to the risk of execution failure, ultimately leading to artificial blockspace scarcity and reduced validator revenues.

3) The mechanism that relies solely on gas price restricts bidders from expressing their ordering preferences, as they are limited to bidding for the top position in the block. This forces participants to adopt other ineffective strategies to increase the chance of their transactions being included in the block, such as sending a large number of useless transactions to occupy blockspace. This situation leads to waste of public resources and efficiency losses.

Instead, Flashbots Auction uses a first-price sealed-bid auction (FPSBA) mechanism, where participants can communicate specific bid and transaction order preferences through private channels without paying for unsuccessful bids. This mechanism maximizes validator payoffs, because each transaction has a corresponding bid, and the validator can choose the transaction combination with the highest payoff. Additionally, different participants need to determine their bids based on the expected revenue of the MEV opportunity, which provides an efficient venue for price discovery and can deduce the market value of the MEV opportunity. It is important to note that the FPSBA mechanism eliminates the problem of frontrunning caused by open bidding.

Flashbots Auction Roadmap

The Flashbots team has adopted an iterative approach to decentralizing the Flashbots Auction architecture. During this process, they will introduce new technologies and improvements in stages to gradually improve the entire architecture.

Pre-trade privacy: Transactions are only made public after being included in a block, excluding intermediaries such as relays and blockers.

Failed trade privacy: Unsuccessful bids will not be included in a block and will not be made public.

Efficiency: MEV extraction is conducted without causing unnecessary network or chain congestion.

Bundle merging: Merge multiple incoming bundles without conflict.

Finality protection: Once a block containing Flashbots bundles is propagated, it is difficult to modify the block. This protects against time-bandit chain reorg attacks.

Complete privacy: Intermediaries such as relays and validators cannot view the transaction content before they are included in the blockchain.

Permissionless: The system has no trusted intermediaries censoring transactions.

Technical Architecture

The Flashbots Auction architecture proposes a network consisting of three distinct parties, each specialized in performing part of the work required to maintain this communication channel. Block builders are responsible for constructing complete blocks, which are proposed by validators.

Searchers

Searchers refer to Ethereum users who, for various purposes, preferentially use the Flashbots private transaction pool instead of the regular P2P transaction pool. These users are responsible for monitoring on-chain state and sending transaction bundles to block builders.

Searchers can be mainly divided into the following three categories:

Ethereum bot operators: They need fast, risk-free access to blockspace, such as arbitrage and liquidation bots.

Ethereum users looking for protection from frontrunning for their transactions, such as Uniswap traders.

Ethereum dApps that require advanced features like account abstraction or zero-gas transactions.

By submitting bundles directly to block builders, rather than through the p2p network, searchers are able to gain “pre-trade privacy,” meaning their transactions cannot be seen by others in the network until they are included in a block. Searchers express their inclusion bids through Ethereum transactions, either as a gas price or as a direct ETH transfer to the coinbase address. Different from setting gas price, the direct payment method can avoid unnecessary failed bid fees and only pay the fee when the transaction is successful. This method not only ensures the privacy of transactions, but also improves economic efficiency.

Block Builders

Block builders are professionals who receive transactions from users and searchers. They work to build blocks with the most profit potential from those transactions. Once a block is built, it is sent to the validators via an mev-boost relay. Searchers can send bundles to multiple builders.

(Block builders construct blocks by integrating bundles from searchers and transactions from the mempool, which are submitted by regular users.)

Relays

Relays are a component of PBS (Periscope Block Scope) and are responsible for storing blocks received from builders, making them accessible to validators.

(The relayer selects the most profitable block from the builders it is connected to and holds it in escrow for the validator.)

In the mev-boost system, validators select blocks with the most profit potential from multiple relays. Each relay keeps the contents of the block secret until a validator decides to propose it for inclusion in the network.

Specifically, relays perform the following steps:

Receive new blocks from block builders.

Send the header of the most profitable block to a validator upon request.

By signing this header, the validator establishes its commitment to propose a full block.

Send the full block to the validator after receiving the block header signed by the validator.

All operations are performed quickly and reliably to ensure validators meet proposal deadlines.

Validators/Proposers

In PoS Ethereum, validators are responsible for proposing new blocks to the network and appending blocks to the blockchain.

(Validator uses mev-boost to choose the most profitable block to propose from multiple relays)

When block builders produce blocks, the resulting blocks tend to be more profitable if they include MEV transactions that generate maximum revenue. Validators can earn higher profits by selecting these blocks that offer the highest profits. This process is known as Mev-Boost, which can increase validators’ earnings.

Bundles

Searchers use Flashbots to submit transaction bundles to block builders for inclusion in blocks. A transaction bundle combines one or more transactions and executes them in the order they are provided. Besides the transactions from searchers, bundles can potentially contain pending transactions from other users in the mempool, and bundles can also target specific blocks for inclusion.

Bundle Pricing

Flashbots’ block builders, at a high level, aim to include the most profitable transactions possible in the blocks they build. In PoW Ethereum, Flashbots’ block builder achieves the searcher’s maximum profit by inserting the searcher’s bundles at the top of the block and removing transactions at the tail of the block. According to gas price measurement, the transactions at the tail of a block are the least profitable transactions for miners to mine. Therefore, for a Flashbots bundle to be considered profitable, it must have a higher gas price than the transactions it displaces at the tail of the block.

In PoS Ethereum, the rule of thumb for bundle pricing on Flashbots is practically the same; more profitable transactions are generally favored by the block-building algorithm. Bundle/transaction profitability is determined by fee per gas used, priority fee, and direct validator payments.

In the PoS mechanism, instead of all bundles being placed at the top of the block, bundles may be placed anywhere in a block. This means that in addition to bundling transactions, other transactions from the mempool can also be added to the blockchain. However, the transactions in the bundle will not be added directly to the blockchain.

Bundle Ordering Formula

Flashbots block builders use a new algorithm designed to produce the most profitable blocks. This design brings about some important changes for searchers to note:

Instead of ranking and including bundles based on effective gas price, the algorithm optimizes for overall block profits.

Execution at the top of the block is no longer guaranteed.

Other transactions (such as those from the mempool) may be implemented between two different bundles, rather than between transactions within a bundle.

RPC Endpoint

Advanced users can interact with the RPC endpoint at relay.flashbots.net or one of the testnet URLs below.

The bundle relay URLs are as follows:

Searcher Reputation

During periods of heavy load, Flashbots provides consistent access to the Flashbots block builder for searchers with a good performance record. To combat sophisticated application layer attacks, also known as Layer 7 attacks, one of several solutions being explored is to enhance the Flashbots infrastructure by introducing a searcher reputation mechanism.

EIP-1559 Support

Flashbots supports EIP-1559 transactions since mev-geth v1.10.5-mev-0.3.0. For searchers who wish to continue using traditional trading types, no configuration changes are required. However, EIP-1559 brings significant changes to the base fee of blocks, which means that searchers who used to transact with 0 gas prices will need to make some adjustments to their transactions. Nonetheless, searchers still have the opportunity to pay fees first, either by transferring funds directly to Coinbase or by paying a gas price higher than the EIP-1559 base fee. But no matter what, the user’s transaction must contain an Ethereum gas price at least equal to the base fee.

2. Flashbots Protect

Overview

Flashbots Protect RPC does not track any user information (such as IP address, location, etc.), nor does it store or record user information. Flashbots Protect is a user-friendly, secure and powerful way to trade on Ethereum, suitable for both new and experienced users.

It has the following crucial advantages:

1) Configurable: Users can choose to send transactions to different builders and set MEV-Share.

2) Frontrunning protection: User transactions will not be discovered by bots in the public mempool.

3) Get backrunning MEV back: If the user’s transaction generates MEV in backrunning, the user can obtain up to 90% of it back through MEV-Share.

4) No failed transactions: Only if users’ transaction has not been revoked or rolled back, it will be included in the transaction, so users do not need to pay for failed transactions.

MEV-Share (More details will be introduced in the later part of this article)

Through MEV-Share, users have the opportunity to earn up to 90% of the MEV that their transactions create. By default, Protect users will be connected with the Stable configuration, which is continuously tuned by Flashbots to optimize execution while protecting users from harmful MEV.

Users only need to send transactions to Flashbots Protect to receive earnings. Advanced users can have more precise control over their transactions and preferences by manually setting up their Protect RPC requests or through the advanced panel.

There are three ways to use Flashbots Protect:

1) Add Flashbots Protect RPC (https://rpc.Flashbots.net) to your wallet. This is suitable for most users.

2) Use eth_sendRawTransaction to send the transaction to https://rpc.Flashbots.net.

3) Use eth_sendPrivateTransaction to send the transaction to Flashbots.

The easiest way is to add Flashbots Protect RPC to users’ wallet, with the ability to configure which builders it is sent to and customize MEV-Share settings.

Improve Transaction Inclusion Speed

Transactions sent through Flashbots Protect are by default only shared with the Flashbots builder, which only builds a portion of Ethereum blocks. If a user wishes to increase the chances of their transaction being included, they can choose to share their transaction with more builders. Just select another builder when connecting the wallet with Protect.

Cancel Transactions

Transactions submitted to Flashbots Protect are sent to the Flashbots MEV-Share node and remain in a pending state for up to 6 minutes.

Flashbots Protect allows users to cancel pending transactions by submitting a cancellation transaction to Flashbots Protect. When canceling a transaction, the user needs to send a new transaction, which must meet the following criteria:

It must be submitted from the same address as the original transaction that is intended to be canceled. It should include the same nonce, the same sender and receiver addresses, and leave the data fields empty. It is free to cancel the transaction in this way, and it is used to verify that you have control over the account that initiated the transaction you wish to cancel. Since the canceled transaction is not included in the blockchain, it incurs no cost.

Fix Stuck Transactions

If your transaction is in “pending” state or the nonce is very high, you will need to clear the activity and nonce data in MetaMask. This will cause MetaMask to update the nonce and transaction history from the network. Your funds and keys are safe during this process.

3. Flashbots Data

MEV-Inspect

mev-inspect-py is a MEV inspector for Ethereum. It is able to analyze various information in blocks, including validator payments, token transfers and profits, swaps and arbitrages, and more. All the data is stored in Postgres for easy query and analysis.

Executing an inspection for a block will be carried out as follows:

Retrieve traces, receipts, and block data from the RPC endpoint.

Decode the traces using recognized ABIs (Application Binary Interfaces) so that its meaning can be understood.

Extract structured objects such as transfers and swaps from the decoded traces.

Store all these elements in the database for future query and analysis.

4. MEV-Boost

MEV-Boost is an open-source middleware run by validators to access a highly competitive block-building market. It was developed by Flashbots to implement proposer-builder separation (PBS) for proof-of-stake (PoS) Ethereum. With MEV-Boost, validators can access blocks from the builder market. Builders generate blocks containing transaction order flow and a fee for the block proposing validator. By separating the role of proposers and builders, MEV-Boost promotes greater decentralization and censorship-resistance in the Ethereum network.

Significance

MEV is a centralizing force on Ethereum. If unattended, the competition for MEV opportunities could lead to consensus instability and permissioned communication infrastructure between searchers, block producers, and validators. In PoS Ethereum, the opportunity to earn MEV becomes even more important as the planned reduction in block subsidies will make MEV a larger portion of total staking revenue. Validators running MEV-Boost maximize their staking rewards by selling their blockspace to an open market. It is estimated that validators running MEV-Boost can increase their staking rewards by more than 60%.

How MEV-Boost Works

PoS node operators need to run three software components: a validator client, a consensus client, and an execution client. As an add-on to the consensus client, MEV-Boost is an independent open-source software responsible for querying and outsourcing block building to a network of builders.

Block builders prepare full blocks, optimizing for MEV extraction and fair distribution of rewards, and send blocks to relayers. A MEV-Boost instance can be configured to connect multiple relays.

Relays aggregate blocks from multiple builders and determine the most profitable blocks to submit to the proposer. The proposing validators’ consensus client then propagates the most profitable blocks received from MEV-Boost to the Ethereum network for attestation and block inclusion.

5. MEV-Share

MEV-Share is an open-source protocol designed for users, wallets and applications to internalize the MEV that their transactions create. Through an “orderflow auction”, it allows users to choose to share transaction data with searchers who bid to include the transactions in bundles. Users are free to choose how to redistribute searchers’ bids between themselves, validators, or other parties. MEV-Share is neutral, permissionless for searchers, and does not favor any particular block builder. The goal is to reduce the centralizing impact of exclusive orderflow on Ethereum and enable wallets and other order flow sources to participate in the MEV supply chain.

Using MEV-Share is simple. Users just need to send transactions to Flashbots Protect, which leverages the Flashbots MEV-Share Node. MEV-Share redistributes MEV back to the party that creates it in the first place: users. The design is scalable and decentralized, allowing searchers to integrate permissionlessly and without favoring any particular block builder.

Users send their transactions to a specialized MEV-Share node, which selectively shares transaction information with searchers based on the user’s privacy preferences. Based on this information, the searcher submits partial bundles to the MEV-Share node in an attempt to extract MEV from the user’s transaction without viewing the complete data of the transaction. MEV-Share nodes will simulate each of these searcher bundles and send the successful bundle and a condition to the block builder. In other words, the MEV-Share node will help searchers share their successful transaction bundle information, which means users will be paid back 90% of the MEV their transactions create. This mechanism ensures that users receive fair rewards in this process.

Currently, MEV-Share nodes only accept backruns.

6. REV

Since the Merge on September 15, 2022, the project party has changed MEV to REV (Realized Extractable Value).

REV can be split into the following 2 parts:

Here, REVS is the value passed to the searcher, and REVM is to the miner. It is important to note that, as explained below, REV already includes the mining cost of the opportunity (i.e. the actual REV of the opportunity depends on the network gas price at the time of mining).

The searcher’s REV consists of:

In a transaction that performs an extraction operation, Vout represents the value flowing from the searcher to the blockchain (excluding gas fees); Vin represents the value flowing from the blockchain to the searcher; MEVg represents the gas price of the transaction; MEVs represents the size of the transaction, that is, the total amount of gas it consume. Vout, Vin and MEVg are denominated in the base network currency (ETH), while MEVs are calculated in gas units. Separating the gas fee from Vout helps quantify the cost of extraction and is how REV is actually calculated.

Here, the term “blockchain” refers to any other address that is not associated with the EOA of the extraction transaction or the smart contract controlled by the searcher, corresponding to a smart contract or EOA. Identifying these addresses is a heuristically guided process based on known searcher patterns and may include oversights. Furthermore, any ancillary transactions related to MEV extraction are not part of the above variables. For miners:

Here, geff represents the effective gas price of the transaction that should have been included in the block if the opportunity was not exploited. Therefore, REV includes the opportunity cost that miners bear through transactions that include MEV extraction.

Since transactions in the transaction pool are short-lived, geff cannot be measured only through blockchain data and logs. Flashbots uses an approximation method that also serves as a lower bound on the value achieved by miners:

Here, gtail is the gas price of the last transaction in the block.

Therefore, even though the roles of miners and searchers are somewhat blurred, the extraction cost of the opportunity can be clearly identified, i.e., the MEV.gtail.

Finally, at this stage, the distribution of value between searchers and miners depends entirely on the choice of MEV, which is influenced by other searchers trying to take advantage of the opportunity.

3.4 Development Potential

3.4.1 Background

MEV can be categorized as follows:

1) Transaction execution category:

Pre-transaction MEV: It refers to operations performed before transaction execution, mainly obtaining value through bidding on public transaction pools or transaction redirection.

Mid-transaction MEV: It refers to values generated during transaction execution, including manipulating transaction queuing order, transaction reordering, and other operations.

Post-transaction MEV: It refers to operations performed after transaction execution is completed, usually related to smart contract interactions on the blockchain, including mining rewards, flash loans, etc.

2) Market manipulation category:

Pre-market MEV: It gains profits by operating the market outside the exchange, such as information manipulation, collaborative manipulation, etc.

In-market MEV: It gains profits through internal operations and trading activities within the exchange, including market price manipulation, stop-loss activation, etc.

Post-market MEV: It gains profits through operations after the transaction is completed, such as transaction returns and market adjustments.

3) Blockchain protocol category:

Contract transactions MEV: It involves transactions executed using smart contracts, generating value by operating contract logic.

Block mining MEV: It involves manipulating the order of blocks during the mining process to obtain value.

Solving the MEV (Miner Extractable Value) issue is an important part of Ethereum roadmap. On November 5, 2020, Ethereum co-founder Vitalik Buterin released an updated Ethereum roadmap, which introduced a new stage - “The Scourge”, designed to ensure reliable, fair, and credibly neutral transactions, and resolve MEV issues. This means that protocols that solve the MEV centralization problem will gain more attention, and the importance of this track will gradually increase.

Over the past few years, the development of MEV has gone through different stages. The early stages (2010-2017) marked MEV’s inception, primarily focused on the Bitcoin network, such as fee sniping and double-spending attacks. From 2018 to 2019, we saw a period of significant growth for MEV on Ethereum, including the emergence of decentralized exchanges, algorithmic stablecoins, and automatic market-making mechanisms on Ethereum, which provides more MEV opportunities.

Currently, there are multiple solutions on the MEV market, with Flashbots being the most prominent one. Flashbots implements MEV extraction through robot encryption, and the launch of its MEV auction platform has received widespread attention and generated considerable MEV revenue. The market potential of MEV tracks is huge. According to Flashbots’ data, before the Ethereum Merge, MEV earnings had already exceeded 206,450 ETH. However, this only accounts for the gains by block proposers, with searcher profits yet to be factored in. According to the current market development, the market size of MEV may be unlimited. Moreover, current actual MEV gains is just a fraction of its potential.

Overall, the MEV track holds promising development prospects. With the continuous innovation of technology and protocols, the emphasis on solving the MEV issues will grow stronger, bringing more opportunities and benefits to users and participants.

3.4.2 Market Scale

The revenue scale of this field almost synchronizes with the trading volume of the crypto market. The scale of MEV is affected by two main factors: there’s a positive correlation between arbitrage frequency and price fluctuations; there’s also a positive correlation between arbitrage volume and the total trading volume.

Taking Flashbots as an example, its total gross extraction profit is $713.95 million, which is regarded as favorable MEV and has a positive impact on market value, DeFi core functionalities and DEX transaction volume. The revenue from sandwich attacks amounts to $1,206.11 million, which is considered unfavorable MEV. Most MEV-protected DEXes hope to control and retain this part of the profit.

Taking the cumulative fee income of the top three DEXes - Uniswap, Pancakeswap, and Sushi - as reference points, their cumulative fees are $5.21 billion, of which MEV income obtained through Flashbots accounts for approximately 37%. In addition to the main DEXes, other DApps, and layer 1 and layer 2 solutions on Ethereum will also generate considerable MEV income. To calculate the fees’ impact across the entire value chain, it is necessary to analyze how MEV profits are distributed among different participants.

According to data from Eigenphi, in January and February 2023, MEV searchers generated $48.3 million from all users’ transactions via wallets and RPC, with $34.7 million going to builders. And builders sent $30.3 million to validators. Profits were distributed as follows: Searchers received $7.3 million (17.4%), builders received $4.4 million (10.5%), and validators received $30.3 million (72.1%). It can be seen that most of the profits (72%) are still obtained by downstream validators. Of the $48.3 million, $6.3 million was burned for EIP 1559. The priority fee for ordinary transactions transmitted to builders from wallets and RPC and then to validators was $32.554 million. While ordinary transactions between wallets and RPC destroyed $227.2 million for EIP 1559.

In the 2021 bull market, the overall income cap hit $476 million. Based on a conservative 10x income, the entire market scale approximates $5 billion. The scale of each niche track can be roughly estimated proportionally. Searchers exceed $1 billion and validators exceed $3.5 billion.

However, bots that participate in and profit from on-chain transactions may still bear the cost of many failed transaction costs as well as other off-chain hedging costs that are not factored into the calculations. In addition, this is only calculated based on the income earned by direct participants and does not take into account the indirect participant market. In fact, the entire field is much larger than the above figures.

3.5 Business Data

Operational Data

Note: Since the Merge on September 15, 2022, the project team has changed MEV to REV (Realized Extractable Value). Compared with the theoretical maximum amount, REV represents the actual realized and extractable amount more accurately. Simply put, REV refers to the revenue miners earn on a blockchain network, while MEV is a more specific concept that involves the potential value miners derive from their ability to order transactions and manipulate certain on-chain activities.

REV:

As of August 31, 2023, total withdrawals since the Merge were 288,829 ETH, with 18,860 ETH in the past 30 days (Searchers’ gains not accounted for). Starting from October 2022, the total amount of Ethereum paid to Proposers has seen a consistent increase, rising from 1.6K per week in October 2022 to 287.1K per week in August 2023, marking an increase of more than 179 times.

Detailed analysis of REV (the dataset below contains statistics for MEV arbitrage and liquidation captured by mev-inspect-py after the Merge)

According to the data, the protocol with the largest proportion in MEV arbitrage is Uniswap V2, accounting for 64.11%, followed by Uniswap V3, Curve and Balancer V1. In arbitrage, the token with the highest proportion is WETH, accounting for 91.58%, followed by USDC, USDT, etc. In terms of liquidation, the Aave protocol accounts for 68.8% and Compound V2 for 31.2%. The total liquidation value is approximately $1.22 million. In terms of tokens, WETH leads with about 25.09%, followed by USDC at 24.07%.

It should be noted that since the prices of all tokens denominated in US dollars are not fully covered, the project team can only calculate about 85% of the total arbitrage volume (denominated in US dollars).

Flashbots Relay Metrics

We can see that the total amount of ETH paid to validators by Flashbots MEV-Boost relay continues to grow. In November 2022, the block reward reached a peak of 13K ETH per week, and the weekly ETH paid to validators averaged between 2-4K.

The total number of blocks submitted by MEV-Boost Relay during the entire time period was approximately 2.5 million. Flashbots accounted for 40.1%, while others accounted for 59.9%.

Flashbots relay validator registration:

According to the data, relay validators who have registered Flashbots account for 81% of the total number of current validators (approximately 810,000). The number of validator registrations continues to increase. From September to November 2022, the number of validators grew rapidly, with the number of weekly registrations reaching a peak. However, from November 2022 to September 2023, the number of validator registrations shows a significant downward trend. Particularly, between December 2022 and April 2023, the registrations were at a low point. Currently, validator registrations remain at a relatively moderate level.

Social Media Data

Twitter: This project does not yet have an official Twitter account.

Discord: Currently, there are 26,870 followers on Discord, with 3,996 online.

Discussions in the Discord community are very active and cover many technical topics.

3.6 Competition Landscape

3.6.1 Project Introduction

Manifold Finance

Manifold Finance (FOLD) is a MEV relay infrastructure project that aims to improve connectivity between DeFi, DApps and protocols, and provide solutions. Founded in 2020 by Sam Bacha, Manifold Finance acts as a middleware between Ethereum users and validators.

One of their main focuses is protecting users from MEV attacks, including sandwich attacks, which can exploit transactions and manipulate prices. With their first product YCabal, Manifold Finance redefines the transaction process, prevents malicious arbitrage attacks on-chain, and reduces gas fees.

Skip Protocol

Skip Protocol has developed a set of MEV products for the ecosystem on Cosmos. The goal of these products is to help blockchain achieve long-term financial sustainability and leverage MEV to achieve this goal. By providing dedicated MEV infrastructure, Skip Protocol enables the blockchain community to autonomously control how MEV revenue is obtained and distributed. Their products help stakers, validators, and protocols earn profits from MEV while improving the on-chain user experience. Additionally, these products allow traders to execute more complex and profitable trading strategies.

3.6.2 Comparative analysis

Manifold Finance, Skip Protocol, and Flashbots are all organizations or protocols that aim to mitigate the negative impact of MEV. Manifold Finance and Flashbots are technical infrastructure, while Skip Protocol is a decentralized protocol.

Manifold Finance works to reduce the negative impact of MEV through SecureRPC and OpenMEV SDK, while Flashbots works through a range of products to democratize and redistribute MEV revenue and bring increased transparency to the ecosystem.

Skip Protocol focuses on solving the problem of integrating MEV searchers and validators. By creating a sealed-bid closed auction system, traders are allowed to submit tipped transactions to validators who prioritize them at the top of blocks based on blocks for more rewards.

Flashbots is a research and development organization aiming to mitigate the negative impacts of MEV. Flashbots Auction bypasses traditional public bidding, allowing users to privately communicate their bids and trade order preferences while maximizing validator rewards and preventing frontrunning. The combination of private transaction pools and sealed bids ensures the stability of the Ethereum network and fair, optimal blocks.

Therefore, these three organizations or protocols differ in their products, technical infrastructure, and problem-solving focus.

3.7 Token Model Analysis

Token Supply and Distribution

The project has not yet issued tokens.

4. Basic Value Assessment

4.1 Key Questions

Does the project have a robust competitive advantage? Where does this competitive advantage come from?

1) Cutting-edge technology and unique market positioning: Flashbots aims to solve the block competition and front-running issues posed by MEV in Ethereum. Cutting-edge technology and unique market positioning give Flashbots a competitive edge in the Ethereum ecosystem.

2) Market demand and industry partnerships: Flashbots also cooperates with multiple projects and exchanges in the Ethereum ecosystem to jointly promote technology and market development, which provides the Flashbots with a greater competitive advantage.

3) Strong team: Flashbots brings together top engineers and researchers from the Ethereum developer community. They have strong backgrounds in blockchain technology and rich experience, capable of addressing market challenges and driving the project forward. Strong team capabilities are a significant factor for Flashbots to establish a competitive advantage.

What are the main variable factors affecting the project’s operations? Are these factors easily quantifiable and measurable?

1) Transaction volume: This is an important indicator to measure the activity and user participation of the Flashbots project. Higher transaction volume means more users are using Flashbots’ services. This can be quantified and measured by counting the number, value and frequency of transactions.

2) Partnerships and community participation: Flashbots needs to work closely with various stakeholders such as Ethereum miners, researchers, and developers to jointly drive the development of Ethereum. The quantity and quality of partners, as well as the activity and engagement of the community, can serve as important metrics for measuring project cooperation and community building.

3) Technological innovation and research results: One of Flashbots’ goals is to promote the innovation of new technologies in Ethereum. Measuring the impact and quality of a project’s technological innovation and research output may be relatively subjective. However, it can be measured by assessing the quality and influence of technical specifications, tools, and software in which the project engages with.

These variables can be quantified and measured to a certain extent, especially in terms of transaction volume. Partnership and community engagement can be basically measured by observing social media activity, quantity and quality of collaborative projects, and the number of participants in activities. Technological innovations and research results may require more in-depth assessment and evaluation, taking into account factors such as quality, feasibility and impact.

4.2 Major risks

1. Centralization risk: Flashbots is an organization that aims to maximize the interests of Ethereum, but this may sometimes conflict with the expectations of the Ethereum community. For example, Flashbots announced that it would review transactions blacklisted by the Office of Foreign Assets Control of the US Department of the Treasury, a decision that sparked widespread public attention and opposition. These issues may have an impact on Flashbots’ reputation in the Ethereum community and user trust.

2. Insufficient liquidity: Insufficient liquidity in Flashbots Auction could hinder its effectiveness, affecting the viability of its business model. In addition, insufficient liquidity of Flashbots Auction may cause it to be unable to attract enough users and validators to participate, impacting its long-term sustainability.

3. Performance issues: The operation of Flashbots’ relays require substantial computing resources and bandwidth, which may cause some performance problems. In addition, Flashbots’ performance issues may affect its stability and reliability in the Ethereum network, further impacting the feasibility of its business model.

4. Problems with the transaction ordering market: The transaction ordering market of Flashbots Auction may prioritize the processing of some transactions, causing public discontent and skepticism.

5. Legal and regulatory issues: The operation of Flashbots Auction may be subject to legal and regulatory restrictions and constraints, which may affect the viability and long-term sustainability of its business model.

6. Mechanism risk: The development of permissioned and exclusive transaction routing infrastructure may have a negative impact on the neutrality, transparency, decentralization, and fairness of Ethereum. Flashbots Auction, as a permissionless and democratic option, needs to find solutions in future developments to avoid such impacts.

Disclaimer：

1. This article is reprinted from [PANews]. All copyrights belong to the original author [世链投研-Elma Ruan]. If there are objections to this reprint, please contact the Gate Learn team（gatelearn@gate.io）, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.