[TL;DR]

• MEV is an abbreviation for "Maximum Extractable Value," Which refers to extracting value from Ethereum users through the reordering, inserting, and removing of transactions within blocks.

• Over $689 million extracted from network users a year to date as the rise of Flashbots and other MEV-Boost relays have had unintended consequences.

• The most powerful MEV-Boost relays, Flashbots, announced it would refuse to process Tornado Cash-related transactions.

• Because MEV-Boost relays refuse to process certain transactions, more than 51% of the network's blocks generated by them make Ethereum vulnerable to censorship.

Introduction

Flashbots and other MEV-Boost relays have helped build more Ethereum blocks since Ethereum switched to a Proof-of-Stake consensus mechanism. MEV Watch data show that 90% of the blocks were generated on September 15 without using the MEV-Boost relay. As of October 14, that figure had fallen to 43%.

The most critical MEV-Boost relays, particularly Flashbots, have publicly stated that they will not include Tornado Cash transactions in the blocks they create. The reason is that on August 8, the Office of Foreign Assets Control (OFAC) added its privacy protocol to the sanctions list, claiming that money launderers and North Korean cyber criminals only use it. Following the ban, primary crypto-intensive services such as Circle and Infura moved Flashbots, one of the organizations that have been quick to declare "OFAC compliance," to blacklist Ethereum addresses. It is, therefore, pertinent to analyze the implication of Ethereum censorship.

What is the MEV-boost relay?

MEV is a powerful centralized force on Ethereum. MEV is short for "Miner Extractable Value" or "Maximal Extractable Value." Profits can be made by extracting value from Ethereum users by reordering, inserting, or censoring transactions within blocks as they are created. It typically affects users of the DeFi protocol who interact with automated market makers and other apps.

Surprisingly, the MEV problem in Ethereum was first identified in 2014—a year before Ethereum was launched—by an analyst coder and long-time algorithmic trader going by the alias Pmcgoohan. Pmcgoohan became captivated with Ethereum and the idea of a programmable blockchain promising distributed and equitable markets after being horrified by what happened in 2008 and the aftermath of the global financial crisis.

He discovered a critical flaw in Ethereum's pre-Genesis draft documents. Pmcgoohan recognized that miners had complete control over the transaction inclusion and ordering process, which meant that when the protocol went live, they could use this power to extract value from unsuspecting users.

Pmcgoohan's warning essentially went unheeded. However, in 2019, a group of researchers raised the same issue in a paper where the term "MEV" emerged to describe the problem Pmcgoohan had discovered years before.

How MEV works.

Miners were responsible for aggregating and selecting transactions into blocks before Ethereum's transition from PoW to PoS (an event now known as the "Merge"). They included in the blocks they mined. They had complete control over which transactions from the mempool—an off-chain by-pass where pending transactions await confirmation.

Miners and sequencers are used to select and order transactions based on the highest gas price or transaction fees, as they are optimized for profit. The protocol, however, did not require transactions to be ordered by fees. Miners could use their discretionary ability to reorder transactions to extract additional profits from users. MEV is the "irregular" revenue stream.

MEV is most commonly associated with Ethereum miners, but it is neither a Proof-of-Work nor an Ethereum-specific issue. Furthermore, the term "miner extractable value" is somewhat misleading. In reality, most MEV extraction before Merge was done by "searchers"—typically arbitrage traders and bot operators—who actively sought and identified MEV opportunities on-chain and captured them in various ways. Miners, on the other hand, only benefited indirectly from these traders' transaction fees. MEV is present on all smart contract-enabled blockchains, with a party in charge of transaction ordering.

MEV-Boost Relay in the post-merge

The primary difference brought about by Ethereum's transition to Proof-of-Stake is that validators have taken over miners' previous roles. Instead of miners expending vast amounts of energy to sequence and validate transactions and embed blocks into the blockchain, validators using much lighter hardware and staking ETH in smart contracts perform the same function.

Because running validator nodes in post-Merge Ethereum is significantly easier than mining, there has been a significant influx of new entrants participating in Ethereum's core protocol operations. Some of these entrants lack the skills and resources to build MEV-optimized and profitable blocks in the same way miners could.

As a result, the Merge has created the conditions for a new approach to MEV known as Protocol/Builder Separation (PBS).

PBS divides Proof-of-Stake validators' responsibilities into two categories: block building and block proposing. It is currently implemented by protocols such as Flashbots and Manifold and will most likely be implemented on the Ethereum core protocol level soon.

Block builders accept transactions from users and searchers and compete to construct the most profitable blocks from those transactions. In the same vein, block proposers are the validators who will select the highest-bidding blocks proposed by the block builders and validate or embed them in the blockchain.

Because block proposers cannot directly accept and evaluate the highest-bid blocks from block builders until PBS is implemented now on Ethereum, they must currently rely on centralized third parties known as "relays." The relays are in charge of aggregating blocks from builders, determining the most profitable ones, and relaying them to validators for signing.

51% of blocks are at risk of censorship; What is happening?

The Ethereum blockchain reached a new censorship milestone on October 14, when 51% of the blocks generated in the previous 24 hours followed the Office of Foreign Assets Control (OFAC) compliance recommendations of the United States Treasury Department.

As a result, the majority of the blocks delivered over the last day were provided by relays that screened out transactions associated with Tornado Cash - a service that mixes transactions to make them anonymous - to comply with OFAC, which had banned Americans from using the mixing protocol.

The rewards that block builders and validators receive for reordering transactions within a block are referred to as maximum extractable value (MEV). Flashbots, Ethereum-based research and development team, has been working on ways to curb the potential harms of MEV extraction by building MEV-Boost, a piece of software that allows validators to request blocks from a network of builders via a middleman called a relay.

Anyone can build a relay to pass MEV-optimized blocks from builders to the validators that propose them to the broader network.

The most popular Relay is the one built and maintained by Flashbots. The controversy stems from the fact that, unlike some other relay providers, the Flashbots relay refuses to forward blocks containing transactions from sanctioned addresses.

Furthermore, only two of the five MEV-Boost relay providers, Manifold and bloXroute, offer non-censoring options.

As of this writing, the MEV-Boost software was used in 57% of all blocks validated on the Ethereum blockchain. And nearly 81% of those blocks were completed via Flashbots' Relay, excluding all Tornado Cash transactions.

Conclusion

When it comes to MEVs, Flashbots is seen as a positive force. By taking MEV bidding off-chain, the organization has reduced gas prices, mitigating MEV's "negative externalities" for Ethereum users. The threat that Flashbots pose to Ethereum's neutrality is arguably more significant than the services currently available. Suppose Flashbots cannot verify Tornado Cash transactions due to possible OFAC interference. In that case, they could reduce their operations until Ethereum core developers find a way to modify the blockchain infrastructure to make censorship impossible. Flashbots is not the only "OFAC compliant" MEV-Boost relay, but it is the largest and remains well-regarded in the crypto community.

It would be in the best interests of the Ethereum ecosystem if Flashbots developed a "fully decentralized block builder" because open-sourcing the Flashbots MEV-Boost relay code alone has not been sufficient to solve the censorship problem.

Author: Gate.io Observer: M. Olatunji

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