Ethereum MEV: Tracing the Development and Impact

The transaction process on Ethereum has evolved significantly since its early days. Initially, users would send transactions that were then broadcasted to the network and entered the mempool for confirmation. Miners would construct blocks prioritizing transactions with higher gas fees. However, the rise of decentralized finance (DeFi) introduced a premium on block space, leading to the emergence of priority gas auctions (PGAs) where bots competed for arbitrage opportunities within the mempool.

These auctions extended beyond arbitrage to include frontrunning, backrunning, and sandwich attacks, creating opportunities for bot operators and miners to profit from elevated gas fees. This scenario gave birth to the concept of miner extractable value (MEV), representing the total ETH miners could extract by including, excluding, or changing transaction orders in a block.

By 2020, MEV had started negatively impacting Ethereum, causing network congestion and increased transaction costs. In response, Flashbots developed MEV-Geth and MEV-Relay to move MEV-related activities off-chain, alleviating network congestion.

With Ethereum’s transition to Proof-of-Stake, MEV evolved to ‘maximum’ extractable value. MEV-Boost implemented proposer-builder separation, allowing solo stakers to utilize MEV infrastructure similarly to large pools. This prevented centralization of stake and over 500k ETH has been extracted post the Merge.

Looking ahead, MEV’s future is intertwined with latency trends towards geographic centralization. The hyper-competitive MEV market incentivizes parties to colocate in data centers, potentially leading to regulatory challenges. Ethereum’s Layer 2 ecosystem, like Dencun, aims to shift MEV dynamics by lowering fees and increasing transaction throughput. However, MEV on L2s may differ due to centralized sequencers.

As Ethereum continues its L2-focused roadmap, MEV mitigation strategies may be necessary to address potential chain flooding by searchers of MEV opportunities. The emergence of a specialized ‘MEV Supply Chain’ signifies the evolving landscape of MEV on Ethereum, emphasizing the need for infrastructure evolution to manage MEV effectively in the years ahead.