MEV: Who Should Profit From a Protocol’s Economic Activity?

Maximum extractable value, or MEV, is all about finding a way to get the most value out of a protocol’s activity

article-image

In Green/Shutterstock modified by Blockworks

share

It’s an ongoing question that must be faced in the core design of any blockchain protocol: Who stands to profit the most?

Maximum extractable value, or MEV, is a bit of a behind-the-scenes game — it’s all about finding a way to get the most value out of a protocol’s activity. Participants in the system are constantly looking for angles that will extract the most value — and not necessarily in a manner that benefits the majority of users.

On a recent Bell Curve podcast with Mike Ippolito and Hasu, guest Justin Drake, a researcher at the Ethereum Foundation, argues that the system should prioritize those “closest to Ethereum” — holders and proposers — rather than let value be leeched out by those further on the fringes. He says that a misalignment currently exists, but is confident that — at least in the case of Ethereum — developers can design MEV so that most of it benefits core users rather than those trying to game the system. 

Mitigating MEV

Other protocols, such as Solana, attempt to solve the MEV problem through different mechanics, but run into problems of their own. Solana nodes do not have a mempool to be attacked and charge standardized gas fees, for example. But even these solutions don’t prevent arbitrage trading bots from running rampant on the protocol and congesting the network. Solana also fails to escape the problem of sandwich trading, which squeezes the average trader into losing value on trades due to slippage.

Almost all the alternatives that are being promoted are just a matter of choosing different priorities, suggests Bell Curve podcast guest Tarun Chitra, founder and CEO of Gauntlet Networks. “All you’re doing is preferencing a different type of actor in the system,” he said.

Fair ordering protocols, for example, set preferences for different applications over one another instead of different users. Chitra explains what he believes is the fairest approach to MEV, boiling it down to a straightforward choice: “Do you want to discriminate,” he asks, “at the user level or at the application level? Your particular design choices will inevitably leak down to doing some form of discrimination.” 

What matters then, Chitra says, is transparency — designing protocols to ensure that fair allocation is determined in a transparent and trustworthy manner. “If you have that transparency, then you can think about redistribution in a credible way.”

When asked about the topic, Zaki Manian, co-founder of Sommelier protocol, offered his general philosophy for handling MEV effectively: “Mitigate what MEV you can, capture what you can of what remains, and then maximize tools for allocating what’s left at the application layer.” 

Encryption-based solutions, Manian says, can go a long way towards eliminating undesirable MEV opportunities. Following this, mechanisms that “capture MEV at the protocol level” and off-chain sequencers can fairly allocate any remaining MEV, “even across different chains or rollups.”

Guest Justin Drake, a researcher at the Ethereum Foundation, asks, “How much of the MEV initially originates from somewhere and can be given back to the originator? Maybe it’s way more than we expect.” The problems of MEV can be fixed, Drake argues, by removing what he calls economic distortions — front-running, sandwich trades, reorganization and so forth — with clever design.

One example is the Flashbots MEV relay. As explained on Ethereum.org, it prevents transaction front-running by allowing searchers to submit transactions without revealing them to the public mempool. Front-running was once the primary cause of a notorious problem with MEV extraction — extreme gas prices — but implementing Flashbots successfully reduced fees.

“These clever designs include inclusion lists, encrypted mempools, enshrined PBS, and a slew of other designs like MEV burn, as well,” Drake says. The issue, then, is not so much a philosophical question of who should profit most, he concludes, it’s about effectively designing protocols with aligned incentives that benefit the system.


Get every episode of Bell Curve as soon as it’s out!

Bell Curve breaks down the most important themes in crypto for people who, like us, are confined to the middle of the bell curve. Each season explores a different thesis that we’ll test and refine through debate with crypto’s best.


Subscribe on Spotify | Apple Podcasts | or view all previous episodes .


Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Flashnote Template Presentation (2).jpg

Research

With the recent election, it’s clear that there will be a meaningful shift in crypto regulations and legislation. Trump is likely as pro-crypto as a president can be. He launched (multiple) of his own NFT collections and is launching an Aave wrapper called World Liberty Fi. He has also spoken out and mentioned that he wants to make the United States "the crypto capital of the planet" and transform it into the "Bitcoin superpower of the world". He proposed creating a strategic national Bitcoin stockpile alongside support from Senator Cynthia Lummis, promising to retain 100% of all Bitcoin held by the U.S. government. More importantly, we’re likely to see deregulation across the board in a lot of industries, with crypto being one of them - as Trump has committed to keeping the crypto market largely unregulated. Crypto, DeFi in particular, has historically been knee-capped by overreaching and hostile governmental agencies and regulation by enforcement, as evidenced by the plethora of Wells notices and lawsuits over the past few years. With Donald Trump winning the presidency, Republicans taking control of the Senate, and being on the verge of securing the House, we think it’s likely that crypto realizes positive regulatory clarity. Below, you can find our analysts’ takes:

article-image

Researcher Justin Drake’s Beam Chain proposal aims to transform Ethereum’s consensus layer with zk proofs and post-quantum cryptography

article-image

Gunzilla’s Theodore Agranat said that blockchain technology helps “enhance’ gamer experience

article-image

BTC continues to smash expectations as it holds near $90,000

article-image

Inflation is higher than it was in 2016, and the Fed is just at the beginning of its rate-cutting cycle

article-image

Bitwise’s Matt Hougan expects BTC to hit $100,000 by the end of the year and continue upward in 2025

article-image

Midwest Blockchain Week showed the depth of talent available at US universities while focusing on how memecoins could bring back the retail investor