This is part two of a multi-part series exploring MEV (Maximal Extraction Value).
To learn the basics of MEV and how it affects you, check out part one of this series, How MEV is preventing you from making profitable trades.
In this piece, we will dive deeper into the efforts that are being taken to protect transactions from MEV exploits and the risks these solutions are bringing to the wider Ethereum ecosystem.
Private Transactions and “Dark Pools”
In our previous piece, we briefly discussed how traders may choose to conduct their transactions off-chain with validators in order to maintain privacy.
In this case, the trader would send a potential MEV transaction directly to the validator, rather than broadcasting it to the public mempool. The validator would then include the transaction in a block and share the profits with the trader. This approach can help traders to protect their transactions from being exploited by other parties, while still allowing them to take advantage of MEV opportunities.
“Dark pools” are private, access-restricted mempools
Instead of sending transactions through a single validator, “dark pools” are private, access-restricted mempools that are open only to users who are willing to pay certain fees. These pools function in a similar way to the off-chain arrangements described above, but on a larger scale.
So you must be wondering, how do these private mempools effect your use of the Ethereum network?
The Risk of “Dark Pools” to Ethereum
- Pay-to-Play: By allowing only certain users to access the mempool and participate in MEV opportunities, dark pools can diminish the permissionlessness and trustlessness of the Ethereum blockchain and potentially turn it into a “pay-to-play” system that favors the highest bidder. This trend could have negative implications for the decentralization and fairness of the Ethereum network.
- Centralization: Permissioned mempools, which are restricted to a certain group of participants, contribute to validator centralization by enabling large pools with multiple validators to offer transaction privacy to traders and users. This could increase the MEV revenues of these validators and give them an advantage over smaller, independent validators. As a result, the use of permissioned mempools could increase the risks of validator centralization, which could have negative consequences for the decentralization and security of the Ethereum network.
What is the largest “Dark Pool”?
The most widely used “dark pool” service is provided by Flashbots
Flashbots is a service that enables searchers to submit MEV transactions to validators without revealing them to the public mempool. It is an independent project that extends the capabilities of execution clients, providing a way for searchers to securely submit their transactions to validators.
Flashbots created an open source middleware called MEV Boost that is run by validators to access a competitive block-building market allowing them to maximize their staking reward.
As seen in the image shared by Flashbots, over 60% of all Ethereum blocks are proposed through MEV-boost. This suggests that the Ethereum network is not as decentralized as previously believed.
From Centralization to Censorship
The Office of Foreign Assets Control (OFAC) is a division of the US Treasury Department that administers and enforces economic sanctions and trade embargoes against targeted foreign countries, organizations, and individuals.
In August 2022, OFAC imposed sanctions on Tornado.cash, an open-source decentralized platform that enables anonymous transactions on the Ethereum blockchain, due to its suspected involvement in money laundering.
The sanctions imposed by OFAC mean that any person or entity (including those based in the US, as well as individuals and organizations from other countries that have connections with US entities) that engages with the targeted platform or the designated Ethereum addresses could be held liable under US law.
According to The Block, over 63% of Ethereum transaction blocks are now OFAC compliant. Ethereum is facing significant censorship issues.
In conclusion
MEV (maximal extraction value) was originally intended to be a reward system for validators and users of the Ethereum network, but it has instead resulted in increased centralization and censorship in the Ethereum ecosystem.
Some argue that as a protocol matures, centralization and censorship are an inevitable outcome. Others argue that centralization and censorship can be beneficial. Regardless, the emergence of MEV has led to a change in the Ethereum ecosystem that is fundamentally at odds with the decentralized, censorship-resistant vision of blockchain networks.
The positive aspect is that the Ethereum developer community acknowledges the issue of MEV extraction and has suggested various solutions to restore decentralization and censorship resistance on Ethereum.
I will delve deeper into those solutions in the next installment of this series. Until then, stay safe and I’ll be back soon.
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