MEV and Liquid Staking

Our previous overview on the Ethereum staking rewards briefly covered the Execution Layer rewards, consisting of transaction priority tips and MEV (Maximum Extractable Value). LSTs MEV significantly increase the probability of validators being selected to propose fresh blocks and duly receive rewards. LSTs facilitate the broader distribution of MEV rewards, thus effectively reducing the concentration of network rewards among a limited number of prominent validators.

To better understand the relationship between MEV and liquid staking we’ve decided to dive a bit deeper on how MEV can make liquid staking protocols more efficient.

Introduction to MEV

Maximal extractable value (MEV) refers to the phenomenon wherein operators find profitable opportunities across the blockchain by previewing pending transactions in the mempool. The mempool could be seen as a waiting area for yet-to-be-confirmed transactions. MEV operators would execute various strategies to extract value from users by reordering, inserting, and censoring transactions within blocks.
Additionally, they profit from more opportunistic MEV such as arbitrage and liquidations.
MEV rewards are split between various agents participating within the MEV ecosystem, these agents can generally be divided into these three categories: Searchers, builders, and validators.

Searchers: as their name would suggest, searchers are there to look for extractable value opportunities through different methods. So most of the arbitrage and liquidations that happen on-chain are performed by searchers. Searchers bundle transactions together and give them to builders, these bundles do not go through the mempool like normal transactions but go directly to the block builder. 

Builders: Searchers group transactions together and the builders put these transactions into blocks for proposers. These blocks may not only contain the transaction of the searcher but can additionally contain transactions from the mempool. The builders are selecting the best opportunities found by searchers. 

Validators: Sell blockspace to the searchers and builders and in return are rewarded with parts of the profits. The validator receives rewards for issuing new blocks and performing their consensus role to validate blocks.

MEV can also complement liquid staking protocols when their node operators run a MEV middleware.

MEV Boost

MEV-Boost is an open source middleware developed by the Flashbots team. It can be run by validators to access a competitive block-building market. MEV-Boost was developed to address the issue of centralized control in block creation responsibilities. Prior to the development of MEV-Boost and the Ethereum Merge, miners held centralized control over the selection, building, and proposing of blocks. This centralized control led to misaligned interests and an unfair marketplace for network participants. MEV-Boost aims to create a more transparent and secure MEV marketplace, by dividing block creation responsibilities among specialized agents. Builders are responsible for creating blocks that include transaction order flow and a fee designated for the validator proposing the block. Separating the roles of proposers and block builders fosters increased competition, decentralization, and censorship-resistance..

MEV-Boost Architecture (Source: Flashbots)

Validators that run MEV-Boost and connect to MEV Relays, have the ability to access the marketplace of builders and propose blocks that optimize the capture of MEV value. Instead of proposing blocks they constructed themselves, validators can source blocks from this marketplace, selecting the one that best captures MEV value in a highly efficient manner. The utilization of MEV middleware has gained significant adoption in the Ethereum ecosystem. At the time of writing, an impressive 95% of blocks proposed within the past two weeks were attributed to validators using MEV-Boost.

MEV-Boost Slot Share (Source: mevboost.pics July 11, 2023)

MEV serves as a valuable complement to the Ethereum staking architecture, as it enables the division of block creation responsibilities. This division, in turn, fosters greater decentralization and efficiency within the network.

The MEV rewards that validators can receive vary considerably and are influenced by several factors, such as the  level of competition for blockspace in the market, the volume and frequency of transactions, and the effectiveness of the MEV middleware utilized.

Daily Gas MEV Revenue (Source: mevboost.pics July 11, 2023)

It is worth noting that even minor improvements in transaction sequencing can result in significant additional rewards. This is particularly noteworthy considering Ethereum's pivotal role as the foundation for the decentralized finance (DeFi) ecosystem, where users conduct daily transactions involving billions of dollars. An example that illustrates this is the 689 ETH MEV reward that a Lido validator received on May 9th 2023: link

MEV Liquid Staking

In addition to node operators being able to complement their revenue with MEV captured value, they have the opportunity to re-stake the execution layer rewards they collect, thereby increasing the number of validators they manage. This, in turn, enhances the likelihood of one of their validators being chosen to propose new blocks and earn rewards accordingly. Such a strategy acts as a lever to boost staking efficiency among validators.

MEV extractors play a crucial role in improving the efficiency of the Ethereum network by capturing rewards from market inefficiencies and arbitrage opportunities. As a result, they contribute to reducing the overall cost associated with transaction execution. This efficiency enhancement has the potential to drive greater demand for the network's services, leading to increased workload for validators.

Liquid staking can also act as an effective mechanism in fostering a more democratic and decentralized MEV ecosystem. By allowing anyone to stake their tokens and actively participate in the consensus process, liquid staking enables the wider distribution of MEV rewards, consequently reducing the concentration of network rewards among a few large validators.

Looking Forward

We are excited to further complement the ecosystem by increasing a wider distribution of MEV rewards along with subsequent demand and utility for staked ETH variants. Stay tuned for how we’ll be working with RPC in the ecosystem to provide even more efficiency in the MEV ecosystem.