Ethereum’s transition to Proof-of-Stake (PoS) has been a windfall for MEV software maker Flashbots. The organization is becoming an increasingly important and centralizing force in Ethereum.
MEV is an acronym for Maximum Extractable Value. MEV used to stand for Miner Extractable Value, but the community broadened the term to Maximum after Ethereum deprecated miners with PoS.
MEV now encompasses all money that block proposers siphon from less sophisticated users’ transactions by censoring, front-running, back-running, re-ordering, or adding opportunistic transactions.
For context, on September 15, about 12% of Ethereum blocks used Flashbots’ MEV-Boost software. Three weeks later, that percentage had nearly quadrupled. If Flashbots continues this growth trajectory, it could soon overtake a majority of all Ethereum blocks.
MEV penalizes everyday users, further enriching the wealthy
Common users of Ethereum simply broadcast transactions for basic purposes like swapping one token for another. They’re not able to first scan multiple networks of liquidity and optimize their order prices and timing.
In contrast, sophisticated Ethereum participants like block proposers monitor a robust network of DeFi applications in real time. Block proposers are typically wealthy operators who can afford services like Flashbots and low-latency infrastructure.
With their expansive surveillance powers over the millions of available trades on DEXs, block proposers can forcibly liquidate, arbitrage, re-order, cancel, or otherwise take advantage of common users. Block proposers’ privileged computational and informational resources allow them to extract rent from regular users who don’t conduct operations with such expensive infrastructure.
Simply put, block proposers extract MEV from regular users. The most popular software used to accomplish this rent extraction, Flashbots, is analogous to software used by quantitative and flash traders in the traditional stock market.
Flashbots Protect: A better-sounding name than Flashbots Extortion
Flashbots claims to provide users a method to protect themselves from one form of MEV. Its solution, Flashbots Protect, is essentially the only option for users to avoid front-running. In addition, Flashbots Protect specifically guards against front-running, which is just one of many types of MEV.
Front-running uses advance knowledge of large transactions that will impact the price of an asset. A trading firm could receive a large buy order for a particular asset. Someone at that firm could see the order and buy that asset before the firm is able to execute its larger order.
Of course, Flashbots Protect can only protect against front-running if (1) a user installs Flashbots’ software, and (2) routes their transactions first through Flashbots’ Auction.
Naturally, Flashbots charges fees in its Auction. Users who decline to route their orders through Flashbots will, on average, pay substantial MEV penalties.
In this way, Flashbots Protect meets the definition of extortion: the act or practice of obtaining from a person by force or intimidation, especially money or other property.
Other features of Flashbots’ software
Because Flashbots Protect prevents front-running, and front-running is one leg of a so-called sandwich attack (the second leg is back-running), Flashbots Protect also prevents sandwich attacks by tautology.
The software also promises to eliminate gas fees paid for reverted transactions, as well as an easier view of transaction status on Etherscan. The company also plays a key role in Ethereum’s decision-making.
Prior to the Merge, when Ethereum was still running Proof-of-Work (PoW), users could activate something called Fast Mode for front-running protection. However, Fast Mode did not offer revert protection. (Revert protection saves users from paying gas fees for transactions that never ultimately join Ethereum’s blockchain.) Now that Ethereum switched to PoS, Flashbots holds a near-monopoly on offering both front-running protection and revert protection.
Block proposers using flash trading and mass surveillance tools like Flashbots’ MEV-Boost could soon pre-process a majority of all Ethereum blocks. This rent extraction shows no sign of slowing since The Merge. In fact, Flashbots’ market share has nearly quadrupled within one month and is threatening to overtake a majority share in the coming months.