MEV Smoothing

The core objective is to pool extracted MEV from activities like arbitrage and liquidations and redistribute it to a broader set of validators or stakers, rather than concentrating it with a few sophisticated searchers. This is achieved through mechanisms like proposer-builder separation (PBS) and dedicated smoothing contracts.

• PBS: Builders compete to create the most valuable block, with the winning bid paid to the protocol's smoothing pool.
• Redistribution: The accumulated value is then distributed to validators based on a predefined, egalitarian schedule.

By smoothing rewards, the protocol reduces the economic incentive for validators to run sophisticated, centralized MEV extraction operations. This helps prevent a scenario where only the largest, best-capitalized validators can compete for the most lucrative MEV, which would lead to staking centralization.

• Levels the playing field: Smaller validators receive a more predictable income stream from MEV.
• Promotes decentralization: A key security objective for proof-of-stake networks.

Traditional MEV often involves time-bandit attacks or reorgs, where validators replace recent blocks to capture MEV. Smoothing protocols aim to disincentivize this by making the value of any single block less volatile and by implementing cryptographic commitments.

• Commit-Reveal Schemes: Builders commit to a block's content without revealing the full MEV value upfront, reducing the incentive for last-second replacement.
• Stable Rewards: With smoothed payouts, the gain from attacking a specific block is diminished.

MEV smoothing transforms highly variable, lottery-like MEV income into a more stable and predictable reward stream for stakers and validators. This improves the economic model for network participants and makes staking yields more reliable.

• Smooths reward variance: Reduces the "luck" factor in block proposal rewards.
• Improves protocol economics: More predictable yields can attract a broader, more stable base of capital to secure the network.

The primary technical implementation involves Proposer-Builder Separation (PBS). In this model:

• Builders (specialized nodes) compete in an auction to create the most valuable block bundle.
• Proposers (validators) simply choose the highest-paying bundle.
• The winning bid is paid to a smoothing pool or directly redistributed. Protocols like Ethereum's PBS roadmap (e.g., MEV-Boost) are foundational to this approach, though native, in-protocol smoothing is the end goal.

MEV Smoothing is often discussed alongside MEV-Burn, but they have distinct objectives:

• MEV Smoothing: Redistributes extracted value within the validator/staker set.
• MEV-Burn: Permanently destroys (burns) the extracted value, reducing net issuance and making the asset more deflationary.

Some protocols may combine elements of both. Smoothing focuses on fairness and security, while burning focuses on monetary policy and tokenomics.

Effective smoothing requires near-instant access to a canonical view of the mempool and block contents. High-latency networks or reliance on a single data provider can create information asymmetry, allowing some validators to front-run the smoothing pool itself. This necessitates decentralized, low-latency relay networks or data availability layers to ensure all participants operate from the same state.

MEV is not confined to a single chain. Cross-chain arbitrage and bridging exploits generate value that a single-chain smoothing pool cannot capture. This fragmentation reduces the smoothing mechanism's effectiveness and can lead to value leakage. Solutions require complex coordination between different consensus layers and execution environments, posing a major interoperability challenge.

Designing the right incentives is critical. Key questions include:

• How are rewards distributed among pool participants?
• How are smoothing pool operators compensated and prevented from extracting value themselves?
• What governance model decides on parameters like the redistribution curve? Poorly designed incentives can lead to low participation, centralization, or the pool becoming a new MEV extraction vector.

Not all value in a block is easily classifiable as MEV. Distinguishing between legitimate arbitrage, priority fees for genuine urgency, and extractive front-running requires sophisticated heuristics. Automated systems may incorrectly penalize validators or fail to capture sophisticated adversarial MEV strategies, leading to inaccurate redistribution and potential disputes.

Redistributing value extracted from user transactions enters a legal gray area. Regulators may view the smoothed rewards as securities or income derived from an activity that could be construed as market manipulation. The legal status of the smoothing pool operator and the tax implications for recipients create significant uncertainty for large-scale adoption.

A smoothing pool's efficacy grows with participation. Achieving critical mass among validators is a chicken-and-egg problem: validators won't join a pool with low total value, and the pool cannot offer competitive yields without many validators. This requires overcoming coordination costs and convincing validators to forgo potential maximal extractable value for the network's long-term health.

Miner Extractable Value (MEV) is the total value that can be extracted from block production by including, excluding, or reordering transactions within a block. It arises from arbitrage opportunities, liquidations, and other on-chain strategies. MEV is the foundational problem that smoothing and other solutions aim to address.

• Sources: DEX arbitrage, liquidations, NFT mint sniping.
• Impact: Can lead to network congestion, frontrunning, and increased transaction costs for users.

Proposer-Builder Separation (PBS) is a protocol-level design that separates the roles of block building (selecting and ordering transactions) from block proposing (signing and publishing the block). This is a core enabler for MEV smoothing.

• Builder: Specialized node that constructs blocks to maximize MEV.
• Proposer (Validator): Chooses the most profitable block from builders via an auction.
• Purpose: Creates a competitive market for block space and allows for MEV redistribution mechanisms.

MEV Redistribution refers to the process of capturing extracted MEV and distributing it to a broader set of network participants, rather than allowing it to be captured solely by block producers or sophisticated searchers. MEV smoothing is a specific form of redistribution.

• Methods: Smoothing pools, protocol-level burning, direct staker/validator rewards.
• Goal: Reduce the negative externalities of MEV and promote a more equitable ecosystem.

A Searcher is an entity (often a bot or automated strategy) that identifies and executes profitable MEV opportunities by submitting complex transaction bundles to builders or validators. They are the primary source of MEV supply.

• Role: Discovers arbitrage, liquidation, or other profitable on-chain actions.
• Tooling: Uses sophisticated algorithms and low-latency infrastructure to compete.
• Relationship to Smoothing: Searchers pay fees (bids) to have their bundles included; these bids become the revenue that smoothing pools distribute.

MEV Burn is a proposed alternative to MEV smoothing where a portion of the MEV revenue captured from transaction ordering is permanently destroyed (burned) by the protocol itself, rather than being redistributed to validators.

• Mechanism: Implemented via a base fee for priority transactions (e.g., EIP-1559 for MEV).
• Effect: Reduces the net issuance of the native token, making it deflationary.
• Contrast with Smoothing: Burning benefits all token holders through scarcity, while smoothing benefits active stakers/validators directly.