Setting Up a Governance Process for MEV Policy Updates

Maximal Extractable Value (MEV) policy defines the rules governing how searchers, validators, and protocols interact with transaction ordering and block building. A formal governance process is essential for updating these rules, as they directly impact user costs, network security, and protocol revenue. This guide outlines the key components for establishing a transparent, on-chain governance system for MEV policy, moving beyond informal discussions to executable code changes. A well-defined process typically involves a proposal lifecycle, a voting mechanism, and a clear implementation path.

The first step is defining the proposal framework. Governance proposals should be submitted as executable code or detailed specifications on-chain. For example, a proposal might modify parameters in a Flashbots Protect RPC integration, adjust the distribution of MEV revenue in a Cosmos SDK-based chain, or update the rules of a proposer-builder separation (PBS) system. Each proposal requires a clear title, a comprehensive description of the change, the on-chain code diff or configuration parameters, and a rationale explaining the expected impact on network metrics like latency, censorship resistance, and validator revenue.

A robust voting system must then be established to gauge stakeholder sentiment. This involves setting a quorum (minimum voting participation) and a passing threshold (e.g., >50% majority). Voting power is typically weighted by a governance token, with mechanisms like snapshot voting for off-chain signaling followed by Timelock-controlled execution for safety. For instance, a proposal to enable MEV smoothing via a protocol-owned smoothing contract would be voted on by token holders, with the executable payload queued in a Timelock contract for a 3-day delay before activation, allowing for a final review period.

Technical implementation requires integrating the governance module with the core protocol. On Ethereum, this often uses OpenZeppelin Governor contracts with a Tally interface. For Cosmos chains, the x/gov module is standard. The process flow is: 1) Proposal submission (with deposit), 2) Community discussion period (e.g., 3 days), 3) Formal voting period (e.g., 5 days), 4) Timelock queueing if passed, and 5) Automatic execution. All parameters—voting periods, quorum, thresholds—should be themselves governable, allowing the system to evolve. This ensures the MEV policy can adapt to new threats like time-bandit attacks or opportunities like fair ordering schemes.

The first prerequisite is a formalized governance framework. This is the set of rules encoded in smart contracts that defines how proposals are submitted, voted on, and executed. For MEV policy updates, this framework must include a timelock contract. A timelock enforces a mandatory delay between a proposal's approval and its execution, giving stakeholders a final review period to react to potentially harmful changes. Popular frameworks like OpenZeppelin Governor provide modular contracts that can be customized to include this critical security feature.

You must also establish clear proposal parameters. These are the numerical thresholds that govern the process, such as the minimum voting power required to submit a proposal (proposal threshold), the percentage of votes needed for approval (quorum), and the voting delay and period. For high-stakes MEV policy changes—like adjusting validator slashing conditions or modifying block builder selection—these parameters should be set conservatively to ensure broad consensus. For example, a DAO might require a 4% quorum and a 60% supermajority for such proposals.

A secure and verifiable voting token is the engine of participation. This is typically the protocol's native governance token (e.g., UNI, AAVE, MKR), which must be distributed to stakeholders who have a vested interest in the network's health. For MEV governance, it's crucial that voting power is aligned with entities that bear the risk, such as stakers, sequencer operators, or relay operators. The token contract must support snapshot voting, which records voter balances at a specific block to prevent manipulation during the voting period.

Finally, you need off-chain infrastructure for communication and simulation. This includes a forum (like Discourse or Commonwealth) for discussing proposal drafts and a block explorer (like Etherscan) for verifying contract interactions. Most critically, you require a tool for simulating the effects of a governance transaction before it is executed on-chain. Services like Tenderly or the OpenZeppelin Defender Simulator allow you to run a "dry run" of a proposal, checking for unintended consequences in the MEV supply chain without risking real funds or network stability.

Effective MEV governance requires a clear process for proposing, debating, and implementing policy changes. This typically involves a decentralized autonomous organization (DAO) or a multi-signature council that represents key stakeholders: validators, builders, searchers, and end-users. The process begins with a formal governance proposal that outlines a specific policy change, such as adjusting the min-bid for builder auctions or modifying the criteria for transaction inclusion. Proposals should include a detailed rationale, technical specifications, and an analysis of potential impacts on network security, decentralization, and user experience.

After submission, proposals enter a community discussion phase. This is critical for gathering feedback and identifying unintended consequences. Forums like the Ethereum Magicians or dedicated Discord channels are common venues. Following discussion, a formal on-chain vote is initiated using a token-based system like OpenZeppelin's Governor. A simple example of a vote function in a Solidity contract might check a proposer's voting power: require(getVotes(proposer, block.number - 1) >= proposalThreshold, "Governor: proposer votes below threshold");. Voting periods typically last 3-7 days to ensure broad participation.

Once a proposal passes, it moves to the execution phase. For protocol-level changes (e.g., to a consensus client like Prysm or Lighthouse), this involves coordinating a client software upgrade. For application-layer policies (e.g., within a specific rollup or DEX), execution may be automated via a Timelock Controller contract, which enforces a mandatory delay between vote approval and implementation. This delay acts as a safety mechanism, allowing users to exit or react if they disagree with the outcome. The final step is verification and monitoring, using tools like Tenderly or EigenPhi to track MEV metrics post-update.

The foundation of a robust governance process is a smart contract-based proposal system. This system defines the lifecycle of a proposal, from creation to execution. Key contract functions typically include propose(), vote(), queue(), and execute(). The propose() function accepts parameters like the target contract address, calldata for the proposed action, and a description hash pointing to off-chain discussion (e.g., a Snapshot or forum post). This enforces a formal structure and ensures all necessary data is immutably recorded on-chain before voting begins.

Proposals must include clear, executable calldata. For an MEV policy update, this could be a call to a setParameters() function on a searcher registry or a upgradeTo() call for a relay contract. Developers should use tools like cast calldata from Foundry to encode the function call. For example, a proposal to change a minimum bond might encode: cast calldata "setMinBond(uint256)" 1000000000000000000. The proposal contract stores this calldata and later uses it via a low-level call() to the target contract if the vote passes.

A critical security pattern is the use of a timelock contract between the vote and execution stages. After a proposal succeeds, it is queued in the timelock with a mandatory delay (e.g., 48 hours). This delay gives the community a final safety window to react to a malicious or erroneous proposal before it takes effect. The timelock becomes the owner or executor of the key protocol contracts, meaning only it can execute the approved calldata after the delay expires. This prevents instant, unilateral changes by any single entity, including the core team.

Governance weight is typically assigned via a token-based voting mechanism. Voters cast votes proportional to their token balance, often using snapshotting (e.g., ERC-20 snapshots or ERC-721 delegation) to prevent manipulation. The voting contract must implement logic for quorum (minimum participation) and a passing threshold (e.g., >50% for simple majority or >66% for super-majority). Gas-efficient voting strategies, like Compound's or OpenZeppelin Governor, are commonly forked and adapted. Consider integrating with Snapshot for gas-free signaling votes before the on-chain proposal is created, gauging community sentiment without cost.

The final step is automated execution. Once the timelock delay passes, any account can call the execute() function on the proposal contract. This function verifies the proposal's state is Queued and that the timelock delay has elapsed, then forwards the stored calldata to the target contract via the timelock. Successful execution updates the proposal state to Executed and emits an event. It is good practice to have a multisig or guardian role with the ability to cancel malicious proposals that are in the Queued state, serving as a last-resort circuit breaker for the system.

The core of a governance system for MEV policy is the voting contract. This smart contract defines the rules for proposal submission, voting, and execution. Key parameters to encode include the proposal threshold (minimum stake or tokens required to submit a proposal), voting period (e.g., 7 days), and quorum requirement (minimum participation needed for a vote to be valid). For MEV-related decisions, consider using a time-lock contract to delay execution, allowing users time to react to approved changes before they take effect.

Voting power is typically derived from a governance token. The simplest model is token-weighted voting, where one token equals one vote. For more nuanced control, consider delegated voting (as used by Compound or Uniswap), where token holders can delegate their voting power to experts or representatives. When setting policy for Maximum Extractable Value (MEV), it's critical that the voting mechanism itself is resistant to manipulation, such as vote-buying or flash loan attacks, which could allow an attacker to temporarily control the governance outcome.

A proposal lifecycle has distinct phases. First, a discussion period on a forum like Commonwealth or Discord allows for community feedback. Next, the formal proposal is submitted on-chain, triggering the voting period. Votes are cast directly from user wallets or through delegation. Finally, if the proposal passes the quorum and majority thresholds, it can be queued in a timelock and then executed, automatically updating the relevant protocol parameters. This process ensures changes are transparent and democratically ratified.

For MEV-specific policies—such as adjusting validator selection criteria, updating block builder requirements, or modifying fee structures—the proposal should include clear, auditable code. For example, a proposal to update a mev-boost relay allowlist would specify the new list of trusted relay endpoints. All code changes should be verified on a block explorer like Etherscan prior to the vote, and major upgrades should undergo a security audit from a firm like OpenZeppelin or Trail of Bits before execution.

We'll build a simple on-chain governance contract for MEV policy updates using Solidity and OpenZeppelin's governance libraries. The contract will allow token holders to propose, vote on, and execute changes to a PolicyRegistry that defines rules for validators and block builders. Start by setting up your development environment with Hardhat or Foundry and install the required dependencies: npm install @openzeppelin/contracts.

The core of the system is the PolicyRegistry.sol contract, which stores the active MEV policy rules. This is a simple key-value store where the policy is represented as a bytes object, allowing for flexibility (it could be a hash of an IPFS document or encoded parameters). The governance contract will have the exclusive right to update this storage. First, deploy the registry:

solidityCopy
contract PolicyRegistry {
    address public governance;
    bytes public currentPolicy;
    
    constructor(address _governance) {
        governance = _governance;
    }
    
    function updatePolicy(bytes calldata _newPolicy) external {
        require(msg.sender == governance, "Only governance");
        currentPolicy = _newPolicy;
    }
}

Next, implement the governance contract. We'll use OpenZeppelin's Governor and TimelockController for secure, time-delayed execution. The MEVGovernor contract will extend Governor and handle the proposal lifecycle. The key function is proposePolicyUpdate, which creates a proposal to call updatePolicy on the registry.

solidityCopy
import "@openzeppelin/contracts/governance/Governor.sol";
import "@openzeppelin/contracts/governance/extensions/GovernorTimelockControl.sol";

contract MEVGovernor is Governor, GovernorTimelockControl {
    PolicyRegistry public policyRegistry;
    
    constructor(IVotes _token, TimelockController _timelock, PolicyRegistry _registry)
        Governor("MEVGovernor")
        GovernorTimelockControl(_timelock)
    {
        policyRegistry = _registry;
    }
    
    function proposePolicyUpdate(bytes calldata newPolicy) public returns (uint256) {
        address[] memory targets = new address[](1);
        targets[0] = address(policyRegistry);
        uint256[] memory values = new uint256[](1);
        bytes[] memory calldatas = new bytes[](1);
        calldatas[0] = abi.encodeWithSelector(policyRegistry.updatePolicy.selector, newPolicy);
        return propose(targets, values, calldatas, "Update MEV Policy");
    }
    // ... required Governor function implementations (votingDelay, votingPeriod, quorum)
}

Integrate a timelock for security. The TimelockController adds a mandatory delay between a proposal's approval and its execution, giving users time to react to potentially harmful policy changes. Deploy the timelock with the governor as the sole proposer and executor. This setup ensures that even a successful proposal cannot be executed immediately, mitigating the risk of a malicious policy update being pushed through in a single block.

Finally, test the complete workflow. Write Hardhat or Foundry tests that simulate: 1) A token holder proposing a new policy (e.g., a rule to cap maximum extractable value per block), 2) Other holders voting on the proposal, 3) The proposal succeeding and entering the timelock queue, and 4) The policy being automatically executed after the delay. Use snapshotting to test voting power at specific blocks and verify the PolicyRegistry state changes correctly.

For production, consider additional features: - Policy Simulation: Use a forked mainnet testnet via tools like Tenderly or Foundry's cheatcodes to simulate the economic impact of a policy change before voting. - Emergency Brake: Implement a multi-sig controlled pause function in the registry as a last-resort safety mechanism. - Transparency: Emit events for all state changes and consider storing policy documents on IPFS or Arweave, with the contract storing only the content hash. The complete code is available on the Chainscore Labs GitHub.

To begin implementation, finalize your governance parameters. This includes setting the quorum threshold (e.g., 5% of total token supply), voting period duration (e.g., 7 days), and the required approval percentage for a vote to pass (e.g., a simple majority of 51% or a supermajority of 67%). These values should be encoded into your governance smart contracts, such as those built using OpenZeppelin's Governor standard. Ensure your TimelockController is configured with the appropriate delay, which acts as a critical security buffer between a proposal's approval and its execution.

Next, integrate the governance module with your existing MEV infrastructure. Your proposal execution logic must interface directly with the systems managing MEV flows. For a searcher or builder policy update, this could involve calling a function on a registry contract like setAllowedSearcher(address searcher, bool status). For a protocol like Flashbots Protect or a CowSwap-style service, integration means the governance contract has the authority to update the relayer or solver allowlist. Thoroughly test these integrations on a testnet (e.g., Sepolia or Holesky) using frameworks like Foundry or Hardhat to simulate proposal creation, voting, and execution.

Establish clear off-chain communication and documentation channels. A successful governance process depends on an informed community. Create a dedicated forum (e.g., using Discourse) or discussion space for temperature checks and signaling before formal on-chain proposals. Publish transparent documentation detailing the proposal lifecycle, how to delegate voting power, and the specific smart contract addresses for the Governor, Timelock, and Token contracts. Tools like Tally or Snapshot can be used to facilitate off-chain signaling and voter education.

Finally, consider the long-term evolution of your governance system. As the MEV landscape and your protocol mature, you may need to introduce more sophisticated mechanisms. This could include a multi-tiered governance structure with a Security Council for emergency responses, delegated expert committees for technical review of MEV-related proposals, or even transitioning to a futarchy model for high-stakes economic parameter changes. Regularly review governance participation metrics and be prepared to iterate on the process based on community feedback and real-world outcomes.