Setting Up a Governance Framework for Validator Extractable Value Policies

Validator Extractable Value (VEV) refers to the profit a validator can earn by strategically ordering, including, or censoring transactions within a block they propose. This includes Maximal Extractable Value (MEV) captured via arbitrage or liquidations, as well as value from transaction fee ordering. Without governance, VEV strategies can lead to network centralization and user harm. A VEV policy governance framework allows a protocol's stakeholders to define, vote on, and enforce rules that govern how validators may or may not participate in these activities, aligning validator incentives with the long-term health of the ecosystem.

Setting up this framework requires several core technical components. First, you need an on-chain governance module, such as a smart contract implementing a token-weighted voting system (e.g., based on OpenZeppelin's Governor). Second, you need a policy registry—a smart contract that stores the active rules, such as allowed MEV relay lists, maximum slippage parameters for backrunning, or slashing conditions for censorship. Finally, you need validator client integration, where node operators run modified client software (like Prysm or Lighthouse) that queries the policy registry and enforces the rules during block proposal.

A basic governance proposal to whitelist a specific MEV-Boost relay would involve several steps. A community member submits a transaction to the Governor contract proposing to update the policy registry. After a voting period, if the proposal passes, the registry is updated. Validator clients, which are periodically checking the registry's state, would then reconfigure their mev-boost endpoints to only connect to the newly approved relays. Here is a simplified example of a policy registry update function in Solidity:

solidityCopy
function updateAllowedRelay(address _relayAddress, bool _isAllowed) external onlyGovernance {
    allowedRelays[_relayAddress] = _isAllowed;
    emit RelayPolicyUpdated(_relayAddress, _isAllowed);
}

Effective VEV governance balances validator autonomy with ecosystem safety. Policies might mandate the use of fair ordering protocols like SUAVE or FSS, require the public disclosure of captured MEV, or implement a tax on VEV profits directed to a community treasury. The key is to encode these rules as machine-readable parameters that validator software can automatically comply with. This moves enforcement from social consensus to cryptographic verification, reducing ambiguity. Frameworks like Cosmos SDK's x/gov module or Compound's Governor Bravo provide proven foundations to build upon.

For a team launching a new Proof-of-Stake chain, integrating VEV policy governance from day one is a proactive measure. Start by forking and adapting an existing governor contract. Define initial policies in the genesis block, such as a default MEV relay set. Most importantly, instrument your validator clients to log policy compliance. This creates an auditable trail, allowing the DAO to verify enforcement and propose adjustments. The end goal is a self-regulating system where the economic interests of stakers, validators, and users are harmonized through transparent, on-chain rules.

A governance framework for Validator Extractable Value (VEV) requires a clear understanding of the underlying blockchain's consensus mechanism and validator economics. VEV refers to the profit a validator can earn by manipulating transaction ordering within a block they propose, distinct from the more general Miner Extractable Value (MEV). You must be familiar with your chain's specific block proposal process, slashing conditions, and the typical sources of VEV, such as arbitrage, liquidations, and front-running opportunities. This foundational knowledge is critical for crafting effective and enforceable policies.

The core technical prerequisite is direct access to a validator node's software and configuration. This typically involves running a consensus client (e.g., Prysm, Lighthouse for Ethereum) and an execution client (e.g., Geth, Nethermind). You will need permissions to modify the node's transaction pool (mempool) sorting logic, block building strategies, and potentially integrate with specialized software like MEV-Boost relays for Ethereum. Ensure your node is fully synced and operates with a high uptime to reliably test policy enforcement in a staking environment.

Development and testing environments are non-negotiable. Set up a local testnet (e.g., using geth --dev or a local Ethereum testnet) or utilize a public testnet like Goerli or Sepolia. This sandbox allows you to simulate VEV scenarios and deploy policy logic without risking real funds or slashing penalties. Essential tools include a code editor, the relevant blockchain's SDK (like ethers.js or web3.py), and monitoring tools such as beacon chain explorers and block analysis dashboards to track validator performance and extracted value.

For the policy framework itself, you will need to decide on an implementation architecture. Common approaches include smart contract-based rulesets on a governance chain, trusted off-chain oracles that sign attestations, or direct modifications to the validator client's source code. Each method has trade-offs in decentralization, upgradeability, and security. Prepare the corresponding development stack: a Solidity environment for on-chain rules, a secure signing server for oracles, or the ability to compile and run a forked version of the consensus client.

Finally, establish the organizational and procedural prerequisites. This includes defining the governance body (e.g., a DAO, a multisig council), creating proposal and voting mechanisms (using tools like Snapshot or Tally), and setting clear communication channels for stakeholders. Document the policy objectives, key risk parameters (like maximum allowable VEV capture), and the escalation process for policy violations. A successful framework balances technical enforcement with transparent human governance.

A VEV policy proposal is a formal governance document that defines the rules and procedures for how a validator set should handle extractable value opportunities. The proposal must clearly articulate the policy objectives, such as maximizing network security, ensuring fair value distribution, or mitigating centralization risks. It should specify the scope of the policy, including which types of VEV are covered—like Maximal Extractable Value (MEV) from block ordering or Proposer-Builder Separation (PBS) rewards—and which validator operations are subject to its rules. A well-drafted proposal serves as the foundational text for community debate and on-chain voting.

The technical core of the proposal involves defining the enforcement mechanism. This typically requires specifying smart contract logic or protocol-level changes. For example, a proposal might mandate that validators run specific software like MEV-Boost for Ethereum or implement a commit-reveal scheme for block proposals. The proposal should include or reference the exact code changes, such as a new SlashingCondition contract that penalizes validators for non-compliance, or an update to the chain's consensus client configuration. Providing verifiable, auditable code is critical for establishing trust and enabling technical review by the community.

Finally, the proposal must outline the governance process for its own adoption and future amendments. This includes specifying the voting mechanism (e.g., token-weighted snapshot, multi-sig execution), the required quorum and approval thresholds, and the timeline for implementation. It should also define key parameters, such as the address of the treasury or reward distributor contract that will receive extracted value, and the process for distributing these funds (e.g., public goods funding, staker rebates). A complete draft, with all technical and procedural details, is then submitted to the governance forum for community feedback before proceeding to a formal on-chain vote.

The core of the governance framework is a smart contract that manages proposal creation, voting, and execution. A common pattern is a Governor contract, often based on OpenZeppelin's Governor module, which handles the voting logic and state. A separate TimelockController contract should be used to queue and execute successful proposals, introducing a mandatory delay. This delay is a critical security measure, allowing the community to react if a malicious proposal passes. The Timelock becomes the owner of the policy parameters, meaning only proposals that pass through the full governance cycle can modify them.

Key parameters must be defined within the Governor contract to balance efficiency with security. The voting delay is the number of blocks between a proposal's submission and the start of the voting period. The voting period defines how long votes can be cast, typically lasting 3-7 days in Ethereum block time. A proposal threshold sets the minimum voting power a user must hold to submit a proposal, preventing spam. Finally, a quorum requirement ensures a minimum percentage of the total governance token supply must participate for a vote to be valid, protecting against low-turnout attacks.

The voting mechanism itself must be carefully chosen. A simple majority (e.g., >50% for) is common, but for sensitive VEV policy changes, a supermajority (e.g., 66% or 75%) may be warranted. Snapshot voting, where votes are cast off-chain via signed messages, is useful for gas-free sentiment checks. However, for on-chain execution of policy updates, binding on-chain voting is required. Votes are typically weighted by the voter's token balance at a specific block number (snapshot), which prevents manipulation by acquiring tokens mid-vote.

For VEV policies, proposals will typically call a function on the policy management contract. An example proposal payload could be: policyContract.setMaxPriorityFeeDeviation(120), which changes the allowed deviation from the network's base fee. The Governor contract, after a successful vote and timelock delay, will execute this call via the TimelockController. It is essential that the governance contract's permissions are meticulously configured, granting it exclusive upgrade rights to the policy parameters and nothing else, following the principle of least privilege.

Developers should implement robust event emission for full transparency. Key events include ProposalCreated, VoteCast, ProposalQueued, and ProposalExecuted. These allow off-chain indexers and frontends to track the governance process. Furthermore, consider integrating with Tally or Boardroom for a user-friendly voting interface. The final step is a comprehensive audit of the entire governance stack—the Governor, Timelock, and their interaction with the VEV policy contract—before deployment to mainnet.

A slashing system is the enforcement layer of your VEV governance framework. It translates abstract policies like "validators must not front-run user transactions" into concrete, automated penalties. The core components are a detection module that identifies policy violations and a slashing contract that executes penalties. Penalties typically involve burning or re-staking a portion of the validator's bonded stake (e.g., 1-5%), with the severity scaling based on the violation's impact. This creates a direct economic disincentive against harmful MEV extraction.

Implementing detection requires integrating with your chain's consensus client or building a dedicated watcher service. For example, to detect time-bandit attacks, your module would compare the finality of a block against the mempool transactions it included, flagging blocks that reorganize history for profit. Detection logic is often written in Go (for Ethereum clients like Prysm or Lighthouse) or Rust (for clients like Lighthouse). The output is a cryptographically signed violation proof submitted to the slashing contract.

The slashing smart contract, deployed on your blockchain's execution layer, receives violation proofs. It must verify the submitter's authority and the proof's validity before applying the penalty. A basic Solidity structure might include a slashValidator function that reduces the validator's stake in the beacon chain deposit contract. Use OpenZeppelin's libraries for secure access control. Always include a timelock and a governance override to allow for appeals or bug fixes in the slashing logic.

Calibrating penalty severity is critical. A 1% slash for a small sandwich attack might be sufficient, while a 51% liveness attack should result in 100% slashing. Consider implementing a graduated penalty system where repeated offenses incur exponentially higher fines. Data from networks like Ethereum, where inactivity leaks and slashing are live, provides real-world parameters. The penalty should always exceed the expected profit from the VEV violation to ensure the mechanism is economically sound.

Finally, the slashing system must be paired with a transparent reporting and appeal process. All slashing events should emit on-chain events for block explorers. Validators must have a clear path to contest slashes via a governance vote or a dedicated appeals panel. This balance of automated enforcement and human oversight, as seen in systems like Cosmos SDK's x/slashing module, maintains network security while preserving validator rights and decentralization.

Integrating a VEV governance framework begins with deploying the core smart contracts. These typically include a policy registry to store approved VEV strategies, a voting contract for stakeholder participation (e.g., token holders, validators), and an enforcement module that interfaces with the validator client or block builder. The policy registry should define clear parameters for each strategy, such as maximum allowable profit margin, permitted transaction types, and required disclosures. A common implementation uses a PolicyManager.sol contract with functions like proposePolicy(bytes calldata policyData) and executePolicy(uint256 policyId) after a successful vote.

Thorough testing is critical before mainnet deployment. Start with unit tests for individual contract functions, then progress to integration tests simulating the full governance flow: proposal, voting, and execution. Use forked mainnet environments (e.g., via Foundry's cheatcodes or Hardhat Network) to test policy execution against real block data. It's essential to test edge cases, such as a policy that conflicts with a validator's solo staking obligations or one that attempts to extract value from cross-chain bridge transactions. Fuzzing tools like Echidna can help identify unexpected interactions between the governance logic and the VEV strategies themselves.

Given the financial stakes and potential for rapid evolution in VEV techniques, designing a secure upgrade path is non-negotiable. Use a transparent proxy pattern (e.g., OpenZeppelin's TransparentUpgradeableProxy) for the core governance contracts, controlled by a multisig or the governance contract itself. This allows for logic upgrades without migrating state. All upgrades must undergo the same rigorous proposal and voting process as a new VEV policy. Establish clear rollback procedures and timelocks for upgrades to give the community time to react to malicious or buggy changes. The final step is a phased mainnet rollout, starting with a limited validator set in a permissioned mode before full decentralization.

A successful VEV governance framework requires continuous monitoring and adaptation. Implement on-chain monitoring tools like EigenPhi or Flashbots Protect RPC to track VEV activity in real-time. Establish clear Key Performance Indicators (KPIs), such as the percentage of blocks where your proposed policy was enforced or the average value captured by validators versus extracted by searchers. Regular reporting on these metrics to your DAO or stakeholder group is essential for demonstrating the framework's effectiveness and justifying its operational costs.

The blockchain landscape and VEV techniques evolve rapidly. Your governance process must be iterative. Schedule quarterly reviews of your PolicyRegistry smart contract rules and the economic parameters in your SlashingManager. Proposals for adjustments should be triggered by significant changes in network activity, the emergence of new VEV strategies like time-bandit attacks, or upgrades to the consensus layer itself. This proactive stance ensures your framework remains a relevant deterrent.

For further learning, engage with the broader research community. Study the Ethereum Protocol Guild's discussions on PBS (Proposer-Builder Separation) developments. Analyze real-world data from mevboost.pics to understand market trends. Consider open-source implementations for slashing condition logic, such as those explored in the Skip Protocol ecosystem for Cosmos. The goal is not to eliminate VEV—which is often a legitimate reward for operational excellence—but to govern its extraction transparently and align it with your network's long-term health and decentralization goals.