Setting Up a Governance Framework for MEV Policy

Maximal Extractable Value (MEV) represents profits that can be extracted by reordering, including, or censoring transactions within a block. For Decentralized Autonomous Organizations (DAOs), which manage significant on-chain treasuries and execute frequent transactions, MEV is a critical governance concern. Unmanaged MEV exposes DAOs to risks like front-running their own proposals, sandwich attacks on treasury swaps, and general value leakage. Proactive governance is required to mitigate these risks and potentially capture value for the collective.

Establishing a governance framework begins with a formal MEV Policy Proposal. This document should define the DAO's stance on permissible and prohibited MEV-related activities. Key components include: - Risk Tolerance: Defining acceptable slippage for treasury operations. - Validator/Sequencer Mandates: Rules for nodes operated by the DAO (e.g., no transaction censorship). - Revenue Capture Strategy: Policies on participating in MEV-sharing systems like MEV-Boost or MEV-Stream on Ethereum, or similar mechanisms on other chains. - Transparency Requirements: Mandating public disclosure of any MEV captured by DAO-operated entities.

The technical implementation of this policy often relies on smart contract safeguards. For treasury management, DAOs can use MEV-protected DEX aggregators like CowSwap or 1inch Fusion, which use batch auctions to neutralize front-running. Proposals for large asset swaps can be programmed to execute via these protected venues. Furthermore, DAOs operating validators should configure their nodes to connect to relays that enforce ethical rules, such as not censoring transactions from certain addresses. A basic example of a governance parameter setting could look like: dao.setTreasuryExecutor(mevProtectedRouterAddress);.

For DAOs that run their own block production infrastructure (e.g., sequencers on L2s or Solana validators), the governance framework must address in-house MEV. This involves creating a transparent process for how extracted value is identified, reported, and redistributed to the treasury. Tools like Flashbots' SUAVE or EigenLayer's upcoming services could be integrated, with governance votes determining the allocation of captured profits—whether to fund grants, buy back governance tokens, or reward stakers.

Continuous monitoring and adaptation are essential. DAOs should mandate regular MEV Transparency Reports from their technical committees or delegated operators. These reports should detail captured value, observed attempted attacks, and the effectiveness of current mitigations. Governance should also establish a process for updating the MEV policy as new extraction techniques (like Time-Bandit Attacks) and mitigation tools emerge. This turns MEV management from a static rulebook into a dynamic, responsive component of the DAO's operational security.

A functional understanding of Maximal Extractable Value (MEV) is the primary prerequisite. You should be familiar with its core forms: arbitrage, liquidations, and sandwich attacks. Understand how these activities interact with the mempool, block building, and the role of searchers, builders, and validators. Resources like the Flashbots Research documentation provide a solid technical foundation.

You must have experience with smart contract development and decentralized governance. This includes writing and auditing Solidity contracts, understanding upgrade patterns like Transparent or UUPS proxies, and knowing how to interact with governance frameworks such as Compound's Governor or OpenZeppelin Governor. Practical knowledge of snapshot voting, timelocks, and multisig wallets is crucial for designing secure proposal execution.

Familiarity with the specific execution layer client and consensus layer client your network uses (e.g., Geth, Erigon, Prysm, Lighthouse) is important. Governance decisions often involve client configuration and upgrades. You should also understand the Ethereum Improvement Proposal (EIP) process, particularly proposals related to MEV like EIP-1559 (fee market change) and EIP-4844 (data blobs), as they directly impact the MEV landscape.

Hands-on experience with MEV infrastructure is highly recommended. This includes using tools like the Flashbots Protect RPC, analyzing data with EigenPhi or Etherscan's MEV dashboard, and understanding the mechanics of MEV-Boost and PBS (Proposer-Builder Separation). Knowing how to run a mev-geth or mev-boost relay locally will provide invaluable context for policy design.

Finally, a strong grasp of cryptoeconomic security and game theory is essential for crafting effective policies. You need to model stakeholder incentives—how rules affect searcher profits, validator revenue, and user costs. Analyzing past governance incidents in other DAOs can help anticipate attack vectors like proposal spam, vote buying, or governance capture.

A governance framework for MEV policy defines the formal process by which stakeholders can propose, debate, and enact changes to how a protocol manages extractable value. This is critical because MEV decisions—such as allowing or restricting certain transaction orderings, implementing PBS (Proposer-Builder Separation), or setting auction parameters—directly impact user costs, validator incentives, and network security. The framework must balance technical nuance with broad community accessibility, ensuring proposals are well-specified and their implications are understood before a vote.

The proposal lifecycle typically follows distinct phases. It begins with a Temperature Check, an informal signal vote on a forum like Commonwealth or Discourse to gauge initial sentiment. A successful check leads to a Request for Comments (RFC), where a detailed draft proposal is published for technical and economic review. This phase is essential for MEV proposals, which often require input from relay operators, block builders, and core developers. The final Governance Proposal is then submitted on-chain, containing executable code (e.g., a Governance.sol function call) or a clear mandate for a multisig to implement the ratified policy.

Effective proposals require precise specification. For an MEV-related upgrade, the proposal text should explicitly define: the scope of change (e.g., updating validator client software to enable a new transaction ordering rule), the implementation mechanism (a smart contract upgrade, a parameter change in a config file, or a new contract deployment), and the triggering condition (activation block height or timestamp). Ambiguity here can lead to failed execution or contentious hard forks. Templates used by protocols like Uniswap or Compound provide a useful starting structure.

Voting mechanics must align with the stakes. Many DAOs use token-weighted voting, where voting power is proportional to governance token holdings. For highly technical MEV votes, some frameworks incorporate expert councils or security committees with veto or delay powers to prevent harmful changes, as seen with Aave's Risk and Gauntlet committees. The voting duration, quorum requirements, and approval thresholds (e.g., a simple majority vs. a supermajority) should be calibrated to the proposal's impact; a change to a PBS auction revenue split might require a higher threshold than a minor parameter tweak.

Post-proposal execution and accountability are final, critical steps. On-chain proposals often include a timelock—a mandatory delay between vote passage and execution—which allows users to exit or prepares a fallback if vulnerabilities are discovered. For off-chain mandates, the proposal must designate a responsible entity (e.g., a developer multisig) and include a verification method, such as requiring the publication of transaction hashes or a verification script. Successful frameworks, like those used to manage MEV on Ethereum post-Merge, establish clear feedback loops where the outcomes of implemented policies are analyzed and can themselves be the subject of new governance proposals.

Maximal Extractable Value (MEV) represents profits validators can earn by reordering, including, or censoring transactions within a block. For protocols like Lido or Aave, which generate significant MEV through user transactions, a key governance question is how to capture and redistribute this value. A revenue sharing proposal formalizes this process, directing a portion of sequencer or validator MEV profits back to the protocol treasury or token stakers. This creates a sustainable flywheel: protocol usage generates MEV, which is shared to benefit stakeholders, incentivizing further participation and security.

The core of this framework is a smart contract that receives funds and executes the distribution logic. Below is a simplified Solidity example for an MEVRevenueSharing contract. It uses OpenZeppelin's Ownable and SafeERC20 libraries for security and assumes the revenue is sent as an ERC-20 token (like WETH). The contract allows the owner (expected to be a governance timelock) to set a distributionRatio and recipient address, typically the protocol's treasury or a staking contract.

solidityCopy
// SPDX-License-Identifier: MIT
pragma solidity ^0.8.19;

import "@openzeppelin/contracts/access/Ownable.sol";
import "@openzeppelin/contracts/token/ERC20/IERC20.sol";
import "@openzeppelin/contracts/token/ERC20/utils/SafeERC20.sol";

contract MEVRevenueSharing is Ownable {
    using SafeERC20 for IERC20;

    IERC20 public immutable revenueToken;
    address public recipient;
    uint256 public distributionRatio; // Basis points (e.g., 1000 = 10%)

    event DistributionUpdated(address newRecipient, uint256 newRatio);
    event RevenueDistributed(address token, uint256 amount);

    constructor(IERC20 _revenueToken, address _initialRecipient, uint256 _initialRatio) {
        revenueToken = _revenueToken;
        recipient = _initialRecipient;
        distributionRatio = _initialRatio;
    }

    function distribute() external {
        uint256 balance = revenueToken.balanceOf(address(this));
        require(balance > 0, "No revenue to distribute");
        
        uint256 distributeAmount = (balance * distributionRatio) / 10000;
        revenueToken.safeTransfer(recipient, distributeAmount);
        
        emit RevenueDistributed(address(revenueToken), distributeAmount);
    }

    function updateDistribution(address _newRecipient, uint256 _newRatio) external onlyOwner {
        require(_newRatio <= 10000, "Ratio cannot exceed 100%");
        recipient = _newRecipient;
        distributionRatio = _newRatio;
        emit DistributionUpdated(_newRecipient, _newRatio);
    }
}

In a live deployment, a keeper or gelato network automation would call the distribute() function periodically (e.g., weekly). The distributionRatio is defined in basis points (bps), where 10000 equals 100%. A typical initial proposal might set this between 500-2000 bps (5-20%), balancing immediate stakeholder rewards with retaining capital for protocol growth. The recipient should be a secure, non-upgradable contract like a Treasury or a RewardsVault that further delegates funds, for instance, via a merkle distributor for stakers or funding public goods grants.

Submitting this as a governance proposal involves several concrete steps. First, the contract must be deployed and verified on a block explorer like Etherscan. Second, a formal Temperature Check snapshot vote gauges community sentiment on the parameters (recipient, ratio). Following approval, an on-chain proposal is submitted to the protocol's governor (e.g., Compound's Governor Bravo or OpenZeppelin Governor) with two actions: 1) transferring ownership of the revenue stream (e.g., from a validator set) to the new MEVRevenueSharing contract, and 2) funding the contract with an initial allocation. Proposals should include clear documentation on the revenue source and distribution math.

Key security considerations are paramount. The contract owner must be a timelock controller, ensuring a delay between a governance vote and execution to allow for review. The updateDistribution function provides flexibility but must remain under strict governance control. Audits from firms like Trail of Bits or OpenZeppelin are essential before mainnet deployment. Furthermore, the proposal should define a clear off-ramp—a process to pause distributions or adjust parameters in case of market volatility or a flaw in the MEV source. This creates a robust, transparent, and community-aligned framework for capturing value generated by the protocol's own activity.

Maximal Extractable Value (MEV) introduces complex ethical and economic decisions for validator nodes. A formal governance framework allows a validator set to establish collective rules, such as committing to fair ordering, participating in PBS auctions, or blacklisting certain transaction types. This process moves beyond individual node configuration to create enforceable, on-chain policy. Proposals are typically submitted as smart contract transactions to a dedicated governance module, like those in Aave or Compound, but adapted for validator-specific parameters.

The core of a proposal is its executable payload. This is the code that will modify the system's state if the vote passes. For an MEV policy, this could be a contract call to update a slashing condition in the Consensus Layer client, whitelist a new block builder like Flashbots, or adjust the priority fee distribution mechanism. The payload must be thoroughly tested on a testnet (e.g., Goerli or Holesky) to prevent unintended consequences from live deployment. Use tools like Tenderly or Hardhat to simulate execution.

A successful proposal requires clear documentation and communication. The description should articulate the policy's intent, its technical implementation, and a rationale backed by data. For example: 'Proposal #42: Enforce OFAC compliance in block proposal by integrating the mev-boost relay allowlist. This reduces regulatory risk for the pool but may decrease MEV revenue by 5-15% based on EigenPhi analytics.' Distribute this through community forums like Commonwealth or Discourse to solicit feedback before the on-chain vote.

The voting mechanism is critical. Most systems use token-weighted voting, where a validator's voting power is proportional to its staked ETH. Consider implementing a quorum (minimum participation threshold) and a supermajority requirement (e.g., 67%) for passing significant changes. The voting period must be long enough for decentralized participation—often 3-7 days. Smart contract functions for voting might look like castVote(uint proposalId, uint8 support), where support is 0 (against), 1 (for), or 2 (abstain).

After a proposal passes, focus shifts to execution and monitoring. The payload executes autonomously, updating the protocol's rules. Validators must then update their client software or configuration to comply with the new policy. Continuous monitoring is essential; track metrics like average block value, relay participation, and slashing events using tools like Dune Analytics or Etherscan. This data becomes the foundation for future proposals, creating a feedback loop for iterative governance.

For decentralized autonomous organizations (DAOs) and protocol teams, managing Maximal Extractable Value (MEV) is a critical governance challenge. A formal framework is required to evaluate services like MEV Blocker that offer transaction privacy and protection from frontrunning. This process moves beyond technical integration to encompass community alignment, risk assessment, and long-term policy. The goal is to establish a transparent, repeatable procedure for approving MEV mitigation strategies that reflect the collective values and security posture of the protocol.

The first phase involves proposal drafting and requirement definition. A working group or dedicated contributor should author a Temperature Check or Request for Comment (RFC) proposal. This document must clearly define the objectives: is the primary goal to protect users from sandwich attacks, reduce failed transaction costs, or preserve fair ordering? It should specify technical requirements such as supported chains (Ethereum, Arbitrum, Optimism), integration method (RPC endpoint, bundle inclusion), and any necessary smart contract modifications. Reference real-world data, like MEV Blocker's public stats on protected volume and refunded gas, to ground the discussion in measurable outcomes.

Following community discussion, a formal on-chain governance proposal is submitted for a vote. This proposal should link to all relevant documentation: the service's audit reports (e.g., from Spearbit or Code4rena), its economic model (fee structure or relayer incentives), and a clear integration plan. For example, a proposal might specify updating the protocol's front-end to default to MEV Blocker's RPC endpoint (https://rpc.mevblocker.io) and educating users on the change. Voting should be weighted to ensure stakeholders with skin in the game—token holders, delegates, and core developers—have appropriate influence over this security-critical decision.

Upon successful vote execution, the technical integration and rollout phase begins. Development teams will implement the changes, which typically involve configuring the JSON-RPC endpoint for transaction submission. A critical step is setting up monitoring using the service's dashboard and alerts to track metrics like protection rate, average gas refunds, and latency. For a Subgraph-based protocol, this might also involve verifying that MEV Blocker's transaction flow does not interfere with event indexing. A phased rollout, perhaps starting with a testnet deployment or opt-in beta, allows for real-world testing before mandating use for all users.

Finally, establishing ongoing oversight and review is essential. Governance should mandate periodic reports—quarterly or biannually—reviewing the service's performance, any security incidents, and ecosystem developments. This creates a feedback loop, allowing the DAO to adapt its MEV policy. Parameters to re-evaluate include the continued cost-benefit analysis, the emergence of new competitors like Flashbots SUAVE, and changes in the underlying MEV landscape. This framework transforms MEV management from a one-time technical decision into a sustained, community-governed policy.

A Community Task Force (CTF) acts as the operational arm of a decentralized governance system focused on Maximal Extractable Value (MEV). Its primary mandate is to monitor network activity, investigate potential policy violations, and provide transparent reports to token holders. Unlike a core development team, a CTF is composed of elected or delegated community members—often including researchers, validators, and data analysts—who bring diverse perspectives. This structure decentralizes oversight power and aligns incentives with the long-term health of the ecosystem, moving beyond one-off governance votes to establish continuous, proactive monitoring.

Establishing the CTF begins with a formal governance proposal. This proposal must define the mandate, scope, and powers of the task force. Key elements to specify include: the types of MEV activity to monitor (e.g., sandwich attacks, time-bandit attacks, censorship), the data sources and tools for analysis (like EigenPhi, Flashbots MEV-Explore), and the frequency of reporting. The proposal should also outline the CTF's authority, such as the ability to flag suspicious transactions for further review by validators or to trigger a governance vote for slashing in cases of severe, provable misconduct by a validating entity.

The operational model requires clear processes. A common framework involves a multi-sig wallet controlled by CTF members to fund operations like paying for blockchain data APIs or compensating members for their work. The workflow typically follows a cycle: 1) Data Collection using MEV inspection tools, 2) Analysis & Triage to identify policy breaches, 3) Reporting through public dashboards or forum posts, and 4) Escalation to the broader governance mechanism if action is required. Transparency is paramount; all analyses and findings should be publicly verifiable to maintain trust and allow for community audit of the CTF itself.

Funding and incentives are crucial for sustainability. The CTF should be funded through the protocol's treasury or a dedicated fee allocation, established via governance. Compensation models can include a flat stipend, bounty payments for investigated incidents, or a combination. It's essential to design incentives that reward thorough, objective analysis rather than the volume of reports. Term limits and a clear process for rotating CTF members help prevent centralization of power and ensure fresh perspectives, with performance evaluated against predefined metrics like report accuracy and responsiveness.

Your governance framework is a living system. Begin by deploying the Governor contract with the initial parameters you've defined—quorum, voting delay, voting period, and proposal threshold. Use a testnet fork of your mainnet to execute a full governance cycle: a community member creates a proposal to update a parameter (like the auctionDuration in your MEV relayer), the vote passes, and the change is executed via the timelockController. This dry run validates your contract integration and voter education materials.

Post-launch, your focus shifts to monitoring and iteration. Key metrics include proposal participation rate, vote distribution across token holders (whales vs. the long tail), and the execution success rate of passed proposals. Tools like Tally and OpenZeppelin Defender are essential for dashboarding and automation. Be prepared to use the governance process itself to amend the framework; a common first proposal is to adjust the quorum requirement based on initial participation data.

The MEV landscape evolves rapidly. Your governance must be equipped to respond. Consider structuring future workstreams: 1) Technical Upgrades: Integrating new auction formats like OFAs or encrypted mempools. 2) Policy Expansion: Creating a treasury-funded MEV Grants program to fund public goods research. 3) Stakeholder Alignment: Forming a Builder Advisory Council with elected representatives from major searchers and builders to provide formal, off-chain input into policy proposals.

For further learning, engage with existing governance communities. Analyze how Compound Governance handles parameter updates, study Uniswap's cross-chain governance structure, and review Flashbots's transparent research on MEV-Boost. The forum for your protocol is your primary coordination tool; use it to post temperature checks and Request for Comments (RFCs) long before proposals reach the chain.

Ultimately, a successful MEV policy framework balances decisive action with inclusive deliberation. It transforms MEV from a technical externality into a managed resource that aligns with your protocol's values. By implementing the steps above—deploy, monitor, iterate, and engage—you lay the foundation for sustainable, community-led stewardship of one of crypto's most complex and impactful phenomena.