Sequencer MEV

The sequencer identifies a profitable pending transaction (e.g., a large DEX swap) and inserts its own transaction before it in the block to profit from the anticipated price impact. This is a classic MEV strategy now executed at the sequencer level.

• Example: Seeing a large buy order for ETH on a DEX, the sequencer buys ETH first, causing the victim's order to execute at a higher price, and then sells the ETH for a profit.

The sequencer selectively excludes certain transactions from blocks entirely. This can be for profit or compliance.

• Profit Motive: Censoring arbitrage or liquidation transactions to capture that value elsewhere.
• Regulatory Motive: Blocking transactions from sanctioned addresses.
• This directly contradicts blockchain neutrality and is a primary concern with centralized sequencing.

The sequencer reorgs (reorganizes) previously published blocks to extract MEV that was missed in the original ordering. This involves rewriting history after seeing new market information.

• Mechanism: The sequencer withholds a block, sees new transactions, then creates an alternative block that includes those transactions in a more profitable order.
• This undermines finality and is considered one of the most severe forms of sequencer MEV.

The sequencer creates multiple, slightly different versions of a block and sends them to different parties (e.g., different arbitrageurs) to extract value via a bidding process.

• Process: Each version gives a different party a slight advantage. The sequencer accepts payments (bribes) from parties competing for the most favorable transaction order.
• This turns block space into a private auction, extracting value that would otherwise go to searchers.

A specialized form of frontrunning where the sequencer places one transaction before and one after a victim's large DEX trade.

• Execution: The first transaction buys the asset, pushing the price up. The victim's trade executes at this inflated price. The sequencer's second transaction sells the asset, profiting from the price difference.
• This requires precise control over transaction ordering, which a sequencer inherently possesses.

In lending protocols, liquidating undercollateralized positions is profitable. The sequencer can prioritize its own liquidation transactions or those from entities that pay a fee, rather than using a public mempool's first-come-first-served model.

• Impact: This centralizes a key DeFi function and captures fees that would be distributed in a more competitive, decentralized environment.

The sequencer exploits its privileged position to insert its own transactions around user-submitted ones to extract value. Frontrunning involves placing a transaction before a known profitable user transaction (e.g., a large DEX swap) to benefit from the resulting price movement. Backrunning involves placing a transaction after (e.g., to arbitrage the new price). This is the most direct form of value extraction, analogous to traditional high-frequency trading but centralized within a single entity.

A sequencer can censor transactions by deliberately excluding them from blocks. This can be used to:

• Block transactions that compete with the sequencer's own MEV strategies.
• Exclude transactions from specific addresses (e.g., for regulatory compliance or malicious reasons).
• Create artificial scarcity in block space to increase fee revenue. This power directly contradicts the permissionless and censorship-resistant ideals of blockchain, as the sequencer acts as a centralized gatekeeper.

This is a sophisticated attack where a sequencer or a validator with block proposal rights can reorg (reorganize) the chain's recent history. By reverting a few blocks and proposing a new ordering of transactions, they can capture MEV opportunities that were missed in the original sequence. This undermines transaction finality and is a significant security concern, as it allows past transactions to be invalidated for profit.

Sequencer MEV has tangible costs for end-users:

• Increased Effective Costs: Users may receive worse prices on swaps as the sequencer extracts the spread.
• Failed Transactions: Users' transactions may fail if the sequencer's frontrunning alters the state before the user's transaction executes.
• Unpredictable Latency: Transaction inclusion times can become unpredictable if the sequencer is optimizing for its own profit rather than FIFO ordering. These effects degrade the user experience and can make cost estimation difficult.

Proposer-Builder Separation (PBS) is a design pattern, pioneered on Ethereum, that mitigates MEV centralization. It separates the role of block building (a competitive market where builders create MEV-optimized blocks) from block proposing (a neutral role that simply selects the highest-paying block). On L2s, this could translate to separating the sequencer role from the entity that finalizes batches to L1, creating a more competitive and transparent market for block space.

A class of solutions aimed at enforcing fair ordering rules before the sequencer processes transactions. Techniques include:

• Commit-Reveal Schemes: Users submit encrypted transactions that are ordered before their content is known.
• Verifiable Delay Functions (VDFs): Introduce a forced time delay between receiving and ordering transactions, reducing the advantage of local network knowledge.
• Threshold Encryption: A committee decrypts transactions only after they have been committed to an ordering queue. These are active areas of research to decentralize sequencing power.

Sequencer MEV (Maximal Extractable Value) is the profit a rollup's designated block producer can earn by manipulating the order of transactions before they are submitted to the base layer (L1). Unlike permissionless L1 MEV, this power is concentrated in a single entity or a small committee, creating a central point of control and potential failure.

• Core Actions: Reordering transactions (e.g., front-running a large swap), inserting its own transactions, or censoring specific users.
• Source of Value: Extracts value from user transactions that would otherwise go to L1 searchers or validators.

A single sequencer creates a centralized trust assumption. It can censor transactions by excluding them from blocks, which poses a significant security risk, especially for applications requiring permissionless access.

• Censorship Resistance: Users lack the L1 guarantee that their transaction will be included. They must rely on the sequencer's honesty or a forced L1 inclusion fallback, which is slower and more expensive.
• Single Point of Failure: The sequencer is a target for attacks (e.g., DDoS). If it goes offline, the rollup may halt until a recovery mechanism (like a permissionless proving window) is triggered.

Sequencer MEV represents a primary revenue stream for rollup operators, alongside transaction fees. This creates complex incentive alignments between the sequencer, users, and the protocol's token holders.

• Profit Motive: The sequencer is incentivized to maximize MEV extraction, which can lead to negative externalities for users, such as worse execution prices.
• Redistribution Models: Some protocols propose redistributing a portion of sequencer MEV back to users or token stakers via MEV smoothing or burn mechanisms to improve economic fairness.

A primary mitigation is moving from a single sequencer to a decentralized sequencer set or a proof-of-stake based committee. This distributes block production rights and MEV extraction power.

• How it works: Multiple entities take turns proposing blocks or participate in a leader election. MEV may be shared or auctioned among the set.
• Challenges: Introduces latency and coordination complexity. Requires robust slashing conditions for malicious behavior (e.g., censorship).

Inspired by L1 solutions like Proposer-Builder Separation (PBS), rollups can implement MEV Auctions (MEVA). Here, the right to build a block (and capture its MEV) is auctioned off, separating the roles of block proposer and block builder.

• Process: Builders (specialized searchers) bid for the right to construct the next block. The winning bid's proceeds go to the protocol or sequencer set.
• Benefit: Can democratize access to MEV, increase protocol revenue, and potentially reduce negative MEV impacts through competitive bidding.

Technical solutions aim to cryptographically prevent transaction reordering, enforcing fair ordering based on objective criteria like receipt time.

• Fair Sequencing Services: Use a decentralized network or threshold encryption to create a canonical order before transactions are revealed, neutralizing reordering MEV.
• Encrypted Mempools: Transactions are submitted encrypted and only decrypted after ordering is committed to, preventing front-running. This trades off some scalability for enhanced fairness.

A cryptographic technique where users submit encrypted transactions (commits) to the sequencer, which are only revealed and executed after a delay. This prevents the sequencer from frontrunning based on transaction content. Key mechanisms include:

• Threshold Encryption: Transactions are encrypted with a public key, requiring a decentralized committee to decrypt after a set time.
• Time-lock Puzzles: Computational puzzles delay the revelation of transaction details.
• Implementation: Used by protocols like Shutter Network to protect on-chain auctions and governance votes from MEV.

Protocols that use cryptographic proofs or consensus to establish a canonical, fair transaction order, removing the sequencer's unilateral power. Approaches include:

• Leaderless Sequencing: Nodes collectively agree on order using algorithms like Aequitas or Themis before execution.
• Verifiable Delay Functions (VDFs): Introduce a mandatory time delay for ordering, making manipulation predictable and detectable.
• Purpose: Aims to provide causal order (respecting transaction dependencies) and mitigate time-bandit attacks where sequencers reorg history.

An architectural pattern that decouples the role of building transaction blocks (builder) from the role of proposing/sequencing them (proposer). Adapted from Ethereum, it introduces competitive bidding.

• Mechanism: Specialized builders compete in an auction to create the most valuable block bundle. The sequencer (proposer) simply selects the highest-paying, credible bid.
• Benefit: Democratizes block building, reduces sequencer's informational advantage, and can redirect a portion of MEV revenue back to the protocol or users.

Replacing a single sequencer with a permissionless or permissioned set of nodes that take turns proposing blocks, often using Proof-of-Stake (PoS) consensus. This directly attacks centralization.

• Rollup Examples: StarkNet (decentralized PoS), Fuel (permissionless PoS), Arbitrum (planned permissioned set then PoS).
• Challenges: Requires solving latency and throughput trade-offs. MEV distribution becomes more complex but is shared among the validator set, reducing individual incentive.

Acknowledging that some MEV is inevitable, this strategy transparently auctions off the right to influence transaction order and redistributes the proceeds.

• MEV Auctions (MEVA): The sequencer sells the right to set the block's transaction order in a public, sealed-bid auction.
• Revenue Sink: Auction revenue can be burned, distributed to stakers, or used to subsidize user transaction fees (e.g., as gas rebates).
• Transparency: Makes MEV extraction a public good rather than a hidden tax.

Preventing information leakage from the public mempool is a first line of defense. Encrypted mempools hide transaction content until execution. SUAVE (Single Unifying Auction for Value Expression) is a dedicated chain envisioned by Flashbots that aims to become a universal, neutral marketplace for block space and MEV.

• Function: Users submit preferences and bids. Builders across different chains (including rollups) compete to satisfy them.
• Goal: Decouples MEV extraction from any single chain's infrastructure, promoting competition and reducing sequencer leverage.