MEV Dissipation

A Priority Gas Auction (PGA) is a bidding war where searchers compete to have their transaction included in the next block by paying increasingly higher gas fees. This competition directly transfers MEV from the searcher to validators (via the block's priority fee) and to the Ethereum network (via base fee burn). PGAs are a primary mechanism for on-chain MEV dissipation.

• Example: A searcher spots a profitable arbitrage opportunity worth 1 ETH. To win the slot, they bid a 0.2 ETH priority fee. The validator captures this fee, and the base fee is burned, dissipating the MEV.

The proposer-builder separation (PBS) architecture formalizes competition. Block builders compete to create the most valuable block bundle for proposers (validators). Builders bid for block space in a block auction, offering a payment to the proposer. This competition ensures the majority of MEV captured by builders is paid out to validators, driving dissipation into the validator set and, by extension, to stakers via rewards.

Intense competition among searchers erodes profit margins. Searchers incur significant costs that dissipate potential MEV, including:

• R&D and Algorithm Development: Costs for creating and maintaining sophisticated trading bots and MEV strategies.
• Infrastructure: Expenses for low-latency nodes, high-performance servers, and proprietary data feeds.
• Failed Transactions: Gas spent on transactions that are outbid or fail, which is captured by the network. This competition transforms pure MEV profit into operational expenditure.

Some protocols implement mechanisms to internalize and redistribute MEV, redirecting it from general searchers to their own users. This is another form of dissipation, shifting value to a specific application's ecosystem.

• Examples:
  • CowSwap: Uses batch auctions and Coincidence of Wants to match trades internally, eliminating arbitrage MEV and returning better prices to users.
  • MEV-Refund Tokens: Some protocols issue tokens that grant a claim on future MEV revenue generated within the protocol.

This is the most direct form of MEV dissipation, where searchers compete in public mempools to have their transactions included. The resulting priority gas auctions (PGAs) drive up transaction fees, transferring value from the searcher to validators and the base fee burn mechanism. For example, a profitable arbitrage opportunity may be bid on by multiple bots until the gas cost consumes most of the profit.

A protocol-level design that formalizes MEV distribution. Block builders compete to create the most profitable block and pay the block proposer (validator) for its inclusion. This dissipates MEV by:

• Creating a competitive auction for block space.
• Transferring a significant portion of extracted value from builders to the broader validator set via proposer payments.
• Increasing transparency in the MEV supply chain.

The primary implementation of PBS on Ethereum. Searchers and builders submit blocks to a relay, which runs an auction. Validators (proposers) use MEV-Boost software to select the highest-paying block. This system dissipates MEV by:

• Enabling open competition among builders.
• Ensuring the winning bid (the MEV) is paid directly to the proposer, redistributing value.
• Capturing MEV that would otherwise be lost to private channels.

Protocols that capture and redistribute MEV value to all stakeholders, not just validators. Mechanisms include:

• Fee burning: Base fees from PGAs are burned (e.g., EIP-1559), benefiting all ETH holders by reducing supply.
• MEV redistribution: Protocols like CowSwap use batch auctions to capture backrunning MEV and return it to users as better prices.
• Staking pool distributions: Validators in pools share MEV rewards with their delegators.

A nascent design where the protocol itself acts as an auctioneer for transaction ordering rights. Applications can submit user transactions with a tip to be protected from harmful MEV (like sandwich attacks). This dissipates harmful MEV by:

• Creating a competitive market for fair ordering.
• Allowing users to explicitly pay for protection, with fees going to the protocol/validators.
• Moving value extraction from adversarial searchers to a transparent, protocol-managed process.

While often seen as MEV extraction tools, they also cause dissipation. By submitting transactions directly to builders or validators via private channels (e.g., Flashbots Protect, Taichi Network), users avoid public mempool competition. This dissipates value by:

• Bypassing public PGAs, reducing fee inflation for the network.
• Shifting the negotiation and payment for order flow to a bilateral agreement, often with a fairer distribution.
• Reducing the 'winner-takes-all' nature of open mempool extraction.

A core dissipation mechanism where MEV revenue is programmatically redirected back to protocol users or stakeholders. This is often achieved through:

• In-protocol auctions (e.g., selling the right to build a block).
• Fee burning mechanisms that destroy a portion of transaction fees.
• Direct redistribution of proceeds to stakers or a community treasury. The goal is to socialize the benefits of MEV, converting a potential negative externality into a public good or a source of protocol revenue.

A key architectural pattern that dissipates validator power by separating the roles of block building and block proposal. In PBS:

• Builders (specialized searchers) compete to create the most profitable block.
• Proposers (validators) simply choose the highest-paying block header. This creates a competitive market for block space, forcing builders to bid their profits to the proposer. PBS is a formalization of MEV dissipation, making the auction explicit and transparent.

A cryptographic technique used to dissipate frontrunning opportunities. Transactions are submitted to the network in an encrypted mempool. A committee of validators uses threshold decryption to reveal the transactions only after they have been included in a block. This prevents searchers from observing pending transactions and constructing arbitrage or sandwich attacks based on that information, effectively destroying that source of MEV.

Protocol-level rules that constrain transaction ordering to reduce exploitable MEV. Examples include:

• Timestamp-based ordering to limit reordering granularity.
• Leaderless consensus mechanisms that randomize block construction.
• Sequencer decentralization in rollups to prevent a single entity from controlling order flow. These approaches aim to dissipate MEV at its source by making the extraction more difficult, costly, or randomized, rather than redistributing the profits after the fact.

Dissipation through value destruction or increased cost. The canonical example is EIP-1559 on Ethereum, which burns the base fee. This mechanism:

• Removes value from the system that might otherwise be captured as priority fee (tip) MEV by validators.
• Creates a deflationary pressure on the native asset.
• Makes certain forms of low-value spam MEV (like simple arbitrage on tiny price differences) economically non-viable due to the burned base fee cost.

DApp-level strategies that dissipate MEV by changing user interaction patterns. Key methods include:

• Commit-Reveal schemes where users submit hashed intents first.
• Batch auctions and uniform price clearing (e.g., CowSwap, UniswapX).
• Private transaction channels (RPCs) that bypass the public mempool. These designs shift the MEV supply chain, moving value from generalized searchers back to users or into application-specific mechanisms, thereby dissipating the generalized extractable value.

A proposed class of mechanisms designed to further dissipate MEV by redistributing proceeds more evenly across all validators, not just those proposing blocks in high-MEV slots. Concepts include:

• Proposer voting for future payouts: A validator includes a vote to distribute a portion of their MEV reward to future validators.
• MEV burn: Destroying a portion of extracted MEV, similar to EIP-1559's fee burn, reducing the total extractable surplus.
• Protocol-managed pools: Automatically distributing MEV rewards from a communal pool. The goal is to reduce variance and centralization pressures on the validator set.

Prevention-based approaches that aim to eliminate certain types of harmful MEV at the source, thereby reducing the total pool of value that needs to be dissipated. This includes:

• Time-Boosted Ordering: Prioritizing transactions by fee and time waiting in the mempool.
• Sequencer Commit-Reveal Schemes: Hiding transaction content until after ordering is decided.
• Leaderless Consensus: Using decentralized sequencing committees (e.g., as proposed for Ethereum rollups). By making the chain more fair and predictable, these methods decrease the profitability of frontrunning and sandwich attacks.

The full stack of actors involved in extracting and distributing MEV, illustrating where dissipation occurs. Key roles include:

• Users & DApps: Generate transaction flow and opportunities.
• Searchers: Run algorithms to detect and construct profitable transaction bundles.
• Builders: Aggregate bundles and compete to build the most valuable block.
• Relays: Facilitate trust between builders and proposers.
• Proposers (Validators): The final block proposer who selects and attests to a block, capturing the builder's bid. Dissipation shifts value from the top (searchers/builders) to the bottom (proposers/network).

The ultimate goal of MEV dissipation is to enhance the economic security of the underlying blockchain. When MEV is captured only by a few specialized actors, it can lead to validator centralization and potential attacks. By ensuring MEV rewards are broadly distributed to the validator set via mechanisms like PBS, the protocol:

• Increases the cost of attack.
• Improves validator profitability and decentralization.
• Aligns the incentives of validators with the long-term health of the network. Effective dissipation turns MEV from a centralization risk into a source of protocol security.