MEV Payment

MEV payments flow through two primary channels:

• Direct Payments: Explicit fees like priority gas auctions (PGAs) or builder/validator tips paid in the native asset (e.g., ETH) for favorable inclusion or ordering.
• Indirect Payments: Value captured through arbitrage or liquidation profits, where the payment is the profit from the executed opportunity itself, not a separate fee.

Payments are distributed across the transaction supply chain:

• Validators/Proposers: Receive tips and block rewards for including and ordering transactions.
• Searchers: Sophisticated bots that identify and bundle opportunities, paying validators for execution.
• Builders: Specialized entities that construct optimal blocks, receiving payment from searchers and paying proposers.
• Users: Can be negatively impacted (e.g., via sandwich attacks) or can benefit (e.g., via order flow auctions).

Many MEV payments are determined via competitive auctions:

• Priority Gas Auctions (PGAs): Searchers bid up transaction gas prices to win inclusion in the next block.
• Builder Auctions: In PBS (Proposer-Builder Separation) models, builders bid their block's total value (fees + MEV) to the proposer.
• Order Flow Auctions (OFAs): Users or intermediaries auction their transaction order flow to the highest-bidding searcher or builder.

Payment execution and settlement are time-sensitive:

• Pre-Confirmation: Payments (bids/tips) are often committed before a block is proposed to secure position.
• Atomic Settlement: MEV extraction transactions and their associated payments are bundled atomically; they all succeed or fail together within the same block.
• Post-Settlement: Validator rewards are distributed after block finalization as part of the block's coinbase transaction.

MEV payments directly influence blockchain security:

• Validator Revenue: MEV can significantly supplement standard block rewards, increasing the cost to attack the network (security budget).
• Centralization Pressure: Large, sophisticated players may capture disproportionate MEV, leading to validator centralization.
• Protocol Design: Mechanisms like MEV smoothing or MEV burn are proposed to redistribute or neutralize these payments' negative externalities.

Specialized infrastructure has emerged to facilitate MEV payments:

• Flashbots SUAVE: A unified auction environment for cross-domain MEV.
• EIP-1559: Changed fee market dynamics, creating a clear "tip" field for priority payments.
• PBS (Proposer-Builder Separation): Formally separates the role of block building (and MEV capture) from block proposal, creating a cleaner payment market.

Validators receive MEV payments as a direct reward for including profitable transaction bundles in a block. This is typically paid via priority fees or a direct transfer from the block builder. This creates a critical economic incentive for network security, but can also lead to centralization pressures as validators with the most sophisticated MEV infrastructure earn more.

• Primary Mechanism: Payments are often embedded in the coinbase transaction or via a smart contract.
• Economic Impact: Can significantly supplement standard block rewards and transaction fees.

Searchers compete in a free market to discover and construct profitable MEV opportunities (like arbitrage). They bid for block space by submitting bundles with a payment to the builder or validator. Builders aggregate these bundles, competing to offer the most valuable block to the validator.

• Payment Flow: Searcher → Builder (for bundle inclusion) → Validator (for block proposal).
• Key Concept: This creates a MEV supply chain where value is extracted and distributed across specialized actors.

The economics of MEV payments can threaten network security by promoting validator centralization. Entities that can afford advanced MEV-boost relays, exclusive order flow (EOF) deals, or sophisticated building software capture more value, creating a feedback loop of increasing stake and profit.

• Risk: Large, well-capitalized staking pools gain a competitive advantage.
• Consequence: Can reduce the number of independent validators, potentially compromising the network's censorship resistance and liveness.

Proposer-Builder Separation (PBS) is a design paradigm, implemented via protocols like MEV-Boost on Ethereum, that formally separates the role of block building from block proposing. It aims to democratize access to MEV payments and mitigate centralization.

• How it works: Independent builders compete to create the most profitable block and bid for it. The proposer (validator) simply selects the highest-paying header.
• Security Benefit: Reduces the advantage of validators with in-house MEV capability, as they access a competitive market for blocks.

Some protocols implement mechanisms to capture and redistribute or destroy MEV payments to benefit the broader ecosystem, rather than concentrating them with validators. This is a form of MEV smoothing or socialization.

• Examples:
  • EIP-1559 Base Fee Burn: A portion of priority fees (a source of MEV) is burned.
  • MEV Auction (MEVA): MEV revenue is auctioned and the proceeds are distributed to a public good fund or token holders.
• Goal: To align validator incentives with long-term network health and user fairness.

The pursuit of MEV payments directly impacts end-users. Searchers pay validators to exploit predictable user transactions, leading to attacks like:

• Sandwich Attacks: A user's large DEX trade is front-run and back-run to extract profit, worsening the user's price.
• Frontrunning: A seearcher's identical transaction is placed ahead of a user's pending transaction (e.g., for an NFT mint).
• Economic Cost: These are negative externalities where MEV payments to validators are funded by losses incurred by regular users.

The most common MEV payment, occurring when a searcher profits from price differences across decentralized exchanges (DEXs).

• Mechanism: A searcher's bot detects an asset is priced lower on DEX A than on DEX B.
• Execution: They use a flash loan to buy the asset on DEX A and instantly sell it on DEX B in a single atomic transaction.
• Payment: The profit is the price difference minus gas fees. This payment is made to the block proposer (validator) via a priority fee to include this profitable transaction.

A critical MEV payment in lending protocols like Aave or Compound, where undercollateralized positions are closed.

• Mechanism: When a loan's collateral value falls below a required threshold, it becomes eligible for liquidation.
• Execution: Searchers compete to be the first to submit a transaction that repays part of the debt and seizes the collateral, earning a liquidation bonus (e.g., 5-10%).
• Payment: The bonus is the searcher's profit. A portion is often paid to the validator as a priority fee to win the block space, making this a direct MEV payment.

A predatory form of MEV where a searcher extracts value from a regular user's large DEX trade.

• Mechanism: The searcher spots a pending user transaction that will significantly move an asset's price.
• Execution: They front-run the user's trade by buying the asset first, causing the user to pay a higher price due to slippage. They then back-run the trade by selling the asset at the inflated price.
• Payment: The profit is the difference between the artificially inflated price and the original price. This value is effectively extracted from the user and forms the MEV payment to the searcher and validator.

A more complex and contentious MEV payment involving chain reorganization to alter history.

• Mechanism: After a block containing valuable transactions (like a large arbitrage) is added, a validator or coordinated group may attempt to reorg the chain.
• Execution: They mine a competing chain branch that excludes the profitable transactions and instead includes their own versions, stealing the opportunity.
• Payment: The profit from the captured opportunity is the MEV payment. This represents a direct payment to the reorg-ing validators at the expense of chain stability and consensus security.

MEV payments extracted from non-fungible token markets, often around minting events or marketplace listings.

• Examples:
  • Mint Arbitrage: Sniping a newly minted NFT at a low price and instantly listing it on a secondary market at a higher price.
  • Floor Sweeping: Detecting a large, cheap listing on one marketplace (due to a listing error or rapid price move) and buying it to resell.
• Payment: The profit from the quick flip. Searchers pay high priority fees to validators to ensure their transaction is included in the block before others.

A direct payment from a user to a validator (or block builder) to prioritize the inclusion of their transaction in a block. This is the most common and transparent form of MEV payment, often used to outbid other pending transactions.

• Purpose: Secures faster execution and front-of-block placement.
• Mechanism: Paid in the network's native token (e.g., ETH, SOL).
• Example: A trader might attach a high priority fee to an arbitrage transaction to ensure it executes before the price discrepancy closes.

A competitive bidding process where searchers pay block builders for the right to have their transaction bundle placed in a specific position within a block. This is a primary mechanism for redistributing MEV.

• Participants: Searchers bid, builders accept the highest-paying bundles.
• Outcome: The winning bid becomes a payment from the searcher to the builder, which is often shared with the proposing validator.
• Platform: Specialized relay networks often facilitate these auctions.

A strategy where a searcher pays to have their transaction placed immediately after a target transaction in the same block. The payment ensures the backrunner can capitalize on the state change caused by the prior transaction.

• Use Case: Common for arbitrage (capturing DEX price differences) or liquidations (repaying undercollateralized loans).
• Payment Flow: The searcher's profit is shared with the block builder/validator via the bundle bid, constituting the MEV payment.

A protocol design that separates the roles of block building (selecting and ordering transactions) from block proposing (adding the block to the chain). It formalizes MEV payment channels.

• Builder Role: Builds blocks with transactions and MEV bundles, receiving payments from searchers.
• Proposer Role: The validator that chooses the most profitable block from builders, receiving a block reward that includes these MEV payments.
• Impact: Creates a market for block space and makes MEV payments more efficient and transparent.

A mechanism where a portion of the MEV payment extracted from transactions is permanently destroyed (burned) rather than paid to validators. This turns MEV into a deflationary force for the network's native token.

• Implementation: Part of the priority fee or other MEV revenue is sent to an unrecoverable address.
• Economic Effect: Reduces net issuance of the token, benefiting all holders by increasing scarcity.
• Example: Ethereum's EIP-1559 burns base fees, and proposals exist to extend burning to other forms of MEV.

An entity (often running automated bots) that identifies and exploits MEV opportunities by constructing and submitting transaction bundles to the network. They are the primary source of MEV payments.

• Function: Discovers arbitrage, liquidations, or other profitable transaction sequences.
• Action: Pays block builders via auctions to include their profitable bundles.
• Risk/Reward: Bears the risk of failed transactions; profit is revenue from the MEV minus the payment to the builder.