Value Flow in the Miner Value Ecosystem

summary:

Miner Extractable Value (MEV) is the foundation of a permissionless distributed system and cannot be eliminated.

The market structure of MEV is dynamic and complex, but the participants who profit from it in a Proof of Work ( PoW ) network are entirely miners and searchers.

MEV has historically been a balance between these two entities. For any given opportunity, the searcher performs the task of technically optimizing a set of transactions and evaluating the game theory of sharing a percentage of potential profits with the miner who chooses to include their attempt among several competitors. Note that both the profits paid to the miners and the profits extracted by the searcher are classified as MEV.

However, in a proof-of-stake (PoS) system, the market structure of MEV is completely different for two key reasons. First, the stake pool participating in the consensus allows the profits generated by the searcher activities to be redistributed to the coalition of individual stakeholders. Second, the role of miners is naturally divided into two different roles: validator (or block proposer) and block builder.

Integrated and modular MEV infrastructure

In the PoS network, there are four important participants in MEV:

1. Stake Pools — Stake pools aggregate L1 tokens from various stakeholders and delegate them to validators participating in block production (e.g. Lido, Gitto, Marinade, Coinbase Stake Pools)

2. Seekers — bots or individuals that identify and attempt to capture profitable on-chain opportunities (e.g. Solana and Ethereum Dashboard)

3. Block Builders — entities that build and order transactions in blocks (e.g., Jito Block Engine, Flashbots MEV-Boost)

4. Validator (Block Proposer) - A validator or full node who votes with their stake in the consensus to propose a block for validation by other nodes in the network. Services such as Staking, Staking, Chorus One, and Staking Facility run block proposers.

In this ecosystem of participants, the central point of leverage is the stake pool (or more accurately, the individual stakeholders that form a federation), because stake ultimately grants validators the right to produce blocks. Validators need stake to maximize revenue, and the market for aggregated stake is highly competitive.

In order for stake pools to aggregate stake efficiently, they must offer competitive reward rates to stakeholders. Historically, staking returns were fixed as a function of protocol emissions, and validators would compete on fees. Today, the amount of on-chain activity has increased, and so have the opportunities for differentiation between stake pools. Stake pools can now compete in a few main ways:

1. Base emissions from production blocks

2. Fees or lack of fees

3. Extracted MEV share

In order for stake pools to offer competitive rates of return, they must delegate to validators who are building the most profitable blocks and ensure that these profits are shared with their stakeholders. If validators are inefficient in extracting MEV, or choose to keep the MEV they extract for themselves, stake pools will quickly reallocate their stake elsewhere.

Seekers are constantly looking for opportunities on-chain or interacting with decentralized order flow markets (e.g., DF Flow). When a seeker finds an MEV opportunity they want to win, they submit their well-thought-out, optimized trades using a block builder-backed relay. They also include tips (a small portion of expected profits) from validators, which increases their chances of success. In a world where stake pools have the most influence, these tips must be at least partially shared back to stake pools so that they can distribute competitive rewards to stakers.

Therefore, stake pools effectively require validators to take blocks from the most efficient block builders to maximize the income of the stakeholders that make up the stake pool. Block builders are also incentivized to build the most profitable blocks because they want more validators to include their blocks, which increases their success rate and potential MEV income percentage.

The main staking pools in proof-of-stake networks offer liquid staking derivatives (e.g., stETH from Lido, cbETH from Coinbase), tokens that represent a 1:1 claim on the original staked asset and accrue all staking rewards. The motivation for staking derivatives is to improve capital efficiency and equity distribution.

Until recently, these ecosystem players have worked together as modular MEV infrastructure providers. However, as MEV capture opportunities increase, we expect MEV infrastructure to consolidate to improve value capture at every touchpoint in the value chain.

MEV Value Accumulation

The market structure of MEV in a proof-of-stake system suggests that value will accumulate at two levels: first through stake pools and stakers, and secondly through infrastructure providers that facilitate MEV extraction and redistribution. The more tightly integrated each component of the MEV infrastructure is, the more effective the system will be in capturing value.

Where protocols cannot capture value, DAOs manage risk, and we believe that state and risk management are necessary to drive sustainable value for any protocol. The integrated MEV system manages risk across every layer of intermediary between searchers, stake pools, validators, and block builders.

For stakers, they manage risk by providing above-market staking returns. For searchers, by providing high-probability transaction confirmations. For validators, by providing incremental income for block proposals through stake delegation. For block builders, by providing incremental income through higher block inclusion probabilities.

Integrated MEV systems improve conditions for all participants in the value chain. They are in a considerably stronger position than any one modular player in the system, and can therefore deliver significant returns to scale.