Prior to the merge we talked about MEV (maximum extractable value) and what to expect from the controversial niche in DeFi.
There were three areas of contention before the merge:
- Was staking getting too centralized?
- Was flashbots and centralized block-producers going to lead to censorship problems?
- Was MEV going to be a defining advantage in a PoS network?
Well over a month since the merge, we can revisit each of these with some additional data and see how the early PoS network has dealt with each.
MEV in Proof of Stake
As we predicted in our last piece on MEV, block producers in Proof of Stake are turning to mev-boost. The benefit of a distributed network of searchers maximizes the ETH rewards and has shown to be a key differentiator in realized yield for validators.
Over 17k ETH has been paid out to validators due to MEV bribes and rewards for blocks. These rewards are all readily used on the execution layer, so represent a current real-yield on staking that makes using the flashbots system ever more enticing.
The net result is that the flashbots and associated relays are now responsible for over 50% of the blocks produced in the network.
But what does it matter if mev-boost is capturing a large share of block production?
Who is making the most so far?
As before, lots of MEV is coming from private transactions. To the extent that flashbots mev-boost relay is the default relay, we can expect that most private transactions submitted through
This plays out in the data. The flashbots builder has created well over 3 times as many blocks as the next closest competitor.
While this seems like a lot, also remember that the block builder has to payout a large portion of these rewards to the proposer. By combining the inflow from MEV bribes and the payout to proposers, we can hope to get a view into how profitable being a builder is.
A brief look at profitability data suggests that many builders are paying out more than they are making in income. However this doesn’t tell the whole story. Many of these are new markets and may be getting payment for order flow outside of the channels easily monitored on chain.
For example, Bloxroute gets payments outside of the typical builder workflow and therefore its builders can look like they are loosing money when they are actually profitable.
Which builders are most efficient?
For validators, an important question will be which relay and set of builders to use in order to maximize the yield through MEV in a way that aligns with the validators values.
For validators who don’t have the time or know-how to set up their own profitable block builder that takes advantage of MEV, using the flashbots relayers is a plug-and-play solution.
In this case, the flashbots mev-boost builder doesn’t come out on top. Instead, it looks like some custom builders have been able to carve out profitable niches. We can see this in the data on average payout to validators.
These unknown builders, while not reaching the scale in number of blocks, are shown to be more profitable for validators than the global average which is around .13 ETH per block.
While this data is fascinating, it only represents a small slice of what we can currently analyze from block building and validator payouts. It is possible there are many different configurations and that some validators are running their own profitable infrastructure that doesn’t show clearly on chain.
As proof of stake continues, it will be important to continue analyzing the profitability and network share of the top builders and the most profitable participants in the network.
The State Staking Centralization
Lido still remains the individual controller of staked ETH, well ahead of the centralized exchanges and the other competitors in the liquid staked derivative space.
In some ways we can see this as a win. A decentralized network of validators has captured the largest market share in a competitive market. The market for staked ETH management is lucrative. Coinbase for example, gets a large percent of their reveneues from their managed staked business. To see a crypto-native organization that is not a centralized exchange emerge as the early leader in the staked ETH game can be seen as a triumph for DeFi.
But there are still many concerns floating around the community. One of these is the ever-present regulatory risk for US-based crypto companies. Lido, Coinbase and other major validators are all based and incorporated in the US. This puts them in a tough spot, with a regulatory environment that is anything but clear. The worry is that one day action from US regulators may make these organizations act in a way that is harmful or deadly for the Ethereum network.
Critics of the validator centralization rightfully call out the regulatory risk and point to the current state of the network as proof.
The issue circles back to fears over censorship. Flashbots and the largest relayers, along with Lido, and other large validator networks, are US-based corporations, and subject to US regulation. This has lead them to take the pragmatic stance of not including sanctioned transactions in the blocks they produce.
In practice, this means excluding transactions that interact with the sanctioned Tornado Cash smart contracts.
The network has landed itself a bit between a rock and a hard place.
On one hand, there are clear incentives to go with centralized staking providers and sanction-compliant MEV solutions. MEV in particular is a massive boost to a validator‘s staking rewards, and we can assume more will join the relayer network in time. This creates something of a flywheel where more stakers get more rewards from MEV, adding to their stake, increasing the number of share that censors transactions.
The fear is that at some point, a user won’t be able to get a “bad” transaction through the network, compromising on one of the network’s prime selling points. Censoring transactions does not a credibly-neutral base layer make.
But not everyone in the community thinks that this is an issue. Many argue that as long as there are some non-censoring validators, all transactions will eventually be included in the network.
That the issue has become a hot topic around the community is an encouraging sign. While the current economic incentives seem to lean slightly towards pushing centralization and censorship, there are lots of good proposals on how to address things to keep Ethereum as a neutral settlement layer. In the end, we likely need more time to evaluate whether there is a credible threat to the Ethereum network.