Everything is MEV
Source : https://www.youtube.com/watch?v=kcmEPvfrTGc&list=PLRHMe0bxkuemFG5hPu9pc87gnlE1iYkKZ
![Everything is MEV](/content/images/size/w1200/2024/04/Everything-is-MEV.png)
MEV is a property of consensus
![](https://stengarl.ghost.io/content/images/2024/04/image-11.png)
![](https://stengarl.ghost.io/content/images/2024/04/image-12.png)
MEV is the most important design consideration in blockchain. It encompasses block rewards, gas fees, protocol rewards, and other financial incentives
Thinking about MEV holistically allows understanding the interactions between protocols
MEV is unavoidable, so breaking up with it is not an option. We must contend with MEV whether we like it or not, and should be considered in all major blockchain verticals
MEV is everywhere
![](https://stengarl.ghost.io/content/images/2024/04/image-13.png)
MEV is the reward for progressing consensus (block rewards, gas fees). Additional value can be extracted by block builders
Misaligned incentives lead to centralization due to increasing returns to scale
![](https://stengarl.ghost.io/content/images/2024/04/image-14.png)
Teams compete to capture MEV opportunities like arbitrage and sandwiching
Misaligned incentives entrench 1-2 dominant trading teams
![](https://stengarl.ghost.io/content/images/2024/04/image-15.png)
Relay markets coordinate orderflow
Relay are already centralizing the block production
![](https://stengarl.ghost.io/content/images/2024/04/image-16.png)
Key source of extractable MEV comes from off-chain price discovery
Experiments like Batch auctions, dynamic fees, better oracles are done to reduce the risk, but the best way to internalize MEV for LPs/users is not found yet.
![](https://stengarl.ghost.io/content/images/2024/04/image-17.png)
Validating multiple chains creates MEV opportunities
Misaligned incentives lead to centralization of stake
![](https://stengarl.ghost.io/content/images/2024/04/image-18.png)
User intents are a major MEV source, so wallets & RPC providers are in good position to capture it
Misaligned incentives lead to sub-optimal order flow/execution
![](https://stengarl.ghost.io/content/images/2024/04/image-19.png)
![](https://stengarl.ghost.io/content/images/2024/04/image-20.png)
There is MEV in distributing value from aggregated intents/order flow
Focus should be on effective intent solving, not overcomplicating intent expression
![](https://stengarl.ghost.io/content/images/2024/04/image-21.png)
Oracle updates create MEV from liquidations
There is an open question on internalizing this MEV VS Protocol absorption
![](https://stengarl.ghost.io/content/images/2024/04/image-22.png)
MEV rewards can accrue to staking rewards or separate token.
![](https://stengarl.ghost.io/content/images/2024/04/image-23.png)
MEV has the right of life and death over stablecoins.
Design goal is harnessing good MEV, reducing toxic MEV extraction
Design protocols which are MEV-Aware
Macro Analysis (7:00)
![](https://stengarl.ghost.io/content/images/2024/04/image-24.png)
"show me the incentives, I'll show you the outcomes". Analyze supply chain/market flows to understand barriers, edges, power dynamics
Understanding Edges in MEV markets :
- Capital - e.g. bidding away entire arbitrage opportunities requires large capital
- Engineering - low latency systems, experience/development resources
- Alpha - rare informational edge/insight into future market conditions
- Business Development - deals for preferential access/flow
Commoditizing Complementary Roles, e.g. Flashbots auction commoditized atomic searchers/builders
Analyzing Dependencies :
- In middle layers, growth depends on permissions from other parties
- Are they motivated to help you grow or commoditize you ?
- Are you solving real problems they care about ?
Micro Analysis (10:45)
![](https://stengarl.ghost.io/content/images/2024/04/image-25.png)
Blockchain protocols are repeated games with players, rules, incentives, strategies and equilibriums. We need to analyze these game elements to understand protocol dynamics
Players in blockchains are searchers, solvers, builders, market makers, users, protocols, relays, validators
Rules of the game are defined in code (smart contracts, clients) and socially enforced norms
Strategies and Equilibriums:
- Resulting strategies may differ from intent, look for dominant strategy
- Dominant strategy equilibrium = when everyone plays dominant strategy
- Nash equilibrium = no incentive for anyone to change strategy
Examples :
- Prisoners' dilemma dominant strategy is to defect/snitch
- On Polygon, dominant strategy may be to spam as much as possible
Create good games (13:00)
![](https://stengarl.ghost.io/content/images/2024/04/image-26.png)
Reward desired behavior, punish undesired behavior. We have to create clear incentives for what we want people to do, and not to rely solely on social consensus when money is at stake
Assign roles that leverage strengths. Give players jobs they are well-suited for (like using solvers to outsource finality risk)
Edges/moats are inevitable. We cannot create an edgeless game, so we must consider barriers to entry these edges will create
No one is good/bad, we are all rational. People will try to exploit incentives for their benefit, and we must expect adversaries like hackers and opportunistic searchers
Design for the future state when you launch, and not just present
Deliberate on MEV creation and distribution. Which users deserve MEV ? What is a "fair" distribution ?
Manage optics for market and regulators. Fraud/ponzi or bad activities can undermine an otherwise well-executed project
![](https://stengarl.ghost.io/content/images/2024/04/image-27.png)
In one sentence, MEV is the core incentive and blockchain protocols are just games