MEV
What if transaction fees become negligible and most revenue for validators comes from MEV (Miner Extractable Value)? This is a thought experiment exploring a potential future where Solana's validator ecosystem becomes dominated by a few powerful players due to the economics of MEV.
Background:
The discussion is about how Solana, a fast and scalable blockchain, might evolve if the main way for validators (the people who secure the network) to make money shifts from transaction fees to MEV. MEV is the profit that validators can make by reordering, including, or excluding transactions in a block.
Potential Problem:
If MEV becomes the primary source of revenue, only a few High-Frequency Trading (HFT) firms with massive computing power might dominate the network, leading to a "semi-permissioned" system where these firms control most of the validation, pushing out smaller or more ethical validators.
Validator Hardware Costs:
To stay competitive, validators would need extremely expensive hardware. Although some people believe hardware prices will drop over time, the argument here is that demand for higher performance will outpace these price drops, making it unaffordable for many.
Profitability Issues:
Validators would need to spend billions on hardware but might struggle to make a profit since transaction fees are low, and inflation (new coins being created) is also low. This could drive them to engage in more aggressive, and potentially harmful, MEV practices to cover costs.
Concentration of Power:
The most profitable validators would be those who can vertically integrate MEV, meaning they handle both the validation and the extraction of MEV themselves. This would make them like major trading firms in traditional finance (e.g., Citadel), but without regulations to prevent harmful practices. This concentration of power would further push out smaller, well-intentioned validators.
Spam and Censorship:
With low transaction fees, the network might be vulnerable to spam attacks, where bad actors flood the network with meaningless transactions. The proposed solution might involve some form of censorship, where certain transactions are prioritized over others, which could be manipulated by those powerful validators to their advantage.
Outcome:
The worry is that Solana could become dominated by a few powerful entities, making it difficult for smaller validators to compete. Even if a well-funded, ethical validator tried to participate, they might not be able to get enough transactions processed to stay in business.
It's fair to say that Ethereum and other EVM compatible chains face similar challenges, but with some important differences due to their architecture and approach to transaction processing.
Similarities:
Just like Solana, Ethereum also has to deal with MEV, where validators or miners can profit by manipulating the order of transactions. MEV can lead to similar centralization pressures, as those who can extract the most MEV might dominate the network. The risk of centralization exists in both ecosystems. If a few powerful validators or miners can afford the hardware and have the expertise to extract MEV efficiently, they can push out smaller players, leading to a more centralized network. As blockchains scale and transaction volumes increase, the hardware requirements to participate as a validator or miner increase. This could lead to a situation where only those with significant resources can participate, further centralizing control.
Differences:
Ethereum’s longer block times (compared to Solana’s sub-second block times) make it more challenging, though still possible, to engage in latency-sensitive MEV strategies. The difference in block times influences the types of MEV strategies that are profitable and how centralized the ecosystem might become. Ethereum's approach to handling MEV is evolving. For instance, with the introduction of systems like MEV auctions (e.g., Flashbots), there’s a more structured way to extract and distribute MEV. This can potentially reduce some of the negative impacts of MEV, like unfair transaction ordering, although it doesn’t eliminate them entirely. Ethereum is also scaling through Layer 2 solutions like rollups, which handle transactions off-chain and then settle on the Ethereum main chain. These L2s have their own dynamics regarding MEV and centralization but also provide a different structure that might mitigate some of the centralization pressures seen on the main chain.
Can Devs Do Something?
Berachain is a Layer 1 blockchain designed to address some of the challenges seen in existing blockchains like Ethereum and Solana, including issues related to MEV (Miner/Maximal Extractable Value) and validator centralization. Here's how Berachain might tackle these problems:
Unique Consensus Mechanism: PoS + PoL:
Berachain uses a PoS consensus mechanism, where validators are chosen based on the amount of tokens they have staked. This is similar to other chains but with a twist. Berachain introduces an innovative Proof-of-Liquidity mechanism, where validators are incentivized to provide liquidity to DeFi protocols in addition to staking. This could diversify the ways validators earn rewards, reducing the pressure to engage in MEV extraction.
Multi-Asset Staking and Governance:
Berachain allows multi-asset staking, meaning validators can stake various assets (not just the native token). This could lead to a more decentralized validator set because it lowers the barrier for participation, as validators aren't limited to acquiring a single asset. Governance over how the chain operates is tied to this multi-asset staking model, potentially leading to more distributed decision-making and resistance to centralization.
Built-in Mechanisms to Handle MEV:
Berachain aims to minimize the negative impacts of MEV by integrating mechanisms that reduce the incentives for harmful MEV practices. Adjusting transaction fees dynamically based on network conditions, which could make it less profitable to engage in certain MEV strategies. Redistributing MEV profits to the broader ecosystem, rather than allowing a few validators to capture all the value, could reduce the centralization pressure.
Encouraging Liquidity Participation:
By incentivizing liquidity provision through Proof-of-Liquidity, Berachain ensures that validators have a vested interest in maintaining healthy liquidity across the ecosystem. This reduces reliance on MEV for profits because validators can earn rewards by contributing to the network's liquidity rather than engaging in competitive, potentially harmful MEV extraction.
Innovative Governance and Slashing Mechanisms:
Berachain could implement stricter governance controls and slashing penalties for validators that engage in toxic behavior, such as harmful MEV practices. If validators are found to be exploiting the system, they could be penalized, reducing their stake or even ejecting them from the network, which would discourage such behavior.
Cross-chain Interoperability:
As a Layer 1 that aims to support DeFi across multiple chains, Berachain’s interoperability could distribute the MEV risks across different ecosystems. Validators wouldn't have to rely on a single chain's MEV opportunities but could diversify their activities, leading to a more balanced validator ecosystem.
This is The B/ERA
LIVETHELIFETV
Berachain addresses the problems associated with MEV and validator centralization through a combination of consensus mechanisms (PoS + PoL), multi-asset staking, dynamic fee markets, and governance strategies that discourage harmful behaviors. By focusing on liquidity provision as a core validator activity, it reduces the emphasis on MEV as a primary source of revenue, which could lead to a more decentralized and equitable network. If successful, it could mitigate the risks that currently challenge SOL & ETH