The Economics of MEV - Bell Curve Podcast Recap

This episode of Bell Curve features a discussion between Hasu and Blocknative CEO and co-founder Matt Cutler around the MEV supply chain, the economics of relays and builders, and the potential impact of account abstraction on the Ethereum ecosystem.

Key Takeaways

Relays hold a pivotal role in the MEV supply chain—yet they have no economic incentives and come with very real costs and risks.

In the MEV supply chain, relays play a crucial role in connecting validators and builders, providing a trusted middleman service that ensures the network operates efficiently. However, despite this role, Matt Cutler points out that relays currently carry significant costs and risks without any economic incentives, leading to concerns about the sustainability of the relay ecosystem.

"There is absolutely no economic incentive for operating the relays. The relays carry very real cost, very real risk, and they carry zero economics."

Hasu, on the other hand, argues that it is difficult to monetize relays in a free market, as they provide a highly fungible service. If relays were to charge fees, it could lead to centralization or incentivize larger players to circumvent them, ultimately defeating the purpose of having relays in the first place.

Cutler countered that the current situation is not sustainable and there should be some opportunity for relays to participate in the value generated by the network. He suggests that exploring different incentive mechanisms and encouraging more teams to participate as relays could help address these concerns. Hasu acknowledged that public goods funding could be one way to support relays, but emphasized the importance of exploring the full design space to find a sustainable solution.

Account abstraction (ERC-4337) can create new user experiences and expand Ethereum's capabilities

ERC-4337, or account abstraction, is a proposal that aims to make Ethereum wallets more expressive and programmable. With a 4337 smart contract wallet, instead of a standard transaction users create "userOps," or pseudo transactions, that express their intent for a specific action on the Ethereum network.

According to Cutler, this "opens up wallets to do all sorts of new and interesting things like social account recovery, gas sponsorship, [and] being able to use any token to pay for gas." Hasu agreed that account abstraction could "supercharge the user experience of crypto in a way that no other proposal has done over the last 4-5 years."

However, the introduction of account abstraction also raises concerns about the potential for increased front-running and the need for more transparent and equitable mechanisms in the MEV supply chain. Cutler acknowledged that it remains to be seen how the market will evolve with the introduction of account abstraction, but expressed optimism that the upgrade would ultimately benefit the Ethereum ecosystem.

Wallets and user preferences have increasing influnce in the MEV supply chain

Matt Cutler refers to wallets as "sleeping giants" in the MEV supply chain, emphasizing the growing influence they have on user preferences and the overall market structure. One development in this area is the introduction of order flow auctions (OFAs), which enable users to express their preferences for how their transactions are processed and potentially recapture some of the MEV generated.

Cutler said that OFAs are "an extremely fascinating development" and that they provide a more equitable way for users to participate in the MEV ecosystem. Hasu concurred, stating that the growing influence of wallets and user preferences is "going to be very, very interesting in the next six months." However, as the influence of wallets and users grows, it raises questions about how to balance the interests of different actors in the MEV supply chain and ensure that the system remains decentralized and equitable.

Be a part of the future of MEV

In the past, Blocknative helped the Ethereum community adapt to upgrades such as EIP-1559 and the proto-PBS ecosystem put in place by The Merge. We look forward to continuing to support the Ethereum development roadmap process and contributing to research and discourse around the economics of MEV.

Validators can earn more by connecting MEV-Boost to the Blocknative Relay endpoint. Connect to our relay today to maximize your block rewards. If you’re a dapp or wallet interested in #ShareTheMEV and Wallet-Boost, we would love to chat with you.

You can always join our Discord community for direct access to Blocknative employees. Or follow us on Twitter @Blocknative for the latest updates from our team.