Ethereum will soon transition from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus protocol. This transition has been worked on for years and is happening in multiple steps. The first step in December 2020 consisted in launching the beacon chain. It is now live, and, at the time of writing, has more than 160k validators or an equivalent of ~5m ETH staked on it. The second step 'The Merge' may be happening in early 2022. While there are still many details beyond this step to be ironed out, enough has already been fixed about Pos Ethereum (eth2) for us to be able to reason about how Maximal Extractable Value (MEV) will look like in it. In this post, we study transaction ordering in eth2 and analyze MEV-enabled staking yields. We find that MEV will significantly boost validator rewards but may reinforce inequalities among participants of eth2. We also discuss qualitative aspects of MEV in eth2 such as the potential dynamics that will unfold between its largest stakeholders like exchanges and validator pools. This post is co-authored by Alex Obadia and Taarush Vemulapalli at Flashbots. Full analysis available here. eth2 summary

edit 10/05/21: update timeline, remove megabundle edit 04/05/21: update timeline, remove proxy contract, add release plan edit 21/04/21: incorporate feedback and finalize proposal edit 14/04/21: update timeline and incorporate feedback Flashbots Core consists of MEV-geth together with the Flashbots Relay. The current live version is v0.1, this document describes the proposed improvements to roll out in the next version, v0.2. The tentative timeline for this version is: April 5th: Initial proposal April 19th: Final proposal May 17th: Code freeze / Formal spec

Kristof Gazso (Nethermind) & Alejo Salles (Flashbots) The incorporation of EIP-1559 in the London hardfork brings a major restructuring of the Ethereum fee mechanism, aiming to allow for easier fee estimation by users and consolidate ETH as the base currency of the network by burning part of the transaction fees. This post analyzes some of the consequences of this EIP under the light of the MEV (Maximal Extractable Value) phenomenon, that is, the permissionless extraction of value by the reordering, addition, or censoring of transactions. Under the new fee mechanism, instead of choosing a gas price for their transactions, users set a "priority fee" for miners to incentivize inclusion, alongside a "max fee", stating the absolute maximum price that they are willing to pay. The protocol will now set a per-block "basefee", computed programmatically from the amount of gas used in the block immediately before, in a negative feedback loop meant for block sizes to stabilize around a target size $s_0$ (initially equal to the maximum current block size). Valid transactions pay a gas price equal to the basefee plus the prioirity fee (only up to the max fee--needed in case of sudden basefee increases); the prioirity fee goes to the miner, and, crucially, the basefee is burnt. These changes have some obvious immediate implications for MEV-related infrastructure, like eliminating the possibility of zero-Gwei transactions, which are presently used for front-running protection in some DEXes like MistX, where miner fees are taken directly from the transferred tokens. On the other hand, we don't expect radically new sources of MEV to arise from the novel fee mechanism. In this note, we highlight three areas where EIP-1559 might have interesting consequences for MEV: increased MEV extraction incentives for miners, the coexistence of different auctions in the Ethereum protocol and its implications for EIP design, and the role of Flashbots as a miner coordinating agent and its ethical implications. Miners economics and the increased incentive for MEV extraction Either due to proper economic incentives or because of their loyalty to the network, miners have produced blocks since the inception of Ethereum without major malicious deviations from the protocol. The Flash Boys 2.0 paper however warned of the nefarious consequences that indiscriminate MEV extraction might bring to the protocol like transaction censoring, or chain re-orgs ultimately threatening consensus stability. Notably, however, it was only recently that MEV extraction became the standard for miners when Flashbots introduced MEV-geth, a fork of the geth client that miners can run to start receiving "MEV bundles", packaged sets of transactions that ensure a payment to miners upon inclusion. Partly due to the looming threat of EIP-1559 reducing their income, most miners were quick to adopt MEV-geth to partially palliate the shock. It is then reasonable to ask, when EIP-1559 comes into action, whether miners will devote extra efforts for further MEV extraction, in particular in ways that are harmful to the network.

Before designing an algorithm for bundle merging at the relay, we need to achieve a better understanding of the problem at hand. In particular, we don't know where incompatibility of bundles is taking place, or: where do our bundles "clash"? Here, we introduce a parsing of the clashing space that ultimately suggests different algorithm approaches. We run an analysis on past relay data to quantify how the clashing of bundles is distributed. For each target block, we check all bundles submitted, and see where each bundle pair clashes according to the following hierarchy: digraph hierarchy { nodesep=0.5 node [color=Red,fontname=Courier] "Don't merge", "Trivial merge", "Multiple orderings", "Simple greedy" node [color=Black,fontname=Courier,shape=box]

In response to the evolving ecosystem of searchers, miners, and the broader Ethereum ecosystem, Flashbots is making changes that impact searcher bundle pricing and selection criteria. These changes are being rolled out today (4/13/2021) and we expect miner adoption of these changes to be swift. Bundles can no longer include ANY reverting or failing transactions There has been a class of tokens released with unexpected behavior that targets Flashbots searchers. These tokens have one behavior in simulation and a different behavior when executing on-chain. The problem occurs when one of a searcher's transactions reverts, noticing this unexpected behavior. However, a single transaction reverting might not be enough to prevent the bundle from landing on-chain. If the successful transactions that land on-chain provide enough value to the miner, the bundle could still be included. A founding principle of Flashbots is avoiding wasted space on the Ethereum mainnet chain, with reverted transactions being one of most common culprits. Given the unexpected token behavior and lack of economic benefit from reverted transactions, keeping more reverted transactions off the chain aligns with Flashbots goals and we are excited to release this feature. Landing reverted transaction in a bundle This 0.2-prerelease includes non-breaking API changes that we felt were important and production ready. We will be shipping the rest of 0.2 in May 2021, including API-breaking changes that will require searchers to update to a new RPC interface. This new RPC relay interface will include the ability to specify transactions which should be allowed to revert on-chain, as specified explicitly by the searcher.

Alejo Salles -- Flashbots Maximal (formerly Miner) Extractable Value ($\textrm{MEV}$) is the value that can be extracted from a blockchain by any agent without special permissions. Considering this permissionless nature, any agent with transaction ordering rights will be in a privileged position to perform the extraction. In Proof of Work blockchains, it is miners who determine transaction ordering within a block, hence the former "miner" term. In practice, bot operators seek to extract $\textrm{MEV}$ by either paying high fees to increase the likelihood that their transactions are mined, or by fine-tuning their gas price choices in order to "time" their transactions right, as is the case when backrunning an oracle update to perform a liquidation. Despite much recent discussion about the topic and, in particular, its associated risks for the Ethereum protocol, we still lack a cohesive formal model for quantifying $\textrm{MEV}$ extraction. At Flashbots, we have released an $\textrm{MEV}$ explorer where we shed light on various aspects of this phenomenon. While we do elaborate on our metrics in the site, they still lack a formal definition. Here, we attempt to provide a unifying operational framework that consolidates $\textrm{MEV}$ extraction metrics, focusing on the Ethereum network[^1]. General Considerations The first important point to make is that $\textrm{MEV}$ is a theoretical quantity that we can only approach asymptotically. Unforseen extraction methods can and will be devised (every new DeFi hack is an $\textrm{MEV}$ extraction event). Hence, we will here focus instead on the Realized Extractable Value, notated $\textrm{REV}$, where $\textrm{REV} \leq \textrm{MEV}$. In other words, $\textrm{REV}$ is the actual value extracted from the blockchain from $\textrm{MEV}$ opportunities[^2]. We note that there's two classes of actors in the system, searchers and miners. We use the generic label miner for actors that bear the privileged role of transaction inclusion and ordering. Searchers are any non-privileged actors aiming to profit from these opportunities. Crucially, miners can also act as searchers.