Twinstake Approach to Maximal Extractable Value (MEV) on Ethereum

Maximal Extractable Value (MEV) refers to the ability of block proposers to capture profit by ordering, inserting, or censoring transactions within a block. MEV on Ethereum has frequently been described as a ‘dark forest’ due to its complex nature with respect to maximisation, traceability and predictability. As a validator or staker, it is essential to identify MEV maximisation methods and ensure that all drivers impacting MEV rewards are understood. It is also important to identify the methods that can practically be employed to ensure the highest possible attainable MEV, whilst assessing the impact that these methods may have on the wider ecosystem. Whilst revenue maximisation is an important consideration, network health maintenance, restriction of criminal activity, and complex interactions with other validator duties must be included in any practical decision.

This piece aims to present Twinstake’s approach to the above questions in an attempt to provide transparency in the available setup options and the tradeoffs associated with each one.

Introduction to the MEV Landscape

The landscape of MEV is a complex ecosystem within the blockchain network, primarily involving four key roles: searchers, builders, relayers, and operators (validators). Each plays a crucial part in the process of identifying, creating, distributing, and ultimately validating transaction blocks in a way that maximizes the potential MEV. Understanding the dynamics and incentives of each participant is essential for appreciating how MEV operates and how it can be optimized.

Searchers

Searchers are the treasure hunters of the MEV ecosystem. They constantly analyze the blockchain for opportunities to create transactions or transaction sequences that can be executed to extract value. This includes, but is not limited to, arbitrage, liquidations, and sandwich attacks. Searchers aim to identify profitable strategies before others do, maximizing the potential gains from MEV.

Builders

Builders, such as Titan or Rsync, take the potential transactions identified by searchers and package them into blocks. They play a critical role in structuring a block to maximize the MEV yield while ensuring that the block remains valid according to network rules. Builders outperform by utilising state-of-the-art infrastructure to minimize latency. There is also a B2B element to the market whereby builders can create deals with searchers to obtain proprietary order flow.

Relayers

Relayers, such as Bloxroute, Flashbots and Eden Network, act as intermediaries between builders and operators. They aggregate and broadcast potential blocks to validators. Relayers prioritize transaction bundles based on profitability and the likelihood of being included in a block by an operator. They are pivotal in ensuring that the MEV opportunities identified and constructed are efficiently communicated and executed on the blockchain. Infrastructure and colocation are the main techniques used by relayers, although some relayers also operate as builders, and as such may have unique order flow or latency optimizations not available to other parties.

Operators (Validators)

Operators, or validators, are responsible for finalizing and adding blocks to the blockchain. They select from the blocks provided by relayers, aiming to include those that maximize the MEV yield for a particular block. Validators must balance the pursuit of MEV with the need to maintain the network's integrity and performance, making strategic decisions that can affect their profitability and the overall health of the blockchain. With respect to practical decision making, an operator can choose which relays to connect to. Operators can also customize the timing of interactions with relayers, so that block are produced later in the slot. This can enable potentially higher MEV capture from the potentially larger mempool existing later in the slot.

Twinstake's Approach to MEV Optimization

In this intricate ecosystem, Twinstake's validators are positioned to optimize MEV within the defined roles and rules of engagement. Twinstake enables:

• ‍Optimised Relay Selection: In addition to our default relayer configuration which connects to only OFAC-compliant relayers, we offer the ability to select additional relayers of interest which may provide enhanced compliance protection or enhanced MEV strategies. Each relay connection will have access to different bids sent by builders, who may have unique orderflow. By connecting to various relays, Twinstake ensures it has access to the highest MEV bids available. Twinstake also offers the ability to connect to paid-for relayer services and where possible, provides guidance on the expected vs experienced MEV uplift to help clients decide whether this is something they would like to purchase.
• ‍Enhanced Timing Strategies: Timing optimisations are implemented such that normal validator duties are minimally impacted to ensure that the other validator duties are not negatively impacted. It is important to consider the potential to miss consensus proposer rewards by implementing poorly optimised timing strategies. If the proposer propagates the compiled block to the rest of the network too late into the slot, there is a risk it will not reach consensus within the allotted time, and can incur both missed rewards as well as penalties. Additionally, missing proposals can negatively impact the network, delaying the propagation of the blockchain.
• ‍Market Leading Data and Research: Twinstake stays abreast of and is involved in MEV-related research and discussions across the ecosystem including attending industry events, working in partnership with optimizing services and producing in-house data and research.

Twinstake continues to assess innovations within the broader ecosystem which can positively impact our clients’ MEV; however, there is a significant amount of randomness in the amount of MEV a validator will receive over its lifetime. Twinstake cannot influence the frequency of block selection, the inherent limit of MEV within a block (higher than the bids sent by relayers), or guarantee specific MEV yields due to the stochastic nature of blockchain activities and MEV opportunities.

Since January 2023, Twinstake has proposed over 33,000 Ethereum blocks and has captured an average MEV reward per block of 0.119ETH compared to the network average of 0.114ETH. Meanwhile, the standard deviation of Twinstake’s MEV per block is 0.568ETH compared to the standard deviation of the network as a whole of 1.413ETH. The largest MEV captured by Twinstake in a single block was 45.145 ETH.  These statistics underscore the significant stochastic aspect of MEV, the variance present in MEV, as well as evidencing Twinstake’s successful strategy in capturing higher than average MEV.

The above optimizations are developed with the health of the Ethereum network at the forefront of the conversation. Twinstake monitors the industry-wide debate regarding the potential toxicity of some forms of MEV, as well as the counterarguments suggesting MEV is the catalyst of an efficient market. MEV maximisation should not come at the expense of the wider ecosystem or enabling unlawful activity, nor should it artificially manipulate the market. These concerns are constantly reviewed and underpin any MEV strategies employed.

Twinstake's strategy balances aggressive MEV pursuit and the stewardship of the blockchain environment, aiming for a sustainable and profitable operation that respects the roles and contributions of all participants in the MEV landscape.

Twinstake is a leading institutional staking provider which offers unrivaled knowledge and experience of the institutional market from our founding heritage coupled with deep crypto expertise and technology from our team of core devs and industry veterans.

For detailed insights into unlocking the full potential of your staking experience on any chain, reach out to the team at [email protected]

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