Key Players in the MEV Ecosystem

Searchers

These are the participants who actively look for MEV opportunities. They analyze the pending transaction pool (mempool) to identify profitable transaction sequences, such as arbitrage opportunities, liquidations, and sandwich attacks. Once they identify an opportunity, they create a transaction (or a sequence of transactions) to exploit this opportunity and bid for its inclusion in a block through a process known as “Priority Gas Auctions” (PGA) or through direct dealings with block builders.

Block Builders

With the advent of Ethereum 2.0 and the separation of block proposal from block building, block builders play a crucial role. They are responsible for assembling a block of transactions in a way that maximizes the value extracted from the block. Block builders receive bundles of transactions from searchers and other sources, and they use sophisticated algorithms to determine the most profitable order and combination of transactions. They then propose these blocks to validators (block proposers) in the hope that their block will be chosen for inclusion in the blockchain.

Validators (Block Proposers)

In a proof-of-stake system like Ethereum 2.0, validators are the equivalent of miners in a proof-of-work system. They are responsible for choosing which block to append to the blockchain. Validators receive proposed blocks from block builders and select one based on various criteria, including the total value the block offers to the validator. This selection process can involve MEV-Boost, a mechanism that allows validators to outsource the decision of which block to propose to third-party builders, thus potentially increasing the MEV rewards.

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Relay Networks

These networks facilitate communication between searchers, builders, and validators. They help in disseminating transaction bundles from searchers to builders and proposed blocks from builders to validators. Relay networks aim to increase the efficiency and fairness of the MEV market by providing a standardized and decentralized way for these participants to interact.

End-to-End Example

Let’s consider an end-to-end example involving a simple arbitrage opportunity:

1. Opportunity Identification: A searcher monitors the mempool and two decentralized exchanges (DEXs), Exchange A and Exchange B. They notice that there is a price discrepancy for a token, ETH, between the two exchanges. It’s selling for $2,000 on Exchange A and $2,010 on Exchange B.
2. Transaction Creation: The searcher creates a transaction sequence to buy ETH on Exchange A and sell it on Exchange B, profiting from the price difference. This sequence may involve multiple steps, like wrapping ETH into WETH (Wrapped ETH), executing the trades on both exchanges, and unwrapping WETH back to ETH.
3. Bidding for Inclusion: The searcher submits this transaction bundle to a relay network or directly to block builders, along with a bid (usually in the form of a higher gas price or a direct payment) to incentivize the inclusion of their transactions in the next block.
4. Block Building: A block builder receives transaction bundles from various searchers and uses algorithms to determine the most profitable combination of transactions. The builder includes the searcher’s arbitrage transactions in a block proposal, considering the searcher’s bid and the overall value the transactions add to the block.
5. Block Proposal: A validator receives proposed blocks from one or more block builders, possibly via a relay network. The validator selects a block that maximizes their reward, which includes transaction fees, block rewards, and any additional MEV rewards captured by the included transactions.
6. Block Inclusion: The chosen block, containing the searcher’s arbitrage transactions, is added to the blockchain. The searcher’s transactions are executed in the order they specified, allowing them to capitalize on the arbitrage opportunity.
7. Profit Realization: The searcher realizes a profit from the price discrepancy, minus transaction fees and any bids they made to ensure their transactions were included in the block.