Last Updated: 06/30/2022

Key Takeaways

If you own ETH, you need to think about Maximal Extractable Value (MEV). While validator yield is important, it’s MEV that quietly drives the world of ETH.

To explain: Ethereum searchers, miners, and soon-to-be validators compete on millisecond timeframes, similar to high-frequency trading firms, utilizing arbitrage, front running, and other methods to access latent on-chain alpha that comes from having a seat in front of Ethereum transaction flow.

MEV measures the total amount of ETH obtained by optimally reordering, including, or excluding transactions to maximize profit. Right now, searchers and miners run the MEV game. After Ethereum transitions to Proof of Stake, the game changes.

  • Scenario 1: MEV remains freely accessible to all block builders and validators post Proof of Stake go-live. Our bullish thesis on Ethereum assumes that MEV democratizes. In an increasingly likely scenario, a third-party solution developed by Flashbots, MEV-Boost, is activated on the network and adopted by most participants after the Merge to resist centralizing forces in the ecosystem. ETH holders will directly benefit in the long term from an economically sustainable and more valuable network as a result. We see an 85% probability of Scenario 1.
  • Scenario 2: There is a structural shift toward highly centralized, vertically integrated actors who outcompete all others for MEV. In this scenario, there is downside potential for the ecosystem and ETH token value over prolonged periods induced by governance, pooled reward risk, and censorship involving a few or one highly sophisticated, primary entity. We see a 15% probability of Scenario 2.
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