Erik Weijers, 17 days ago

MEV-Burn proposal: ETH will get even more scarce

Ethereum developers have come up with a simply solution against the arms races that unfold because of mempool related trading. They will simply burn the ETH that these participants collect! The effect is that Ethereum will become even more scarce/deflationary and - hopefully - valuable.

A refresher on Maximal Extractable Value (MEV): it's the phenomenon of Ethereum validators benefiting from the fact that they can determine which transactions to pick from the mempool (waiting line) for the next block - and the order of these transactions. The classic example of how they make money is called a sandwich attack: a so-called searcher (a bot) detects a large pending trade on a decentralized exchange and places a trade right before and right after it and pockets the provoked price difference.

Meat in the lions' den

Burning ETH is nothing new: it has happened since the EIP-1559 update from 2021. Why the MEV-Burn proposal? Because MEV can have some nasty side effects. MEV rewards can be so big that virtual fights break out over the bounty. 

Compare it to throwing a huge piece of meat into a lions' den. The big male lions will fight over it, leaving nothing for the rest. Similarly, advanced MEV players extract money from ordinary users who don't have all the advanced mempool analytics at hand. In their fight over the profitable block, they will try to DDos attack each other and will attempt to reorg the chain. This creates an unstable situation, making newly created blocks less final. 

For these reasons of unfairness and instability, Ethereum wants to get rid of the MEV rewards. But won't the MEV players protest against their sometimes-big bounties of dozens or hundreds of ETH being taken away? 

Well, first of all, MEV scalpers are in essence traders and don't determine the roadmap of Ethereum. And second, burning ETH will benefit the price of their ETH too. MEV-Burn could roughly double the deflationary rate of Ether, burning an extra 200 thousand to 400 thousand ETH per year. This will create an additional deflationary effect of 0.2% per year. In the long run, that's a lot. 

When MEV-Burn?

While burning ETH sounds straightforward, it may take four years or so to be implemented. Proposer-Builder Separation is a pre-requisite for MEV-Burn. This is an architectural overhaul and scheduled to go live on the Ethereum roadmap, in the splurge phase. That's quite a few years in the future. In the meanwhile, the MEV bots can enjoy those sweet profits.

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