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| By Beth Canova |
The Merge upgrade was a brilliant technical success. But it also ushered in an array of changes and challenges.
One at the center of conversation has been network validators optimizing maximum extractable value, or the maximum value that can be extracted from block production, in excess of the standard block reward and gas fees.
This is done by including, excluding and changing the order of transactions in Ethereum's (ETH, Tech/Adoption Grade "B") block.
If you're more familiar with traditional finance, this is a bit like stockbrokers selling their order flows to market makers to earn extra money beyond just collecting commissions on executed trades.
By switching to a proof-of-stake consensus mechanism, the Merge allowed for the meteoric rise of MEV-boosting relays, which act as profitable mediators between block proposers and block builders, bringing more rewards to validators.
In other words, validators have the option to outsource their block production duties to the highest bidder, effectively increasing their annual percentage rate.
These rapidly became very popular among validators. However, this also coincided with the Tornado Cash sanctions.
As a refresher, in August, the Office of Foreign Asset Control — the U.S. Treasury's enforcer of trade and economic sanctions — accused privacy app Tornado Cash of money laundering and sanctioned several Ethereum addresses associated with it.
Then, the biggest of the MEV boosters, an outfit called Flashbots that currently relays 81% of MEV-boost blocks, voluntarily picked up the OFAC sanctions list and started enforcing them.
My colleague Chris Coney wrote about this previously. I suggest giving that piece a read for more context.
It's unclear whyFlashbots made this decision. But it's plunged the crypto community into deeper conversations around censorship as others followed suit.
There are currently seven active MEV-boost relays, including Flashbots. Four now follow OFAC compliance requirements by systematically excluding transactions that interact with sanctioned Ethereum wallet addresses.
Suddenly, there seemed to be clear evidence that Ethereum was facing potentially crippling censorship issues.
In practice, however, sanctioned Tornado transactions are hardly dead in the water.
They're just a bit slower, because they have to wait for a noncompliant block to be included in and processed.
Still, many are concerned about the writing on the wall. And with good reason — crypto is meant to be a neutral space, free from government overreach. From my vantage point, there are two possible solutions.
The first — a political solution — is more idealistic. It would involve educating validators about importance of neutrality and asking them to shift to using non-censoring relays.
In this spirit, Flashbots has now launched open-sourced versions of its relay. This gives validators who dislike the politics implemented on their closed-source versions the chance to review and modify it.
This seems like a rather healthy market response.
However, the second solution — a technical one — is more likely to maintain censorship resistance in the future.
This would mean programming a solution into the blockchain. That could look like limiting relay block-building power, boycotting the censorious relays or punishing them through slashing.
It's possible that the minimum threshold of 32 ETH and technical requirements for validators may be adjusted to make validation easier for single stakers in general. The goal there would be to dilute the dominance of larger players … such as centralized exchanges that may not give much thought about what the community wants and are slow to act.
For now, we'll be waiting for such proposals to see how the big brains behind the network believe they can bring back neutrality to the base layer.
Best,
Beth
