How MEV Contributes to Blockchain Block Space Demand and Fees
Summary
The article examines maximal extractable value (MEV) as a source of demand for blockchain transaction space. It distinguishes transactions driven by users’ need to access applications from MEV transactions generated by opportunities within the system. Searchers compete to have profitable transactions included, with fees flowing to validators and burned tokens as well as searcher profits. The report breaks MEV down by strategies such as sandwiching, atomic arbitrage, and liquidations, and compares their revenues and margins.
Using Ethereum data through early 2024, the author estimates MEV at roughly a tenth of transaction fees on average, with larger shares during market shocks. The report describes this share as mean reverting and likely associated with volatility, while noting that the pattern reflects financial applications and could change as application mix evolves. Its estimates omit some activity, especially opaque centralized exchange to decentralized exchange arbitrage, whose figures are uncertain. The author expects MEV’s share to matter more on lower fee networks, but presents this as a forward-looking thesis rather than established evidence.
Key ideas
- MEV is endogenous demand for block space created by opportunities arising from other system activity.
- Searchers compete for transaction inclusion, distributing value among validators, token burns, and searchers.
- MEV strategies have different revenue scales and margins, with arbitrage and sandwich activity more competitive than liquidations.
- Ethereum MEV’s share of transaction fees is described as generally stable but prone to spikes during volatile events.
- Reported MEV estimates exclude or incompletely measure some centralized exchange to decentralized exchange activity.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.