Flashbots frontrunning the MEV crisis

Flashbots is a research and development organization formed to mitigate the risks of capital centralization posed by miner-extractable value (MEV) to smart-contract blockchains.

Flashbots is levelling the playing field by addressing the MEV Crisis and upholding the core principles of Ethereum - neutrality, transparency, decentralization, and permissionlessness.

Before we dive into the details of the crisis, MEV is defined as "a measure devised to study consensus security by modeling the profit a miner (or validator, sequencer, or other privileged protocol actor) can make through their ability to arbitrarily include, exclude, or re-order transactions from the blocks they produce."
This includes both conventional profits from transactions and unconventional profits from reordering, transaction insertion and transaction censorship.

Miners have an economic incentive to select the transaction with the highest gas price and order transactions based on gas spend. The financial system being built on Ethereum creates opportunities for pure profit, such as different kinds of arbitrages and liquidations. However, traders are very much aware that such opportunities are limited and can be episodic, therefore will compete to get them.

As it stands, there are currently two methods in the competition - frontrunning or backrunning.

Frontrunning - also known as Priority Gas Auctions (PGAs) is where Transaction A is broadcasted with a higher gas price than an already pending transaction B so that A gets mined before B.

Backrunning is where Transaction A is broadcasted with a slightly lower price, than the already pending Transaction B, which results in Transaction A getting mined immediately after B.

Both methods however are inefficient and ultimately lead to network and chain congestion and consensus security instability.

Both methods however are inefficient and ultimately lead to network and chain congestion and consensus security instability.

Flashbots approach to migigating the crisis is broken down to 3 parts: Illuminate the Dark Forest, Democratize Extraction, and Distribute Benefits.

Flashbots aim to illuminate the dark forest through the MEV-Inspect method, which scans Ethereum blocks and provides a visualization of MEV metrics over time. The aim is to gain a better understanding of the MEV ecosystem and provide it to the community in an attempt to remove information asymmetry.

In order to democratiza extraction, the MEV-Geth method, which is an upgrade to the go-ethereum client, enables a sealed-bid block space auction mechanism for communication transaction order preference. It creates a better channel for communication between miners and traders bidding for inclusion of their transactions.

As MEV extraction continues to grow, Flashbots predict that there will be a need for some value distribution towards users and system stability. Therefore, as well as mitigating the risks, Flashbots aim to replace said risks with virtuous economic cycles in order to reinforce Ethereum's core values.

Their technical proposal can be found here.