Original title: Solana MEV: An Introduction

Original author: Ryan Chern, HELIUS

Original compilation: Luffy, Foresight News

This article is intended to give you a basic understanding of how MEV works on Solana. In short:

· MEV on Solana is not going away.

· Not all MEVs are bad.

· Profitable front-running is possible not just in AMMs, but also in DEX liquidity venue structures.

· Solana’s constant block production and lack of an in-protocol mempool changes the default behavior and social dynamics of the blockchain.

· Others might fork or otherwise try to replicate Jito's off-protocol memory pool to extract more MEV, but this would be difficult both technically and socially.

· Many validators support the decision to remove the Jito mempool and give up sandwiching revenue to support the long-term development and health of Solana.

Introduction

In a proof-of-stake network, when you are designated as the owner of a specific block As the leader, you have the authority to decide the content of the block. Maximum Extractable Value (MEV) is the value gained by adding, removing, or reordering transactions within a given block.

With increased activity and interest on Solana, MEV is becoming an increasingly interesting topic. On January 10, 2024, a searcher rewarded the verifier with 890 SOL, which was one of the largest rewards in the history of Jito:

In the week ending March 12, 2024, Solana validators received over $7 million in Jito tips for block space. Today, over 50% of Solana trades are failed arbitrages, and since transaction costs are so low, expected returns remain positive. In the long run, traders will profit from such trades.

Solana’s MEV structure

Overview

MEV on Solana is different from other chains in that it encourages searchers to run their own nodes and integrate with high-staking nodes to get the latest view of the blockchain (because Solana is latency sensitive). This is due to Solana's continuous state updates and stake-weighted mechanisms, such as Turbine (for reading updated state) and stake-weighted QoS (for writing new state).

One of the most notable differences is the absence of a traditional mempool like is common on other chains like Ethereum.

Solana’s continuous block production eliminates the need for any additional or extra-protocol auction mechanisms, which reduces certain types of MEV (particularly front-running).

MEV Transactions

MEV opportunities occur in different categories. Here are some common types of MEV transactions that exist on Solana today:

· NFT Minting: MEV from NFT minting occurs when participants attempt to acquire rare or valuable NFTs during public minting events, including blue chip NFTs and long tail NFTs. MEV opportunities during NFT minting events can suddenly increase, with block x-1 having no NFT MEV opportunities and block x having a large number of MEV opportunities (here block x refers to the block when minting goes live). The massive congestion caused by these NFT mintings was one of the reasons for Solana's frequent downtime in 2021/2022.

· Liquidations: When borrowers fail to maintain the collateralization ratio required for their loans, their positions will be subject to liquidation. Seekers scan the blockchain for such undercollateralized positions and execute liquidations to repay part or all of the debt and receive part of the collateral as a reward. Liquidations occur in protocols that use tokens and NFTs as collateral. Liquidations are necessary for the protocol to remain solvent and are beneficial to the broader ecosystem.

· Arbitrage: Arbitrage involves exploiting price differences for the same asset on different markets or platforms. These arbitrage opportunities exist within a chain, between chains, and between CEXs and DEXs. Intra-chain arbitrage is currently the only form of arbitrage that guarantees atomicity because both trades are executed on the same chain, and intra-chain arbitrage requires additional trust assumptions. Arbitrage keeps assets priced consistently across different markets as long as it does not lead to an increase in harmful order flow.

Jito

Jito is an off-protocol blockspace auction mechanism for partial blocks, distinct from MEV-boost which builds full blocks (Jito and mev-geth are similar in spirit but very different in implementation). Jito provides off-chain inclusion guarantees for a specific set of transactions called bundles. Bundles are executed sequentially and atomically (all included or none included). Searchers who win the auction and pay a tip submit bundles that were previously guaranteed to be executed on-chain. Jito tips exist off-protocol, separate from in-protocol priority fees.

This approach aims to reduce spam and increase the efficiency of Solana's computing resources by running the auction off-chain, only by guaranteeing bundles to publish the auction's single winner to the block middle. Searchers can use bundles to implement one or both of the following properties: fast, guaranteed inclusion, and frontrun/backrun transaction bidding. This is especially important considering that a large portion of the network’s computing resources are currently consumed by failed transactions.

Memory Pool

Unlike Ethereum, Solana does not have a native in-protocol memory pool. Jito’s now-deprecated mempool service effectively created a canonical off-protocol mempool, as ~65% of validators run the Jito-Solana client (rather than the native Solana-Labs client).

After going online, transactions will stay in Jito's pseudo memory pool for 200 milliseconds. During this time, searchers can bid for the opportunity to preempt/backtrack or sandwich pending transactions, and the highest bidder will be forwarded to the validator for execution. Sandwich transactions account for a significant portion of MEV revenue, measured in tips paid to validators.

Jito's memory pool service was shut down on March 8

No one likes to talk about sandwich trading (especially on Ethereum) because it creates strictly negative externalities for the end trader: that user gets the worst price possible. For reference, Sandwich trading on Ethereum alone generated approximately $24 million in profits over the past 30 days. When users set a maximum slippage, they almost always trade at that price. In other words, if the order is filled, the user's actual slippage is almost always equal to the maximum slippage they set.

Jito searchers can still submit other types of MEV trading packages that do not rely on mempool order flow, such as arbitrage and liquidation trades (this requires observation in the block Trade and grab your chance at the next Jito auction).

Supply Chain

For reference, the current Ethereum block construction supply chain is as follows Display:

On Solana (for validators running the Jito-Solana client) The block building supply chain looks like this:

· Incoming Transaction: The scheduled status of the transaction currently waiting to be executed. This can come from RPC, other validators, private order flow, or other sources.

· Relayers: The relays on Solana are different from those on Ethereum. On Ethereum, a relayer is a trusted entity that connects block builders and proposers (builders trust the relayer not to modify their blocks). On Solana, relays are responsible for relaying incoming transactions, performing limited TPU operations such as packet deduplication and signature verification. The relay forwards the packets to the block engine and validators. There is no need for an equivalent relay on Ethereum because Ethereum has a mempool and Solana does not. The relay logic is open source and anyone can run their own relay (Jito makes relay instances a public resource). Other known Solana network participants also run their own relays.

· Block Engine: The block engine simulates transaction combinations and runs off-chain block space auctions. The MEV-maximized transaction package is then forwarded to the leader running the Jito-Solana client.

· Seekers: Searchers seek to take advantage of price differences by inserting their own transactions into a given block. They can leverage sources like Jito's ShredStream (and previously MempoolStream).

· Validator: Validators build and generate blocks. Jito-Solana blocks are constructed by the scheduler, which reserves 3 million CUs, representing the first 80% of the block, for transactions routed through Jito.

These parties are not necessarily independent entities, as entities can be vertically integrated. As mentioned before, validators have full authority over their blocks. Validators themselves can look for economic opportunities by inserting, reordering, and censoring transactions for a given block while becoming leaders.

Seekers can also submit transactions via the RPC method (standard intra-protocol routing) regardless of whether the leader is running Jito-Solana. Due to Solana's relatively low fees and uncertain scheduler, sending transactions remains a common method of capturing MEV opportunities. Some MEV opportunities may exist longer than expected, anywhere from one to dozens of blocks.

MEV distribution among participants

While Solana can speed up transaction execution and reduce the opportunity for certain types of MEV, it may exacerbate the potential for latency-driven centralization, in which validators and searchers seek to move their base Facilities integration to gain competitive advantage. We are still far from a competitive stable equilibrium state of infrastructure and related mechanisms.

Source: Twitter

In a world where block times are below 200 milliseconds, this provides a comparative advantage to senior players with the infrastructure and expertise to optimize the system. So far, Ethereum has strayed away from this balance, creating solutions outside of the protocol to give searchers a democratized opportunity to compete.

How to mitigate MEV

Common off-protocol mechanisms are coming into the protocol to reduce Solana chain MEV opportunities on. These mechanisms include:

· RFQ systems: RFQ (request for quote) systems (such as Hashflow) have made their way into Solana and are becoming increasingly popular (ecosystem-wide) Cumulative trading volume exceeds US$10 billion). Orders are fulfilled by professional market makers (Wintermute, Jump Crypto, GSR, LedgerPrime) rather than through on-chain AMMs or order books, and signature-based pricing allows for off-chain calculations. This effectively moves price discovery off-chain, with only completed transfer transactions going on-chain.

· MEV-protected RPC endpoints: These endpoints allow users to receive a portion of the proceeds from their order flow as rebates. Searchers bid for the right to backdate transactions and bid for associated rebates, which are returned to users. Such terminals are typically managed by trusting the counterparty running the terminal to ensure that front-running or sandwich trading practices do not occur.

MEV mitigation/redistribution mechanism is a combination of users capturing part of the value from the order flow and moving price discovery auctions and related mechanisms off-chain. These mechanisms involve trade-offs between cryptocurrency properties, such as censorship resistance, auditability, and trustlessness.

Conclusion

This article introduces the main players and latest developments of the MEV supply chain on Solana and common forms of MEV on Solana.

Research in the field of Solana MEV has primarily focused on investigating the impact of different MEV mitigation/redistribution mechanisms. Ethereum invests heavily in infrastructure, and Flashbots are designed to provide democratized MEV opportunities, but other designs are also imposed to deal with possible negative externalities.

Solana has the opportunity to explore new models at the forefront of MEV and block production supply chains.

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