Introduction

Researchers at Paradigm, Dan Robinson and Dave White, have proposed the implementation of Miner Extractable Value (MEV) taxes to enable decentralized applications to capture their own MEV. This innovative mechanism aims to redirect value back to both users and developers.

Understanding MEV

MEV, known as Miner Extractable Value, signifies the potential profits that miners or validators can acquire through reordering, including, or excluding transactions within a block. Recently, the European Securities and Markets Authority highlighted ongoing investigations into MEV mechanisms, indicating possible classification as a market abuse mechanism under MiCA regulations.

Traditional Allocation of MEV Profits

Historically, profits from MEV operations flow to block proposers. For example, a Solana-based MEV bot recently amassed about $1.2 million in profits. Nonetheless, the proposed MEV taxes present a fresh approach to redistributing this value, as indicated in a recent report.

Mechanism of MEV Taxes

The concept of MEV taxes revolves around the deployment of a smart contract that imposes a fee proportional to the transaction's priority fee. For instance, an application could enforce an MEV tax of $99 for every $1 of priority fee, effectively capturing 99% of the MEV.

Implications for Decentralized Finance (DeFi)

By embracing MEV taxes, any blockchain application can conduct its MEV auction autonomously without external off-chain dependencies. This strategy holds the promise of resolving key issues in DeFi, such as streamlining trade execution in decentralized exchanges (DEXs) and safeguarding against losses for automated market makers (AMMs).

Benefits for DEX Routers and AMMs

MEV taxes can supplant traditional auctions for DEX routers, guaranteeing users optimal trade prices through competitive bidding. Furthermore, AMMs, often subject to arbitrage-related value erosion, can leverage MEV taxes to capture this value and shield liquidity providers.

Integration into Wallets

Wallets have the potential to incorporate MEV taxes, enabling users to capitalize on the MEV generated by their transactions, consequently boosting their overall gains.

Challenges and Regulatory Compliance

The effectiveness of MEV taxes hinges on block proposers conforming to competitive priority ordering regulations. These regulations mandate transaction sorting based on priority fees without manipulation. Any violation of these rules by block proposers might lead to the misappropriation of MEV for personal gain. Ensuring compliance within a decentralized and trustless setup poses a notable challenge.

Conclusion

The introduction of MEV taxes represents a crucial advancement in optimizing value distribution within decentralized applications. By reshaping the landscape of MEV capture, these taxes have the potential to enhance equity and efficiency in blockchain environments.