Learn about MEV tax in one article: Is the 'illegal wealth” of 'clippers” not protected?

Paradigm researchers Dan Robinson and Dave White proposed a new concept "MEV tax." The MEV tax mechanism allows applications to reclaim a portion of the MEV from a transaction, with the goal of redistributing the value of the MEV to avoid all of it being appropriated by the searcher who executed the transaction. This mechanism can be effectively implemented on OP Stack L2 such as OP Mainnet, Base and Blast.

MEV Tax Introduction

MEV taxes are a mechanism that allows smart contracts to automatically withdraw fees by analyzing the priority fees in transactions. Under this framework, smart contracts charge a percentage of the MEV tax based on the priority fee of the transaction. A priority fee is a fee that users pay to speed up the speed at which their transactions are confirmed by the network. After EIP-1559, Ethereum’s transaction fees are divided into base fees and priority fees. The base fee is set automatically by the network and dynamically adjusts based on network congestion, while the priority fee is an additional fee paid by users to block proposers to incentivize their transactions to be processed first.

The smart contract checks the priority fee of the transaction and charges a proportional additional fee accordingly, called the MEV tax. For example, under the MEV tax, users pay a 1u priority fee to block proposers to incentivize them to prioritize this transaction. In order for the searcher to have all the MEV of this transaction belong to him (for example, he can make a profit of 100u), he must pay 99u to the smart contract according to the 1:99 ratio set by the smart contract that interacts with the transaction, and the 99u will be returned To the application (used to provide rewards to users, etc.). In the absence of MEV tax, users pay a priority fee of 1u, and the proposer will get 1u if the transaction is processed, but the MEV (100u) generated by this transaction will belong to the searcher.

The validity is based on the rules of competitive priority ordering

The validity of the MEV tax is based on the rules of "competitive priority ordering":

Sort by priority fee: Block proposers should sort transactions according to their priority fees, and transactions with high priority fees should be processed first.

No censorship: Block proposers cannot censor or exclude any transactions, even those paying lower priority fees.

No peeking and delay: Block proposers cannot peek at the transaction content in advance, nor can they delay the processing of certain transactions without reason.

Based on this rule, MEV tax is only valid on OP Stack L2. Because the block proposers (sequencers) on these chains follow the rules of competitive priority. If sequencers violate these principles, they can also evade the MEV tax by manipulating the order of transactions, capturing the value for themselves.

For Ethereum L1, the construction of blocks is carried out through competitive block auction systems such as MEV-Boost. Multiple block builders participate in the competition, trying to achieve success through transactions including high fees. Maximize revenue. Since the MEV tax will reduce the builder's income, in a highly competitive block building environment, builders will tend to prefer transactions that do not implement the MEV tax, so this mechanism is ineffective on Ethereum.

Problems solved by MEV tax

MEV tax can be adopted by any smart contract without requiring specific external facilities, allowing smart contract developers to customize the charging model according to their own application needs. This flexibility ensures that different blockchain protocols and applications can be optimized according to their own strategies while maintaining compatibility with other systems. For example:

Optimize DEX transactions: When MEV tax is introduced in DEX, the execution price of the transaction not only depends on the market supply and demand relationship, but also includes the component of MEV tax. Because in order to get the deal done first and get a better price, searchers pay a higher MEV tax. This part of the fee can be used to increase the priority of the transaction in the block, or as a reward mechanism to feed back to users or liquidity providers, which may change the execution price of the transaction and indirectly reduce transaction price slippage. .

Reduce the losses and rebalancing problems of liquidity providers in AMM: AMM can be set to prioritize transactions that pay higher MEV taxes, so that part of the profits can be directly recovered from arbitrageurs and returned to AMM or liquidity liquidity provider to ensure that the income of liquidity providers is more stable.

Capture the "backrun" MEV generated by the transaction: By integrating the MEV tax into the smart contract wallet, a mechanism is designed to allow the user's wallet to automatically charge the MEV tax during the transaction. In this way, when other market participants try to take advantage of the MEV generated by user transactions, they must pay the MEV tax, which can be returned to the user of the original transaction. This mechanism effectively allows users to capture the MEV generated by their own transactions, protecting their interests.

Limitations of the MEV tax

In addition to the effectiveness mentioned above, which is highly dependent on the sorter's strict compliance with the competitive priority sorting rules, the MEV tax also faces some other limitations. For example, when a block is completely full, block proposers may have to abandon lower priority transactions instead of simply including them later in the block. The success of the MEV tax also requires competition in the market, which means that transaction opportunities need to be widely known. For some applications based on user intentions, this may require the disclosure of user intentions, leading to potential value leakage in competition.

Although the MEV tax mechanism faces some challenges and limitations, this innovative method is also a way to redistribute MEV reasonably and return the MEV profits that originally belong to the searcher to the application. The purpose of MEV tax and MEV Share is similar, both are looking for ways to return MEV to promote fair distribution of the MEV ecosystem.

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