Title: Peering into Solana's MEV Ecosystem: Another Dark Forest Outside of Ethereum

Author: Ryan Chern

Translation: Luffy, Foresight News

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

• MEV on Solana has not disappeared.
• Not all MEV is bad.
• Profitable front-running trades are possible not only in AMMs but also in the structure of DEX liquidity venues.
• Solana's continuous block production and lack of protocol-native mempool changes the default behavior and social dynamics of the blockchain.
• Others may fork or attempt to replicate Jito's off-chain mempool in other ways to extract more MEV, but this is technically and socially challenging.
• Many validators support the decision to remove Jito's mempool, giving up sandwiching revenue, to support the long-term development and health of Solana.

Introduction

In proof-of-stake networks, when you are designated as the leader of a specific block, you have the right to determine the content of that block. Maximum Extractable Value (MEV) refers to the value obtained by adding, removing, or reordering transactions within a given block.

With the increasing activity and interest in Solana, MEV is becoming an increasingly discussed topic. On January 10, 2024, a searcher rewarded validators with 890 SOL, one of the largest rewards in Jito's history:

In the week ending March 12, 2024, Solana validators earned over $7 million in Jito fees due to block space. Currently, over 50% of Solana transactions are failed arbitrages, and due to the very low transaction costs, the expected profit remains positive. In the long run, traders will profit from such transactions.

Solana's MEV Structure

Overview

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

One of the most significant differences is the absence of a traditional mempool commonly found on other chains like Ethereum.

Solana's continuous block production does not require any additional or off-protocol auction mechanisms, reducing certain types of MEV (especially front-running).

MEV Transactions

MEV opportunities arise in different categories. Here are some common types of MEV transactions currently present on Solana:

• NFT Minting: MEV is generated when participants attempt to obtain rare or valuable NFTs during public minting events (including blue-chip NFTs and long-tail NFTs). MEV opportunities in NFT minting activities can suddenly increase, with block x-1 having no NFT MEV opportunities, while block x has a large number of MEV opportunities (where 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 crashes in 2021/2022.
• Liquidation: When borrowers fail to maintain the required collateral ratio for their loans, their positions may be subject to liquidation. Searchers scan the blockchain to find such under-collateralized positions and execute liquidations to repay part or all of the debt, earning part of the collateral as a reward. Liquidations occur in protocols using tokens and NFTs as collateral. Liquidations are necessary for the protocol's solvency and beneficial for the broader ecosystem.
• Arbitrage: Arbitrage involves exploiting price differences of the same asset on different markets or platforms. These arbitrage opportunities exist within chains, across chains, and between CEX and DEX. On-chain arbitrage is currently the only form of arbitrage that guarantees atomicity, as both transactions are executed on the same chain, while cross-chain arbitrage requires additional trust assumptions. As long as it does not lead to an increase in harmful order flow, arbitrage can maintain asset price consistency across different markets.

Jito

Jito is an off-chain block space auction mechanism for specific blocks, different from MEV-boost for building complete blocks (Jito and mev-geth are similar in spirit but differ significantly in implementation). Jito provides off-chain guarantees for a group of transactions called bundles. Bundles are executed in sequence and atomically (all included or none included). If a searcher wins the auction and pays a fee, they submit the previously guaranteed bundles for on-chain execution. Jito fees exist off-protocol, separate from on-protocol priority fees.

This approach aims to reduce spam and improve the efficiency of Solana's computational resources by running auctions off-chain and only publishing the winning single bundle to the block. Searchers can use bundles to achieve one or both of the following attributes: speed, guaranteed inclusion, and front-run/back-run trade bidding. This is particularly important considering that a significant portion of the network's computational resources are currently consumed by failed transactions.

Mempool

Unlike Ethereum, Solana does not have a native on-protocol mempool. The now deprecated mempool service of Jito effectively created a standardized off-chain mempool because about 65% of validators run the Jito-Solana client (rather than the native Solana-Labs client).

Upon submission, transactions will stay in Jito's pseudo-mempool for 200 milliseconds. During this time, searchers can bid for front-run/back-run or sandwich trades, and the highest bidding transaction bundle will be forwarded to validators for execution. A significant portion of sandwich trade MEV revenue is measured by fees paid to validators.

Jito's mempool service was shut down on March 8

No one likes to talk about sandwich trades (especially on Ethereum) because it brings strict negative externalities to end traders: the user gets executed at the worst price. For reference, in the past 30 days, sandwich trades on Ethereum alone generated approximately $24 million in profit. When users set the maximum slippage, they almost always get executed at that price. In other words, if the order is executed, the user's actual slippage is almost always equal to the maximum slippage they set.

Jito searchers can still submit other types of MEV transaction bundles not dependent on mempool order flow, such as arbitrage and liquidation trades (which require observing transactions in a block and seizing opportunities in the next Jito auction).

Supply Chain

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

The Solana block construction supply chain (for validators running the Jito-Solana client) is as follows:

• Incoming Transactions: The current pending status of transactions waiting to be executed. This can come from RPC, other validators, private order flow, or other sources.
• Relay: The relay on Solana is different from Ethereum. On Ethereum, the relay is a trusted entity that connects block builders and proposers (builders trust the relay not to modify their blocks). On Solana, the relay is 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. An equivalent relay is not needed on Ethereum because Ethereum has a mempool, while Solana does not. The relay logic is open-source, and anyone can run their own relay (Jito provides relay instances as a public resource). Other known participants in the Solana network also run their own relays.
• Block Engine: The block engine simulates transaction combinations and runs off-chain block space auctions. It then forwards the MEV-maximizing transaction bundles to leaders running the Jito-Solana client.
• Searcher: Searchers seek opportunities to exploit price differences by inserting their own transactions into a given block. They can utilize sources such as Jito's ShredStream (and the previous MempoolStream).
• Validator: Validators construct and generate blocks. Jito-Solana blocks are built by the scheduler, which reserves 3 million CUs for transactions routed through Jito, accounting for the first 80% of the block.

These participants are not necessarily independent entities, as entities can vertically integrate. As mentioned earlier, validators have full authority over their blocks. Validators themselves can seek economic opportunities by inserting, reordering, and reviewing transactions in a given block when they become leaders.

Regardless of whether the leader runs Jito-Solana, searchers can also submit transactions through RPC methods (standard protocol internal routing). Sending transactions is still a common method to capture MEV opportunities due to Solana's relatively low fees and the uncertainty of the scheduler. Some MEV opportunities may persist longer than expected, ranging from one to several blocks.

MEV Allocation Among Participants

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

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Source: Twitter

In a world where block times are less than 200 milliseconds, this provides a comparative advantage to seasoned participants with infrastructure and expertise to optimize the system. So far, Ethereum has deviated from this balance, creating off-protocol solutions to democratize opportunities for searchers to participate in competition.

Mitigating MEV

Generic off-protocol mechanisms are entering the protocol to reduce MEV opportunities on the Solana chain. These mechanisms include:

• RFQ System: The RFQ (Request for Quote) system (such as Hashflow) has entered Solana and is gaining popularity (with a cumulative trading volume of over $10 billion for the entire ecosystem). Orders are filled 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 computation. This effectively moves price discovery off-chain, with only completed transfer transactions entering the chain.
• MEV-protected RPC Terminals: These terminals allow users to receive a portion of their order flow's earnings as a rebate. Searchers bid for the right to back-run trades and bid for associated rebates, which are returned to the user. Such terminals are typically managed by trusting counterparties running the terminals to ensure no front-running or sandwich trade behavior occurs.

MEV mitigation/redistribution mechanisms are a combination of users capturing value from their order flow, 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 has outlined the main participants in the MEV supply chain on Solana, recent developments, and common forms of MEV on Solana.

Research in the Solana MEV space is primarily focused on investigating the impact of different MEV mitigation/redistribution mechanisms. Ethereum has invested heavily in infrastructure, and Flashbots aims to provide democratized MEV opportunities but also imposes other designs to address potential negative externalities.

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

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