Paradigm researchers introduce MEV taxes to redirect value to developers

Researchers at Paradigm, Dan Robinson and Dave White, have introduced Miner Extractable Value (MEV) taxes, a mechanism that aims to help decentralized applications capture their own MEV, potentially redirecting value back to users and developers.

For the uninitiated, MEV refers to the profits that miners or validators can gain by reordering, including, or excluding transactions within a block. Notably, the European Securities and Markets Authority recently revealed an ongoing examination of MEV mechanisms, suggesting it could be a market abuse mechanism under MiCA.

Traditionally, the profits from these MEV activities go to block proposers. For instance, a Solana-based MEV bot recently garnered about $1.2 million in profits. However, the proposed MEV taxes offer a new way to distribute this value, according to a recent report.

These taxes operate by deploying a smart contract that imposes a fee proportional to the transaction’s priority fee. For instance, an application may impose an MEV tax equivalent to $99 for each priority fee of $1, thereby taking 99% of the MEV.

This method allows any blockchain application to conduct its own MEV auction without the need for additional off-chain infrastructure. The technique could solve major issues in decentralized finance (DeFi), such as optimizing trade execution in decentralized exchanges (DEXs) and reducing losses for automated market makers (AMMs).

For DEX routers, MEV taxes can replace traditional auctions, ensuring users receive the optimal price for their trades through competitive bidding. AMMs, which typically lose value to arbitrage, can also benefit by using MEV taxes to capture this value and protect liquidity providers.

Additionally, wallets can integrate MEV taxes to enable users to capture the MEV generated by their transactions, increasing their overall profits.

However, the efficacy of MEV taxes hinges on block proposers adhering to competitive priority ordering regulations. The rules mandate the sorting of transactions based on priority fees without any form of manipulation.

Any deviation from these rules by block proposers could result in the appropriation of MEV for their own benefit. In addition, ensuring compliance with the regulations in a decentralized and trustless manner remains a significant challenge.