A core enabler for the growth of crypto networks has historically been the issuance of new tokens to compensate active participants. From the Bitcoin block reward, to the distribution of inflated tokens to stakers in Proof-of-Stake, to yield farming enabling DeFi protocols to bootstrap liquidity. 

All these protocols usually have in common that token incentives are targeted to be temporary; distributed to bootstrap the protocol. Usually there is a fee - or at least an expectation - that a protocol is or will charge for the services it provides to users. These fees are expected to at some point compensate participants and reduce the need for dilution to pay for the services validators and their delegators, or - in DeFi protocols - other parties such as liquidity providers, provide. 

In the past, the most common place these earnings have been expected to come from in smart contract networks was from gas fees paid to execute computation on the network. But improved scalability and the impact of high fees on the user experience have put this model somewhat into question. If networks can scale enough to serve all of their users’ needs, do they have to keep block space artificially scarce to create a sustainable business model? 

Enter MEV; a relatively recent phenomenon in the crypto space. The realization that there exist opportunities for block proposers to profit from inserting or reordering transactions in their blocks. Examples include e.g. arbitrage transactions balancing prices between DEXes, or - more exploitative - front-running DEX users. MEV as a research field is experiencing a rapid evolution.

At a high-level it looks as if leading protocol teams and the ecosystem at large are on a trajectory towards minimizing negative externalities and implementing solutions to create markets and mechanisms that ultimately aim to redistribute profits from these activities to network participants.

Such a form of redistribution suggests that some of the yield required to ultimately pay for network security could be expected to come from MEV. In practice, currently most networks still rely mostly on token issuance to pay for network security. But a look at the data shows that there is a trajectory towards this narrative, especially in a more mature ecosystem such as Ethereum, where a lot of liquidity and activity take place.

I presented on this topic at the Staking Summit hosted by Staking Rewards in November in Lisbon, listen to the full recording (starts at 1:24:44 below and find the associated slides here.

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