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Blockchain Explained

Moving From the MEV Supply Chain to the Transaction Supply Chain


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Rob Behnke

October 31st, 2023


Transactions are the basic building block of the blockchain’s distributed ledger. Users submit transactions that are organized into blocks. These blocks are added to the distributed ledger, updating the state of the blockchain network. These transactions can be used for various purposes, such as transferring value or ownership of a token from one party to another or interacting with smart contracts on a smart contract platform.

The blockchain is designed to be a decentralized system. However, this process of adding data to the blockchain via transactions is driven by incentives that introduce opportunities for the centralization of power. The Transaction Supply Network is a new model for how data is added to the blockchain that attempts to embrace the key blockchain concept of decentralization.

Block Creation and MEV

Blockchains are designed to be decentralized systems. Without a single, central source of authority, most of the work of maintaining the blockchain is performed by actors who are incentivized or paid for their efforts.

At a high level, the process of adding data to the blockchain in the form of a transaction looks something like the following:

  1. A user decides that they want to perform a transaction and communicates this intent to their blockchain wallet.

  2. The wallet generates a transaction that carries out the user’s intent (e.g., transferring cryptocurrency to an address or executing a smart contract function).

  3. The wallet transmits the transaction to a blockchain node, and it moves through the blockchain’s peer-to-peer (P2P) network.

  4. Transactions are stored in a mempool until they are included in a block.

  5. A searcher identifies a set of transactions in the mempool that they want to include in a block.

  6. A builder creates a block using this bundle of transactions.

  7. A validator confirms the validity of a blockchain block before it is added to the digital ledger.


In step 5, transactions are not added to the blockchain in a first-come-first-served fashion. Instead, the searcher selects transactions to maximize the Maximum Extractable Value (MEV) of the block. The MEV is the amount of profit earned by the block producer and depends on the inclusion and order of various transactions within a block.

MEV is the incentive that drives blockchain networks like Ethereum. The various participants in the ecosystem are competing for the available MEV, which can result in undesirable outcomes and the centralization of power in the hands of a few parties. The more MEV that a party earns, the more tokens that they have to stake, and the greater their power over the blockchain network.

Navigating the Shift from the MEV Supply Chain to the Transaction Supply Chain

The traditional MEV supply chain — as described above — defines a few key roles in the block creation process: the user, wallet, searcher, builder, and validator. Of these, two (the user and wallet) are controlled by the user and a source of income (users pay the fees that generate MEV). The remaining three — the searcher, builder, and validator — are the ones consuming potential income and are operated by various competing parties. 

These various roles are illustrated in the image below:

MEV Supply Chain

Source: frontier.tech/infinite-games

By defining only a few key roles for various parties to compete for, the MEV Supply Chain encourages the centralization of power. A highly effective searcher-builder-validator coalition may be able to outcompete other parties, and the more successful they are, the more of an advantage they hold.

The Transaction Supply Network focuses on breaking these roles into smaller pieces to enhance decentralization and shift the focus from wealth acquisition/redistribution to wealth creation. 

The image below illustrates the concept of the Transaction Supply Network:

Transaction Supply Network

Source: frontier.tech/infinite-games

This Transaction Supply Network accomplishes the exact same goal as the MEV Supply Network. At the far left is a user who generates some intent to perform a transaction on the blockchain. At the far right is a validator who is empowered to inspect and approve a block composed of several transactions.

However, this Transaction Supply Network looks very different from the MEV Supply Chain illustrated above. Instead of a few steps on the journey between user and validator, there are over a dozen. Additionally, the Transaction Supply Network introduces feedback loops and various functions that better support the needs of Web3 gaming and other blockchain-based projects.

The Transaction Supply Network has the potential to decentralize the rewards earned by maintaining the blockchain while increasing the overall pot for everyone. The decentralization aspect is illustrated by the many roles shown above. An organization or project specializing in a particular role has a much greater potential to outcompete others in that role than in the limited ecosystem of the MEV Supply Chain. As a result, it is harder for a few organizations to maintain a stranglehold on MEV.

The Transaction Supply Network also has the ability to increase the amount of value available by making it more desirable to build on and use a blockchain system. By enhancing the infrastructure, the Transaction Supply Network enables new types of games to be developed. These games attract additional users who may be willing to pay more to have their transactions added to the blockchain.

Conclusion

The Transaction Supply Network is a new model or paradigm for addressing the challenge of getting transactions from users to the blockchain. At a high level or from the perspective of the blockchain, little has changed. The core roles of searcher, builder, and validator still exist in the new Transaction Supply Network model.  However, by creating new roles and breaking the process of building and recording a transaction into smaller pieces, this new model better aligns with the goal of blockchain decentralization and has the potential to positively impact the growth of smart contract platforms such as Ethereum. Defining many smaller roles encourages more targeted competition and can drive growth and optimization in various areas. At the same time, it also redistributes wealth across more parties, helping to combat the potential for centralization of power in the blockchain.