Paradigm researchers introduce MEV taxes to redirect value to developers

Dan Robinson and Dave White, researchers at Paradigm, introduced Miner Minerable Value (MEV) taxes, a mechanism intended to help decentralized applications capture their MEVs and potentially redirect value back to users and developers.

For the uninitiated, MEV refers to the profit miners or validators can make by rearranging, including or excluding transactions within a block. Notably, the European Securities and Markets Authority recently revealed an ongoing review of MEV mechanisms and suggested that it may be a market abuse mechanism under MiCA.

Traditionally, profits from these MEV activities go to block bidders. For example, a Solana-based MEV bot recently made a profit of approximately $1.2 million. But proposed MEV taxes offer a new way to distribute this value, according to a recent report.

These taxes work by implementing a smart contract that imposes a fee proportional to the priority fee of the transaction. For example, an application could impose an MEV tax equivalent to $99 for each $1 of priority fee, thus capturing 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 can solve important problems in decentralized finance (DeFi), such as optimizing trade execution on decentralized exchanges (DEXs) and reducing losses of automated market makers (AMMs).

For DEX routers, MEV taxes can replace traditional auctions and ensure users get the best price for their transactions through competitive bidding. AMMs that typically lose value due to arbitrage can also benefit from using MEV taxes to capture that value and protect liquidity providers.

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

However, the effectiveness of MEV taxes depends on block bidders adhering to competitive prioritization arrangements. The rules mandate that transactions be ranked according to priority fees without any manipulation.

Any deviation from these rules by block proposers may result in MEV being allocated for their own benefit. Additionally, ensuring regulatory compliance in a decentralized and trustless manner remains a significant challenge.