Crypto Fundamentals #68

💫Jito Shuts Down MEV on Solana

What is MEV?

MEV, short for Maximal Extractable Value, refers to the maximum value that can be extracted from block production beyond standard block rewards and gas fees. Before transactions are finalized via inclusion in a block they wait in a place known as the mempool for all to see. Typically, MEV searchers, entities looking for value extraction opportunities, will scan the mempool for transactions that they can take advantage of. An example is a standard DEX swap which will affect the price of the assets in the pool. MEV searchers can identify transactions like these before they are executed and exploit them by injecting a transaction before and after the swap to profit on the price move in a nearly risk-free way.

The issue with MEV

If you tried to get in on the Solana memecoin action last week by swapping directly on-chain you may have had trouble doing so. Many users have been experiencing difficulties using Solana DEXs recently, with transactions frequently failing to go through. Anecdotally, the solution was to increase your slippage tolerance, and get a worse execution price on your swap. Slippage refers to the difference between the price you are quoted when you send a transaction, and the price the trade actually gets executed at. On most DEXs users can set a maximum amount of slippage that they will accept in order for their transaction to go through. However, with traders trading against shallow liquidity memecoin pools, transactions were seeing much larger impacts on price than is typical, indicating high slippage. To make matters worse, Solana MEV bots aiming to sandwich attack users trades were moving price so significantly that it was nearly impossible to execute a transaction within reasonable slippage ranges.

The solution?

Solana MEV is different from other chains like Ethereum in that it does not have a native mempool. Jito Labs is a company that develops Solana MEV infrastructure. They are the primary provider of MEV infrastructure on Solana, offering a third-party mempool where MEV can be harvested. At its peak at the end of last week (3/8), Jito was generating 10,000 SOL in tips, at an annualized rate of ~$500m. This balance reflects how much people were willing to pay to have their transactions that were being impacted by MEV included in new blocks.

To the surprise of the broader crypto community, the Jito team decided suspend the mempool offered through their Jito Block Engine product, in a demonstration of their dedication to the long-term success of the Solana network. The team noted that Solana has always been a consumer-friendly chain that was easy to onboard onto, and that the negative externalities caused by MEV were damaging to users in a way not seen before at such scale. The question remain whether or not this will resolve the problem long term. Some community members believe another team will come along and build a copycat product, potentially introducing the same problem back into the ecosystem. Others praised Jito for the valiant move as they are forgoing revenue in favor of the long term health of the community. Meanwhile, Solana network fees and revenue have continued to rise above all time highs.

Detailed dashboard for people who love more numbers in smaller font:

Note: Revenue represents fees that go to the protocol’s treasury or are returned to tokenholders via a burn mechanism. Weekly commits and weekly dev activity as of 2/24/24.

The content is for informational purposes. None of the content is meant to be investment advice. Use your own discretion and independent decision regarding investments.