Recently, the phenomenon of MEV in the Solana ecosystem has attracted widespread attention. This behavior not only threatens the fairness of transactions but may also affect the overall security of the network. In order to address this issue, the Solana Foundation directly removed the relevant validators, but this move also raised concerns about “centralization” among people.
(Background:
The EU’s new regulatory draft regards MEV as “market abuse” and requires exchanges to report all suspicious transactions…)
Through blacklisting to combat MEV
Is the Solana Foundation the largest “shareholder” of validators?
Centralization issue, a bigger challenge?
Fairness and transparency in the world of cryptocurrency trading have always been core issues. In the Solana ecosystem, the recent phenomenon of MEV (Maximum Extractable Value) has sparked widespread concerns. MEV involves miners or validators manipulating transaction order to gain additional profits, which not only threatens the fairness of transactions but also affects the overall security of the network.
On June 10, the Solana Foundation announced that it had removed more than 30 validators, primarily Russians, from its Delegation Program due to their involvement in “sandwich attacks.” Additionally, Solana co-founder Anatoly Yakovenko suggested on Twitter that enhancing competition among block producers might be a potential solution to the MEV problem.
However, the community’s focus seems to be less on solving the MEV problem and more on the Solana Foundation’s direct removal of validators, raising doubts about its “centralization.”
MEV refers to the ability of miners or validators to manipulate transaction order, insert their own transactions, or delay specific transactions on the blockchain to gain additional profits.
The well-known sandwich attack by bots is a form of unfair competition in MEV transactions. The sandwich attack is a typical MEV attack method where attackers place two transactions around a victim’s transaction to manipulate prices and profit from the difference, often causing significant losses to the victim.
The MEV issue on Solana began to emerge during the recent bull market. On April 28, data platform Blockworks Research announced that MEV revenue on Solana had exceeded that of Ethereum. This data was almost negligible before November 2023.
On April 5, data revealed that Solana’s transaction failure rate reached 75%, attributed to the large volume of arbitrage transactions sent by MEV bots.
Previously, Solana only distributed 50% of transaction fees to validators, effectively curbing the generation of MEV. Because every transaction has a cost, validators had no strong incentive to engage in MEV transactions if the profits were not high. However, with the increasing activity of transactions on Solana and the rise of MEME, arbitrage attackers could overlook transaction fee losses for more profits.
On May 28, the Solana validator community approved Solana Improvement Proposal (SIMD)-0096, allocating 100% of transaction fees to validators. Critics believe this could lead to collusion between validators and transaction initiators to engage in fraudulent transactions (lowering the cost of wrongdoing), further increasing the occurrence of MEV.
After the Solana Foundation removed validators involved in MEV from the Delegation Program, it did indeed result in losses for these validators. According to stakeview data, several validators saw a 99% decrease in staking rewards in Epoch 627.
Why can the Solana Foundation have such a significant impact on validators? The main reason lies in Solana’s native Proof-of-Stake system design. In this system, the main participants are delegators and validators.
Any user holding SOL tokens can become a delegator by staking their tokens with validators. Delegators earn staking rewards by staking tokens, while validators earn commissions and block rewards.
Staking rewards come from Solana’s inflationary tokens, which are distributed to staked accounts. Validators can set a certain percentage of commission to share profits from staking rewards.
Block rewards come from transaction fees. In the original scheme, 50% of the rewards go to validators, while the remaining 50% is burned. In addition to regular transaction fees, Solana allows additional priority fees to be set, which can increase the priority of transactions and shorten execution times. The existing MEV issue primarily stems from these priority fees.
Validators typically need to stake a certain amount of SOL to participate in transaction validation. However, due to the high initial cost of setting up Solana nodes, the Solana Foundation introduced the Delegation Program to incentivize more small and medium nodes to join. This program includes two main components:
1. Providing USD rewards to eligible validators. Each validator node can receive up to $250 per month.
2. The foundation directly provides the tokens needed for staking to validators.
The 30+ validators punished this time were kicked out of this program, so fundamentally, it does not mean that these excluded MEV nodes cannot earn rewards through validating the network, but they have lost the support of the Solana Foundation.
Currently, there is no public data showing what proportion of validators’ tokens come from the Solana Foundation. In October 2023, a researcher @arixoneth stated that around 73% of the total staked 106 million SOL tokens come from the Solana Foundation. According to the Solana Foundation, all validators who pass the test can join the Delegation Program.
Unlike Ethereum’s approach of improving MEV through Layer 2 networks or enhancing the EVM, the Solana Foundation’s practice of directly removing malicious validators from the Delegation Program has raised concerns about centralization in the foundation.
In addition to the Solana Foundation, the largest equity pool on Solana, Jito DAO, proposed a governance proposal on June 10 to establish a blacklist of malicious validators and exclude them from Jito’s equity pool.
A key opinion leader commented on this matter, stating, “The Solana Foundation has deleted some validators to validate Solana. This is absurd! Permissionless? Decentralization? What a joke! Solana solved MEV! They are just scammers and another group of scammers.”
In addition to the direct removal of validators causing ecological concerns, the approval of Solana Improvement Proposal (SIMD)-0096 by the validator community on May 28 also faced criticism from many small and medium validators for the overly centralized governance process and suspicion of catering to a small group of beneficiaries.
Some members indicated that the biggest beneficiaries in this proposal are validators, and the voting weight is determined by large validators. This resulted in a vote where “a small group decided the fate of millions.” The voting outcome directly doubled validators’ profits and will increase the inflation rate of SOL tokens. However, only 51% of token holders voted during the voting process, and all voting rights were delegated by validators.
Solana co-founder Anatoly Yakovenko suggested on Twitter that enhancing competition among block producers might be a potential solution to address the MEV problem. However, comments in the community do not seem to buy into this idea, with one comment joking, “Or maybe have the Solana Foundation directly delete validators from the blacklist.”
While the MEV issue on Solana may be alleviated in the short term, governance in the long run needs to address problems and construct a more reasonable governance structure.