MEV Capture and Decentralization in Execution Tickets

TL;DR

This paper models how Execution Tickets in Ethereum capture MEV, revealing conditions for optimal extraction, the impact of risk and heterogeneity, and how PBS mechanisms influence decentralization and market dominance.

Contribution

It introduces an economic model of Execution Tickets, analyzing their effectiveness in capturing MEV and the effects of market heterogeneity and PBS on decentralization.

Findings

Execution Tickets can extract all MEV under ideal conditions.

Risk aversion and capital costs reduce MEV capture.

PBS mechanisms can mitigate but not eliminate centralization risks.

Abstract

We provide an economic model of Execution Tickets and use it to study the ability of the Ethereum protocol to capture MEV from block construction. We demonstrate that Execution Tickets extract all MEV when all buyers are homogeneous, risk neutral and face no capital costs. We also show that MEV capture decreases with risk aversion and capital costs. Moreover, when buyers are heterogeneous, MEV capture can be especially low and a single dominant buyer can extract much of the MEV. This adverse effect can be partially mitigated by the presence of a Proposer Builder Separation (PBS) mechanism, which gives ET buyers access to a market of specialized builders, but in practice centralization vectors still persist. With PBS, ETs are concentrated among those with the highest ex-ante MEV extraction ability and lowest cost of capital. We show how it is possible that large investors that are not builders but have substantial advantage in capital cost can come to dominate the ET market.