Blaine on Warpcast

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1/8) 've officially been priority ordering pilled. Why? Two words: MEV Taxes. What the hell are MEV taxes, and why should you care? After reading through @paradigm's 'Priority Is All You Need' article by @danrobinson and @davewhite it’s clear: - MEV taxes capture a cut of extracted MEV and redirect it to the app layer. - Protocols can start leveraging this today. Especially with @unichain's launch. To understand MEV taxes, we first need to look at how MEV is extracted when priority ordering isn’t enforced. Here’s a classic example: An MEV searcher sandwiches a victim’s trade by placing a buy order before and a sell order after their transaction. Notice how the block isn’t ordered by priority fees. Instead, the block builder reorders transactions to maximize MEV profits. ref: https://paradigm.xyz/2024/06/priority-is-all-you-need

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2/8) For those who need a refresher, here’s a quick recap of the key players: Searchers find MEV opportunities and compete to extract them. Block builders control transaction ordering, deciding who actually profits. Since searchers must bid high fees to win, builders prioritize the highest bidders, and those fees ultimately go to the block proposer.

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3/8) How do MEV searchers compete when priority ordering isn’t enforced? They bid priority fees, but not too much. They bid just below the break-even point, where the MEV extracted is still greater than the fee paid. MEV extracted > priority fee paid = profit ✅ MEV extracted ≤ priority fee paid = no profit ❌ More bidding = higher priority fees, which flow to the block proposer, while builders profit by selling the most valuable block.

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4/8) What happens when priority ordering is enforced? Right now, block builders freely reorder transactions to extract MEV. With strict priority ordering, transactions are always sorted by priority fees. This changes everything: 1. MEV searchers must bid honestly. They can no longer rely on custom transaction ordering to extract MEV. 2. Searchers must bid priority fees fairly, instead of paying builders off-chain. 3. Priority fees act as a price tag on MEV. The higher the fee, the more MEV is being extracted, making it the perfect target for taxation. Now, instead of MEV quietly flowing to searchers and builders, a portion can be captured at the app layer. Read on to see how this works in practice...

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5/8) How do MEV taxes work? With priority ordering enforced, MEV taxes become simple to implement: 1. The smart contract watches priority fees, tracking MEV in real time. 2. MEV heavy transactions pay a tax, cutting into their profits. 3. Instead of MEV going to searchers and builders, protocols keep a share. In this example, the searcher originally bids 100 ETH in priority fees to extract MEV. After the tax is applied, the searcher pays just 1 ETH in priority fees, but must send 99 ETH directly to the contract. We hear this being called 'MEV Internalization.' It's just another way of saying you're capturing MEV at the app layer instead of letting builders and searchers keep it all. By simply enforcing transaction ordering, we’ve unlocked an entirely new design space.

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6/8) Priority ordering is what makes MEV taxes actually work. When transactions are sorted by priority fees, MEV heavy transactions naturally stand out. A smart contract can tax them just by looking at those fees. You might be thinking, "Can't we just tax MEV without enforcing priority ordering?" Not really. Here’s why: Without priority ordering, MEV searchers can avoid taxes by: - Privately paying builders through off-chain deals or private mempools, hiding their real bids. - Splitting MEV across multiple transactions to stay under the radar. With priority ordering, none of that works. Searchers have to bid publicly and honestly, making MEV taxation automatic and enforceable.

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7/8) Here’s what priority ordering actually looks like: Transactions are strictly ordered by priority fees, preventing block builders from arbitrarily reordering transactions for private MEV. MEV heavy transactions naturally rise to the top, making them visible and taxable.

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8/8) Priority ordering doesn’t just enable MEV taxes. It gives protocols a way to capture and redistribute value that would otherwise go to searchers and builders. DEXs can cut trading fees. Lending markets can boost yields. DAOs can fund public goods. MEV internalization turns hidden value into protocol-owned assets. A small shift with massive implications. That’s why I’m priority ordering pilled.

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As always, if you like this content, drop me a follow. ✌️ You can also subscribe to my newsletter http://blainemalone.com/newsletter for new content like this every Thursday.

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the problem is that builders can arbitrarily censor transactions, you need a way to bypass builders for this to be viable.

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