Improving Proof of Stake Economic Security via MEV Redistribution

Abstract

Maximal Extractable Value (MEV) has generally been viewed as a negative, parasitic aspect of economic transactions on blockchains that increases costs for non-strategic users. Recent work has shown that MEV is not always bad for social welfare in crypto networks. In this note, we demonstrate that if rational validators in Proof of Stake (PoS) protocols are able to earn a portion of MEV revenue, by a process we call MEV redistribution, they are disincentivized to unstake and lower economic security. We construct a joint staking-lending dynamical system in which a fraction of MEV revenue is used to increase staking returns. We formally show that this MEV redistribution can avoid bad competitive equilibria between staking and lending in which no users stake under benign conditions on the reward inflation schedule of the protocol, and conduct numerical simulations that demonstrate this. This represents another potentially positive externality of MEV, provided that the mechanism for redistribution is well-designed.