KEY TAKEAWAYS
- Balancer deploys v3 on the Base blockchain, introducing a Priority Fee Router to redistribute MEV profits to liquidity providers.
- The Priority Fee Router uses priority fees to determine transaction ordering, benefiting LPs by taxing high-priority transactions.
- Future iterations may integrate priority fees into the AMM’s fee structure, enhancing optimization and user experience.
Balancer has announced the deployment of its v3 on the Base blockchain, incorporating a Priority Fee Router designed to charge priority fee MEV (Maximum Extractable Value) taxes. This mechanism aims to redistribute MEV profits to liquidity providers (LPs), marking Balancer’s second MEV internalizing Automated Market Maker (AMM) design following the launch of CoWAMMs in mid-2024. The announcement was made here.
The Priority Fee Router is based on a novel MEV internalization mechanism theorized by Dan Robinson and Dave White of Paradigm. It leverages priority fees, which are tips paid on top of the base fee for transaction inclusion, to determine transaction ordering within a block. On Base, a blockchain enforcing priority ordering, the sequencer organizes transactions by their priority fees, giving preference to those with higher fees.
How Priority Fee Taxes Work
In most modern Ethereum Virtual Machine (EVM) blockchains, users specify two key gas parameters: the Max Base Fee and the Priority Fee. The Max Base Fee sets a ceiling for the block’s base fee, while the Priority Fee acts as a tip for transaction inclusion. Unlike the base fee, priority fees can vary between transactions in the same block.
On Base, priority fees influence transaction ordering rather than inclusion, as blocks rarely reach capacity. High priority fees often indicate MEV extraction, where searchers compete to be first in line to capture opportunities. The Priority Fee Router redistributes MEV profits by taxing high-priority transactions and redirecting a portion of these fees to LPs.
Implementation and Future Prospects
The Priority Fee Router will manage two key parameters: the Priority Fee Threshold and Multiplier Constraints. Transactions subject to priority fee taxes are restricted to single-hop trades, ensuring precise tax allocation. For pools containing ETH, taxes collected are directly injected into the pool, increasing the value of LP tokens. Non-ETH pools will initially use an off-chain mechanism for distribution, with plans to make the system more permissionless in future iterations.
Future developments may integrate priority fees directly into the AMM’s fee structure, offering optimization opportunities. However, for the initial release, Balancer has opted for a simpler implementation. The mechanism’s effectiveness will be evaluated, with potential adjustments to maintain a consistent user experience during high network activity.
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