MEV Exploration: From the Perspective of ERC-4377

GoPlus Security
5 min readSep 1, 2023

In the beginning

ERC-4337 is an Ethereum standard that achieves account abstraction on the protocol without any consensus-layer changes. Deployed on the Ethereum mainnet in March 2023, ERC-4337 makes it possible to transact and create contracts in a single contract account. It opens the door to user-friendly crypto wallet designs that could potentially facilitate broader adoption.

ERC-4337 enables:

  • social recovery of wallet
  • perform atomic multi-operations
  • pay transaction fees with ERC-20 tokens
  • sponsorship of users’ gas fees on your DAPP
  • a host of other applications

If you are looking for more explanations and definitions of what ERC-4337 is and actually means, check out **ERC-4337: Account Abstraction Using Alt Mempool.

In this article, we mainly focus on investigating MEV in ERC-4337.

Understanding ERC-4337 MEV

Recall that Ethereum has public venues for transactions, namely mempool. With the development of Ethereum, more and more transaction venues have been developed with some network actors keeping their own private mempools.

In ERC-4337, rather than initiating a traditional transaction, smart contract wallets will instead create pseudo-transaction objects known as UserOperations (userOp) that represent the user's desired transaction intent. Instead of going to the traditional public mempool that hosts pending transactions, UserOperations are instead sent to the UserOperation mempool—a dedicated, higher-level mempool specifically for UserOperations.

However, ERC4337 creates alternate UserOperation mempools, fragmenting public sources of MEV opportunities.

From Traditional MEV to ERC-4337 MEV

If you are looking for more definitions and explanations of Maximal Extractable Value (MEV), check out What is Maximal Extractable Value (MEV).

Traditional MEV

In the PoS network, there are four important actors in MEV:

Figure 1: Main Actors involved in traditional MEV

MEV stems from the fact that transactions on the Ethereum are not executed atomically, but rather in batches. The order of transactions within a block can affect the outcome of some transactions. Notably, searchers are not the only ones who can exploit the transaction order to extract MEV from the mempool. Block builders, such as miners in proof-of-work (PoW) or validators in proof-of-stake (PoS), have the ultimate power to decide which transactions to include in a block and in what order. They can extract the MEV themselves or in cooperation with searchers.

ERC-4337 or Bundler MEV

In ERC-4337, Bundler is emerging as a critical role.

Figure 2: Main Actors involved in Bundler MEV

An In-Depth Insight on Bundler MEV

Bundler is an external account (EOA) that validates and executes UserOperationtransactions on behalf of the user on a smart contract wallet. All transactions on Ether must be triggered by an EOA. Bundler enables users to trigger smart contract wallet transactions without having to create and memorize an EOA's private key, thus eliminating some of the redundant user operation steps.

Figure 3: Main Operations that Bundler can do

However, the characteristics of Bundlers allow them to gain financial benefits, including the opportunity to create MEV.

  • Bundlers can pocket the difference between the maximum priority fee and the actual gas spent after the UserOperation is executed.
  • Similar to a repeater for a normal transaction, Bundler can capture MEV by sorting UserOperations within a bundle.
Figure 4: Bundler bundles multiple UserOperations into a single Bundle transaction

The mechanism of Bundler looks like that MEV searcher cannot access the mempool and re-arrange the order of transactions since all transactions are included in the UserOperation mempool. However, Bundlers enable them to be operated by searchers, builders, and Order Flow Auctions (OFA), who can also capture MEV.

The key difference that ERC-4337 will create is that it will split the mempool into two types: 1) traditional mempool containing individual transactions, and 2) new mempool that contains UserOperation with more complexity than usual. As ERC-4337 wallets become more popular, it seems very likely that searchers will run bundlers to extract MEV from user operations.

Does ERC-433 Reduce the Impact of MEV

ERC-4337 enables the creation of multiple alt mempools with different rulesets and their unique mempool IDs. This allows DApps to run their own mempool, which shares only limited information about transactions, thereby reducing the impact of MEV. This is the way ERC-4337 could be used to change the MEV landscape and make it fairer to users.

MEVs have become an integral part of the Ethereum economy. On one hand, they benefit the ecosystem by swiftly addressing imbalances through arbitrage bots. On the other hand, they result in a negative user experience, particularly with sandwich bots, causing disruptions during transactions.

The introduction of ERC-4337 could potentially be a turning point for the overall MEV landscape. The key factor lies in the replacement and optimization of the mempool by different types of mempools, dispersing public transactions and avoiding centralized accumulation, which could make it more challenging for MEV operators to execute their strategies. Nevertheless, it’s important to note that ERC-4337 has not yet been fully implemented. Thus, in the near future, users will still have to coexist with MEV and its effects on their experience.

Reference

[1] What Is ERC-4337, or Account Abstraction for Ethereum?

[https://academy.binance.com/en/articles/what-is-erc-4337-or-account-abstraction-for-ethereum#What-Is-ERC-4337?](https://academy.binance.com/en/articles/what-is-erc-4337-or-account-abstraction-for-ethereum#What-Is-ERC-4337? )

[2] 4337 mev supply chain

https://hackmd.io/@dmarz/4337-mev-supply-chain

[3] Value Flows in the MEV Ecosystem

https://multicoin.capital/2022/10/31/value-flows-in-the-mev-ecosystem

[4] ERC-4337: Account Abstraction Using Alt Mempool

https://eips.ethereum.org/EIPS/eip-4337#client-behavior-upon-receiving-a-useroperation

[5] Deep Dive into Account Abstraction and EIP-4337: Scaling Ethereum UX from 0 to 1

https://medium.com/blockchain-at-usc/deep-dive-into-account-abstraction-and-eip-4337-scaling-ethereum-ux-from-0-to-1-c2e6da49d226

[6] Introductory Guide to Account Abstraction (ERC-4337)

https://www.blocknative.com/blog/account-abstraction-erc-4337-guide

[7] What is Ethereum Mempool?

https://www.geeksforgeeks.org/what-is-ethereum-mempool/

[8] Does ERC-4337 reduce the impact of MEV-Boost on Ethereum?

https://insights.blockbase.co/erc-4337-reduce-mev-boost/

[9] Simplifying Ethereum’s ERC-4337: The Future of Crypto Payments using Smart Contract Wallets

https://masterventures.medium.com/simplifying-ethereums-erc-4337-the-future-of-crypto-payments-using-smart-contract-wallets-6830705b0e62

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