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5.4
Tips & MEV (EL)
Tips and MEV are two more sources of validator rewards. Unlike standard staking rewards, these are paid out immediately when the payloads of the blocks they occur in execute. Both tips and MEV are divided between Node Operators and the rETH pool with commission given to the Node Operator as described in section 5.2.
What are tips?
When a transaction is submitted, a gas fee is paid. This is composed of a base fee and a priority fee or tip. The base fee is determined according to base fees of previous blocks. As of the London upgrade, which included EIP-1559, this base fee is burned (no one receives it, it is destroyed). This helps keep Ethereum inflation in check (and in fact, Ethereum is deflationary at the time of this writing).
The priority fee, or tip, is an amount the transaction submitter can add as a bonus for the block proposer/builder to try to get their transaction included as soon as possible. The block has a field for the address where tips should be sent to, called the Fee Recipient (previously called the coinbase). Note that, as described in section 5.1, the Fee Recipient address is not a value derived from somewhere onchain. Rather, it is communicated via the local node's clients.
What is MEV?
MEV (Maximum Extractable Value) is a complicated subject, far beyond the scope of this course1. MEV is a catch-all term for any funds a block builder gets in order to build blocks in certain ways. It can encompass anything from including transactions in a certain order to handing a person an envelope of cash to watch for your transactions and put them first.
For our purposes, we are most often referring to processes like sandwiching transactions and front-running.
Example: Suppose a large RPL buy was incoming. Large enough that the purchase from the liquidity pool would raise the price from $35 to $36. Seeing this, the block builder can sandwich the transaction, meaning, they could insert their own transaction to buy an amount of RPL at $35, then process the large RPL buy, then insert a transaction to sell what they just bought at $36, therefore making $1 per RPL in their transaction. For large amounts of RPL, a lot of ETH can be extracted that way.
MEV is a controversial subject and is considered theft by many in the ecosystem. In the above example, the initial buy slightly raises the price for the original buyer, thus "cheating" them out of a lower price, just to profit from their transaction. However, to maintain competitive liquid staking APRs, protocols must use block builders who collect MEV and distribute it back to the proposer.
How are EL rewards collected?
Unlike regular staking rewards, tips and MEV are not Consensus Layer rewards and so do not look to the withdrawal credentials for where to be sent. These are Execution Layer rewards. They are paid out to the Fee Recipient address for the node that proposed the block. This address is communicated to the block builder by the local clients of the proposing node.
Rocket Pool Node Operators can choose to set the Fee Recipient to either the Fee Distributor or the Smoothing Pool:
The Fee Distributor contract divides the rewards between the Node Operator and rETH contract and sends the Node Operator portion to their withdrawal address.
The Smoothing Pool takes in all members' tips and MEV, then at the end of a 28 day cycle pays out an equal reward to each minipool (adjusted by commission). Since proposals can be rare, the Smoothing Pool is a way to mitigate risk at the expense of potentially losing out on a "lottery" block with abnormally large rewards.
MEV Theft
There is a potential conflict an astute user might gather from the above sections. These Execution Layer rewards are meant to be sent, either via the Fee Distributor or Smoothing Pool contracts, to both Node Operators and the rETH contract. However, the local node tells the block what address to use as the Fee Recipient.
Could the local node simply take all the EL rewards by setting the Fee Recipient to their own wallet? In fact, one could do this and it is called MEV theft.
MEV theft is a problem because of the harm it can do to rETH value. First of all, it deprives the rETH holders of their share of the rewards. Second, the minipool operator could simply continue to steal MEV and never exit the validator. Even if the protocol wishes to slash the ETH bond as a penalty, theft gains will eventually be greater than the slashing and the operator might never exit, leaving the borrowed ETH forever locked up onchain and further hurting rETH value. Remember, the ETH cannot be penalized by Rocket Pool until the validator exits.
A partial potential mitigation to MEV theft is via the RPL token...
1 To learn more about MEV, start with the Ethereum Dev docs and Ethereum is a Dark Forest.