Mapping Revenue Distribution Paths in MEV-Enabled Protocols

Introduction

Modern decentralized finance protocols increasingly rely on sophisticated mechanisms to capture and redistribute transaction fees, arbitrage opportunities, and other forms of miner‑ or validator‑extracted value (MEV). In this landscape, a protocol’s revenue distribution model becomes a critical component of its economic design, influencing incentives, user participation, and long‑term sustainability.

This article explores how revenue flows through MEV‑enabled protocols, mapping the pathways from raw extraction to end‑beneficiaries. We dissect the different revenue streams, examine the distribution frameworks employed by leading protocols, and discuss governance, risk management, and future trends. By the end, you will have a clear understanding of how MEV revenues are channeled, the trade‑offs involved, and best practices for designing equitable and resilient distribution schemes.

MEV Fundamentals

Miner‑extracted value refers to the profit a block producer can gain by reordering, inserting, or censoring transactions in a block. In proof‑of‑stake networks, validators replace miners, but the core concept remains: a party can capture value by manipulating the transaction ordering within a block. MEV has evolved from a niche inefficiency into a mainstream economic engine, with protocols now deliberately exposing and monetizing these opportunities.

The main sources of MEV revenue in DeFi are:

• Arbitrage – exploiting price differences across decentralized exchanges (DEXs) or across chains.
• Front‑running – positioning a transaction before a known large trade to profit from its impact on price.
• Back‑running – placing a trade immediately after a large transaction to capture the subsequent price movement.
• Sandwich attacks – a front‑run and back‑run executed in a single transaction.
• Liquidation opportunities – triggering under‑collateralized positions to obtain collateral.
• Censorship or block inclusion fees – selectively including or excluding transactions to influence execution.

Each of these activities generates a different fee or profit stream. Protocols built atop MEV frameworks expose a variety of tools to capture these revenues, but they also expose new risks to users and the ecosystem. Hence, designing a robust revenue distribution mechanism is essential.

Revenue Streams in MEV‑Enabled Protocols

Below we identify the primary revenue streams that protocols must account for, along with examples of how they arise in real deployments.

A typical MEV‑enabled protocol aggregates these streams and then channels them through a distribution pipeline. The pipeline is not always linear; instead, it often comprises multiple layers of redistribution, each governed by its own rules and incentives.

Distribution Mechanisms

1. Direct Pay‑outs to MEV Participants

In many early MEV‑capturing services, revenue is paid directly to the bot or router operator. This approach aligns the incentive of the service with that of the protocol because the service operator receives a share of the extracted value. However, it also concentrates wealth in a small set of actors and can discourage broader participation.

Key Features:

• Simple revenue split (e.g., 90% to bot, 10% to protocol).
• Transparent payout schedule (per block or per transaction).
• Minimal governance requirements.

2. Treasury Accumulation and Redistribution

Some protocols create a dedicated treasury that accumulates all protocol fees, MEV capture fees, and other revenues. The treasury is then used for various purposes such as funding development, liquidity incentives, or community grants.

Key Features:

• Centralized pool of funds.
• Governance‑controlled distribution (voting on proposals).
• Potential for long‑term value creation through reinvestment.

3. Staking‑Based Distribution

Protocols with proof‑of‑stake or delegated‑stake models can use MEV revenue to increase staking rewards for validators. By allocating a portion of captured MEV to validator incentives, the protocol encourages participation and improves security.

Key Features:

• Automatic inclusion of MEV revenue into validator rewards.
• Enhances validator incentives and decentralization.
• Requires careful accounting to avoid double‑counting.

4. Liquidity Mining and Yield Farming Incentives

Certain protocols allocate MEV revenue as rewards for liquidity providers or yield farmers. This model is common in DEXs that run liquidity pools, where additional MEV revenue can be paid out as token rewards to incentivize deeper liquidity.

Key Features:

• Variable reward rates based on MEV extraction volumes.
• May lead to over‑incentivization if not properly capped.
• Aligns liquidity provision with protocol growth.

5. Multi‑Tiered Distribution

Advanced protocols often employ a layered distribution that combines several mechanisms. For instance, an initial slice of revenue may go to the MEV operator, a second slice to a treasury, a third to validators, and a final slice to community rewards. This multi‑tiered approach balances incentives across actors while ensuring a portion of revenue remains in the ecosystem.

Protocol‑Level Distribution Models

Below we examine three representative protocols that illustrate different revenue distribution philosophies.

A. Flashbots

Flashbots is a research and development organization that runs an MEV marketplace. It collects a small fee from participants who use its services to capture MEV. The fee structure is straightforward: 10–20% of the captured MEV is taken by Flashbots and the rest goes to the participant. Flashbots does not maintain a treasury or distribute revenue to the broader community; instead, it reinvests in infrastructure and research.

Distribution Pathway:

1. User submits a transaction bundle to Flashbots.
2. Flashbots inserts bundle into the transaction pool.
3. MEV is captured by the user’s transaction.
4. Flashbots receives a percentage fee.

Flashbots’ model emphasizes low friction for users and focuses on optimizing the MEV extraction process rather than community redistribution.

B. Uniswap v3

Uniswap v3 introduces concentrated liquidity, which allows liquidity providers (LPs) to allocate capital within specific price ranges. The protocol also captures MEV through front‑running opportunities and protocol fees. Uniswap distributes a portion of the protocol fees to LPs as rewards, while another portion goes into a treasury that is used for community grants and product development.

Distribution Pathway:

1. User swaps tokens → protocol fee collected.
2. Fee split: 90% to LPs (proportional to liquidity provision), 10% to treasury.
3. Treasury funds: community grants, marketing, research.
4. Additional MEV revenue: captured by arbitrage bots, often indirectly benefits LPs by stabilizing prices.

Uniswap’s distribution model aims to align incentives between liquidity providers and the broader ecosystem.

C. MakerDAO

MakerDAO operates a decentralized stablecoin system where collateralized debt positions (CDPs) generate DAI. Liquidations of under‑collateralized positions provide a liquidator fee, which is split between the liquidator and the MakerDAO treasury. The treasury then uses these funds for governance proposals, risk mitigation, and ecosystem growth.

Distribution Pathway:

1. Under‑collateralized CDP → liquidation.
2. Liquidator receives a portion of the collateral as fee.
3. Remaining fee added to treasury.
4. Treasury used for governance, risk management, and community incentives.

MakerDAO’s model emphasizes safety and governance, ensuring that liquidation fees contribute to the system’s resilience.

Layered Distribution Paths

In many MEV‑enabled protocols, revenue distribution is not a single hop. Instead, it flows through multiple layers, each governed by distinct rules and participants. A typical layered path might look like this:

1. Transaction Level – Fee paid by the user to the block producer or MEV router.
2. Protocol Level – Portion of fee allocated to the protocol’s treasury or LP rewards.
3. Validator Level – Portion allocated to validators or stakers.
4. Community Level – Portion allocated to community grants, research, or governance proposals.

Each layer must transparently report its share and the criteria used for allocation. Transparency is critical to prevent hidden siphoning of funds and to build trust among users.

Illustrative Flowchart

Below is a textual description of a typical flowchart that could be represented diagrammatically:

• User initiates transaction → Block producer collects gas fee.
• MEV router extracts value → Pays capture fee to router.
• Protocol splits remaining fee: X% to treasury, Y% to LPs.
• Treasury reserves portion for community grants.
• Validator rewards pool receives portion for staking incentives.

The flow can vary based on protocol design, but the principle remains: revenue is split among the actors that contribute to network security, liquidity, and governance.

Governance and Incentives

The governance layer is often the most critical component of revenue distribution. Protocols can adopt various governance models—token‑based voting, quadratic voting, reputation‑based systems—to decide how treasury funds are allocated. The design of this layer has direct implications on:

• Equity – ensuring that early adopters and larger holders do not monopolize revenue.
• Alignment – aligning incentive structures with long‑term protocol health.
• Flexibility – allowing the protocol to adapt to changing market conditions.

Example: Quadratic Voting in Curve

Curve Finance employs a quadratic voting system to govern the allocation of governance token rewards. Under this system, the amount of voting power a holder has scales with the square root of the number of tokens they hold, reducing the disproportionate influence of large holders. Revenue distribution proposals are then voted on, and approved proposals allocate treasury funds accordingly.

This governance model balances the need for decentralization with the reality that larger stakeholders bring more capital and expertise.

Risks and Mitigations

Revenue distribution mechanisms, especially those involving MEV, face several risks:

Effective risk mitigation requires a combination of technical safeguards, governance transparency, and community oversight.

Future Outlook

The MEV landscape is evolving rapidly. Emerging trends that will influence revenue distribution include:

• Layer‑2 and cross‑chain MEV – New rollups and cross‑chain bridges introduce fresh MEV opportunities, requiring more sophisticated revenue models.
• Regulated MEV – As regulators scrutinize MEV practices, protocols may adopt formal compliance mechanisms and open‑source MEV aggregators.
• Dynamic fee models – Algorithms that adjust fee splits in real time based on network conditions can optimize revenue distribution.
• Hybrid incentive structures – Combining staking rewards, liquidity mining, and community grants in adaptive ways can align more participants with protocol goals.

Protocols that remain flexible, transparent, and community‑centric will be better positioned to harness MEV’s economic potential while maintaining ecosystem health.

Conclusion

Revenue distribution in MEV‑enabled protocols is a multi‑faceted challenge that intersects economics, governance, and engineering. By carefully mapping revenue paths—from raw extraction to final beneficiaries—protocol designers can create incentive structures that promote security, liquidity, and community participation. The examples discussed illustrate that there is no one‑size‑fits‑all solution; instead, the optimal distribution model depends on the protocol’s goals, user base, and regulatory context.

As the DeFi ecosystem continues to mature, the ability to capture MEV responsibly while distributing its benefits equitably will be a defining factor for the success and resilience of future protocols.