With the upcoming Merge of the Ethereum network, there are a variety of terms which are important to know. These have implications for the network’s development and for those who participate in its functioning, as validators and otherwise.
The overview below covers some of the main definitions which are important to know.
Merge
The Ethereum community has changed the former designation of PoS Ethereum as “ETH2” to “Merge”. ETH1 used to be the execution layer (EL) that is responsible for state management, execution and transaction bundling, ETH2 the consensus layer (CL) that is responsible for block production and validating transactions. With the Merge, there is only Ethereum and ETH, no ETH2. Execution layer and consensus layer will form one network, Ethereum based on a PoS consensus mechanism.
Consensus-layer (CL) rewards
CL rewards refer to the rewards from the issuance of new ETH (inflation rewards), which validators receive for participating in the security of the Ethereum blockchain.
Tips
Tips are a priority fee that users can pay to speed up their transaction. Think of it as if you would go to your MetaMask, initiate a transaction, and then want your transaction to arrive sooner and thus you increase the gas fee. Tips are part of the overall transaction costs paid by a user. They increase if users want to prioritize their transactions by paying a higher gas fee. Validators then receive Tips as additional rewards for validating the Ethereum blockchain.
Maximal Extractable Value (MEV)
MEV refers to not just relying on CL rewards from the protocol and Tips from user transactions but finding opportunities to generate additional rewards from changing the transaction order in a block. In fact, as the word “maximal” indicates, it is referring to having the highest economic value within a block. From a technical perspective, these additional rewards are also paid to validators through Tips. Thus, when the public discusses MEV and Tips, they sometimes refer to it as the same. The difference therefore is not the “technical location” in which the additional rewards arrive at the validator but how they are generated. With MEV it is through a specific party looking for opportunities as mentioned above. With the current PoW Ethereum, roughly 90% of miners outsource MEV extraction to third parties. It is expected that the same will happen in PoS Ethereum via e.g. MEV-Boost.
Execution-layer (EL) rewards
EL rewards can be referred to as a combination of rewards consisting of Tips and rewards generated through MEV. Technically, validators receive EL rewards as additional Tips for prioritizing and reordering transactions.
