OK I think I disagree with most of your points here.
I
“You state that if MEV is burned, this would lower rewards down to the issuance. But as Barnabé states, you cannot enforce only burning surplus.”
You misunderstood Barnabé’s comment here. He was pointing out that the proposer reward would also end up being burned. But proposer rewards are only 1/8 of issuance, so the impact is nowhere near as severe as you suggest.
II
“More and more ETH will be liquid-staked (asymptotically approaching 100%)”
With the beacon chain running for 2 years, we have reached 12% of all Ether staked. Of this, about a third is liquid-staked. So 4% of Ether is liquid-staked. I don’t think it’s reasonable to casually state that this will asymptotically approach 100%. Indeed the consensus layer is not designed to cope with the majority of ETH being staked, which is why Vitalik has previously proposed capping the size of the validator set.
“Even while unstaked, staking rewards trickle down to all unstaked ETH via lending rates”
I’m not sure I understand the mechanism you’re implying here, but my suspicion is that the “trickle down” is not equivalent to staking rewards. Happy to be enlightened on this one.
III
“In the new scheme, that validator would make 0% of the rewards and be quickly forced out entirely”
Again, this is based on the misapprehension that proposers take all the rewards. In fact 87.5% of issuance goes to validators which are participating in attestation or sync committees.
IV
“The race to lower latency is especially insidious: it practically guarantees that the best-positioned validators must be vertically integrated with the best block builder(s) as well as with other validators.”
I agree with you on latency, this is a problem with basically any auction mechanism (this is one reason EIP-1559 is so elegant). As a side note I understand this is an open problem for in-protocol PBS too - auctions introduce knotty timing problems and tend to favour those with low latency network access.
Conclusion
- Instead of reducing incentive for proposer centralization, it would increase it. I disagree. By burning MEV/proposer rewards, the payout for validator becomes much more even, reducing pressure to pool stake.
- Instead of making validator rewards close to the issuance, it would make it close to zero. Incorrect. It might result in burning of proposer rewards, but these are only 1/8 of issuance.
- It would let ETH capture the value of MEV but at the cost of destroying Ethereum’s economic security + decentralized validator set. The long-term MEV (and value of ETH) under that model is worth 0. This is based on the two points above to which I have already stated objections.
- Finally, MEV is already transferred to ETH holders today, just with more extra steps. Again, this is far from true since a small proportion of ETH is staked. Do you have data or further detail to back up this argument?