Podcast notes – Hasu and Mike on MEV (Bell Curve) – “If a single regulatory regime can make rules in crypto, then crypto has just failed”

Hosts: Hasu and Mike
Hasu – advisor to Flashbots, Lido

MEV value chain
-money from reordering / censoring transactions
any value a privileged actor can extract – eg, Central Bank printing money, can be considered MEV

People use crypto to escape MEV in real world

Should build crypto systems resilient to MEV

Principles in reducing MEV
-more competition = lower fees, less MEV
-more private = harder to extract MEV
-more user control

MEV is invisible – even looking at transaction data in Etherscan, won’t see sandwich attack

Parties:
Users
Wallets
Searchers
Builders
Relayers
Validators

MEV schools
1. Democratizing MEV – hard to minimize MEV, isolate builders role, make it competitive
2. Minimize MEV –

User/wallet layer – order flow auctions – users don’t send to public mempool or block builder, auctions off right to execute your transaction, if there are competing bidders, the price rises, and value goes to user (instead of to MEV capturer)

Mike: “Payment for order flow” – Robinhood offering zero fees, selling order flow to Citadel / hedge funds
Mike: In past, equity brokerages would charge you for trades – now people have opted for free trades / invisible fees (eg, Robinhood)
We can do better in Defi – especially the transparency

World of Cosmos and Ethereum are converging – ETH community has been better at executing
Hard to say in future if X project is ETH or Cosmos project – there’s increasing convergence

MEV accrues to whomever gets to order the transactions
Mike: MEV will accrue to execution layer

L2 sequencers today are centralized – with plans to decentralize – will eventually face same MEV problems as ETH L1
L2s all need PBS (proposer builder separation)

Sequencers today in L2 does 4 things
-receive transactions
-decide on ordering of transactions
-give user a receipt
-send order batch to data availability layer — that’s what creates finality

MEV should not be counted towards security budget — that’s how core devs think about it, want to minimize and not enshrine it
Minimum security should be paid from inflation + base fee

“MEV is very hard to track”

Different forms of MEV
-arbitrage – different prices on different exchanges, or underpriced asset
-sandwich attacks – buy before a user, then sell it to the user at higher price
-liquidations – searchers typically do this

Uniswap V3 – concentrated liquidity – reduced sandwich attacks

Statistical arbitrage – take balance sheet risk, small period of time where you have to hold asset before selling it

Many top Defi traders are also block builders – want to maximize inclusion guarantee, greater control over trading strategy – can make trade at last moment, can see all other transactions and order / cancel them

In systems we build, must make sure they’re not sensitive to latency — otherwise there’s incentive to colocate near each other, more centralization
Phil Daian post on this: https://collective.flashbots.net/t/decentralized-crypto-needs-you-to-be-a-geographical-decentralization-maxi/1385

Turn latency into price / auction, auctions are generally more fair, and price (ability to pay) is easier to decentralize than geographic proximity

Users love Robinhood because good feature is very visible (free trades) and bad feature is very invisible (selling user order flow)

Mike: Optimism and Arbitrum have very different approaches to MEV

“Solana is case study for why to not build low latency blockchains”
1 of 2 Solana block builders is operating liquid staking protocol
If you don’t have robust mempool and fee market design, get a lot of spam
58% of Solana transactions are failed arbitrage transactions

What’s novel in Cosmos —
-Osmosis doing something very interesting – onchain block building and searching
-Noma (sp?) & Penumbra – intent based transaction framework

Mike: Cosmos has very different opinions, diversity of ideas
Hasu: Big drawback is everyone has different validator sets, but as shared security grows, what compromises will be made?

How does regulation bump into MEV?
Crypto is about fair and equitable markets for users with less manipulation and exploitation
Execution on public blockchains is continually improving
Regulators are largely pragmatic

“If a single regulatory regime can make rules in crypto, then crypto has just failed”

Podcast notes – Nick Johnson, ENS lead dev – Bell Curve podcast

Guest: Nick Johnson, ENS lead dev
Kiwi; Lived in New Zealand, Ireland, the UK

Goal never was to launch DAO, goal was maximally achievable decentralization — at that time there was only “The DAO” and not a lot of examples or playbook

Launched purely as governance mechanism – what to do with funds raised from registration fees?

Started with generous ETH Foundation grant

ENS is public good, non profit, goal is to leave as much value behind for users as possible

Believes protocols should all be public goods – things like ETH, L2, infrastructure
“If you want people to innovate on your platform then your platform should be open”
Makes exception for apps eg, DeFi, DEXes

Grew up with internet in 90s – open governance at the time, thing that everyone can improve on, left big impression on him

In 90s AOL didn’t succeed because it was walled garden, too much friction, extracting value that wasn’t re-invested in ecosystem

Attitude in web3 that working in nonprofit / charity gets paid badly and need sacrifice — totally reasonable to pay market rate

ENS token
-best tool we had available, but have shortcomings – eg, tendency to plutocracy
-intentionally launched as governance token, not a profit-accruing token
-wrote ENS Constitution explicitly states that revenue will not return to token holders – instead used to re-invest in ecosystem

ENS didn’t launch as a DAO – felt DAO ecosystem, tooling, examples weren’t there
What changed – use of OpenZeppelin contracts; human control of ENS had been reduced

Can be frustrating to run DAO – differing visions

Lots of parallels to corporate governance, but built more like a co-op than a for-profit
Delegation is still necessary – you don’t want token holders voting on every single decision

What if VCs buy a lot of tokens?
“Probably our biggest risk”
Defenses are social (lots of tokens given to long-term contributors, core team) and financial (would need to spend too much relative to value of $ in treasury)
“Constitution as friction mechanism”

ENS Labs is centralized, get budget and is “hired” by DAO
Hope to see other development orgs funded to help ENS (besides ENS Labs)

Quadratic voting is elegant but only works if you can solve Sybil problem (prove it’s a real human, not bots)
Imagine a good ID system, can still offer $50 to stranger on street to use their ID

Voting escrow tokens (lock tokens to get more weight or just participate in voting) – provides way to show long-term commitment to organization

Tough to design token economic / voting systems that can’t be gamed

Cares about financial privacy
KYC doesn’t reduce money laundering but does reduce financial privacy
Tornado Cash is great example – the devs actually built in compliance mechanisms – but OFAC / Dutch prosecutors ignored that and still charged them with money laundering

Optimism is public benefit corp – very encouraging
More skeptical of StarkNet (raised a lot of VC)

Just share the code, even if its messy – so many benefits from open source

Need more DAO tooling for day to day governance, a unified platform
Helpful to have OpenZeppelin’s version of the governor contractor – based on Compound’s – ENS DAO was one of first to use it

Will see more professional DAO delegates

What excites him
see DAO move to long-term vision, setup an endowment to last 50-100 years
-integrating with DNS
-offchain names – names w/o reg fees
-happy to see Ethereum hasn’t fallen into trap that Bitcoin did which resists any change

DAO provided meaningful outlet for community to contribute eg, small grants program
“Giving them permission to be involved”

Often low participation is because people have selected themselves out of it – you don’t have to be prominent to make a contribution