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”
