An article to understand the necessity of extracting MEV in the cryptocurrency world

In any distributed system where security is provided by economic incentives, MEV is a key indicator of network security (including centralized systems).

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Author | Philip Daian

Some readers may have understood the view that “extracting MEV equals theft”. In this article, I will discuss in depth why in my opinion the extraction of MEV in the cryptocurrency world is not similar to theft; why MEV is a key indicator of network security in any distributed system that provides security by economic incentives (Yes, including centralized systems); and how we as a community should deal with MEV in the next 3-5 years. I will argue that the existence of MEV is fundamental, and there is no known magic wand that can solve this problem.

Coin World-An article to understand the necessity of extracting MEV in the cryptocurrency world

My MEV journey

I will first analyze the relationship between Distributed Fairness Protocol and MEV, and the relationship between Distributed Fairness Protocol and true fairness; then I will demonstrate why MEV is a tricky double-edged sword, and its wide range of influence will simplify it to ” Both good and bad attempts are reduced to reductionism; finally, I will provide a road map of how the community should respond to MEV, what I plan to do, and what you should do regardless of your role in the ecology.

This article only represents my personal opinion. Although I have an intricate relationship with MEV, personally or professionally, I hope that readers will look at the following content from the perspective of the point of view, rather than receiving it in its entirety.

let’s start!

The existence of MEV is fundamental

First, we believe that the existence of MEV is fundamental to cryptocurrency experiments. It will not disappear. It has the following logical relationship with the cryptocurrency experiment:

The transcriptability of encryption technology: All distributed systems that can function as currency must have the key feature of “auditability”, or the ability to verify system state transitions and/or user behavior. Auditability is a key feature provided by the Merkel transaction root of the Bitcoin blockchain and many Ethereum smart contracts. We achieve auditability by creating encrypted records or proof arguments, both of which can be verified by others. This is the key to the method of building a distributed economic system. Without it, no one can verify anything in the system. However, both recordability and auditability have opened the door for MEV. There are always some users who prefer a certain version of an event over the other, and there are always users who find a certain record more valuable than others. These users will be able to express a preference for the selected outcome through conditional payments, and these payments (and the preferences themselves) provide a form of MEV by changing the incentives for the person choosing the record.

Interoperability under various trusts: There will never be a single blockchain architecture that dominates all (sorry, extreme supporters). In multiple systems with multiple trust assumptions, the boundaries of these systems can always provide value to those in privileged positions at these boundaries. For example, even if ETH itself does not have MEV, there may be room for MEV to be used for arbitrage in Binance Smart Chain with ETH, especially for those who do verification on both sides. Therefore, the people who control the order of bitcoin transactions make arbitrage on centralized exchanges during periods of high market activity. For MEV to disappear completely, the world must operate within a single trust zone, which seems…impossible.

This picture is shamelessly taken from a lecture on interoperability and MEV by Charlie Noyes, and then modified it. That lecture is very enlightening.

Coin World-An article to understand the necessity of extracting MEV in the cryptocurrency world

Permissionlessness: A common design pattern of cryptocurrency is to provide payments that any user can receive in order to provide useful actions to the network. This is the cornerstone for countless distributed applications to run. For example, in Uniswap, if there is no MEV formed with the arbitrage market of external or centralized exchanges and other decentralized exchanges, the price cannot reflect market changes, nor can it provide users with useful trading products. In MakerDAO, if there is no MEV paid to the liquidation robot, there is no incentive to pay gas to update the loan status in the system, which directly leads to the collapse of the system. In Cryptokitties, without the MEV used to pay for fertility gas, no kittens will be born. It is the existence of “bribery to everyone” (bribery without permission) that supports the operation of these systems and is not always harmful. It is often a necessary condition for decentralized or “permissionless” agreements to operate, for security to be guaranteed, and why they can achieve some equilibrium without requiring permission.

Please note that in addition to not requiring permission, centralized systems can also have these features. This is obvious to everyone who thinks about MEV in a system like Binance Chain and who controls who extracts what, but it also applies to distributed databases, non-financial systems, communication systems, and users A system that wants to safely bribe a participant to perform a certain action. These bribes can be regarded as MEV in a broad sense.

For economic safety, MEV must be extracted

Assuming that you are convinced of my argument so far, that is, agree that there will always be a certain MEV in a distributed system. Now let us take it as an axiom and only think about the world where MEV exists and can be extracted (for example, our empirical world today)

Consider the economic security model of cryptocurrency. Satoshi Nakamoto defines cryptocurrency as follows: “As long as the CPU computing power controlled by honest nodes exceeds that of nodes controlled by attackers, it is safe.” When can we expect “honesty” “There are more nodes (nodes that operate according to the protocol without offset) than attacking nodes? This is where to see whether Satoshi Nakamoto’s honest model can withstand the test.

One reason for the success of cryptocurrencies is that their security assumptions are weaker than honest assumptions. If we can accept to rely on an honest majority assumption, such as a public key, we can simply use a license consensus protocol and create a monetary abstraction. On the contrary, cryptocurrency allows more abstract economic assumptions than this “permission.”

Such an economic hypothesis is that due to the “extra-protocol incentives” that want to convert mining revenues into legal currency for a long time, miners have sufficient incentives not to participate in dishonest mining behaviors. Another assumption is that the computing power of the CPU costs money, so the Satoshi Nakamoto consensus makes the cost of the attack not to be underestimated. No matter what security assumptions make you believe that Bitcoin is feasible, it may be economic assumptions that make you believe rather than honest assumptions. Although honesty may be the basis of technical analysis, economics is the reason for its existence, and I bet that this is also the reason why many people reading this article believe that Bitcoin is feasible (directly or indirectly).

Economics is important, and we don’t want to rely solely on identity or trust. In this model, in order to motivate people to behave in the desired way, we as a community use the concept of economic rewards. Such incentives provide security for any interesting cryptocurrency system, so that it cannot be simply replaced by a database. In the cryptocurrency system where the verifier provides security, the existence of MEV (whether withdrawn or not) fundamentally changes the verifier’s incentives. If the verifier involved in economic activities ignores MEV, it will systematically lose to the verifier using MEV.

If we want any form of strong economic security, each validator must extract the available MEV at roughly the same rate. Any validator who withdraws MEV at a higher rate than others is essentially concentrating economic benefits, thereby affecting the security of the system. Any miner who withdraws MEV at a higher rate than others can centralize CPU control. This situation is more direct in the equity proof system, and the pledger can extract MEV more efficiently from the centralized pledge funds.

If the verifier leaves the MEV in a system, it is tantamount to providing a subsidy to the attacker. Under a purely economic rational model, this is tantamount to self-destruction and security degradation, because this will lead to centralization or oligopoly.

Want to extract MEV? Want to be beautiful..

In order to keep our economic assumptions solid, we must keep MEV extraction efficient and democratic .

MEV and fairness

Those who are new to MEV will naturally ask the question “Why don’t you enforce a fair agreement on the first layer of agreement, and it’s over?” Of course, there can be an encryption protocol to build a more fair mining system than the existing proof-of-work mining system. A way of sorting with less manipulation?

Dear reader, here is the problem. Let us sincerely participate in this “adding a fair agreement” exploration. The first step is to define “a fair agreement.” We need to specify a protocol that is integrated into the first layer. A reasonable way to choose a protocol is to read the most cutting-edge academic literature on fair ordering, which gives the following criteria:

Coin World-An article to understand the necessity of extracting MEV in the cryptocurrency world

(The red letter in the picture: Which agreement would you choose? Who will choose?)

After further analysis, people found that there is no such thing as a “fair ordering agreement”, just as there is no such a thing as a “consensus agreement”. On the contrary, what we have is more like a series of protocols, parameterizing network assumptions, failure thresholds, the set of nodes running them, encryption assumptions, and so on. Which one should I choose and which is more popular?

The interesting conclusion here is that as long as there are two fair sorting agreements, MEV will also arbitrage these agreements. Please note that the definition of MEV does not require honest assumptions, but only involves profit-maximizing behavior. If the validators in the two protocols maximize their profits, they can break the fair ordering protocol in a variety of ways and make profits.

This is similar to market design in many ways. There are many proposals for fairer market design. They are great. I want to see them deployed, tested, and used for experimentation. However, the claim that any of these designs is a panacea for improving fairness often stems from their analysis being carried out in an isolated model, which does not fully reflect the complexity of the real world, and in terms of economic incentives, for those who are willing and able to use For MEV people, these differences will become more prominent and more profitable.

We need more experiments and research. Distributed fairness is a very promising research direction, which can benefit all mankind through market design. But we should not exaggerate.

What is fairness?

When delving into this complex topic, it is helpful to review how we define fairness in the real world:

Coin World-An article to understand the necessity of extracting MEV in the cryptocurrency world

Obviously, fairness must be impartial. But when there are multiple choices, how can there be only a single fair agreement, and people (should) have different choices?

I think this is tantamount to the daydream of liberals-to have a global property ledger, where all justice in the world originates. I’m sorry. I’m sorry not because I can’t empathize, but because I think it is impossible and absurd for all mankind to reach a consensus on such a complex and influential issue.

Going back to fairness, then we will find that some fairness agreements are useful for some users, and other agreements are useful for other users. Which agreement do you say is more fair? The one selected by group A or group B? It is impossible to predict in advance.

Fair sequencing protocols may try to approach the concept of fairness in the real world, but they can never get an ideal, unparameterized definition, because removing these parameters requires humans to reach a consensus on the issue of “what parameters are fair”. This in turn requires human beings to reach a consensus on “what is fair” first.

Therefore, fair sorting can only be close to ideal at best. It is useful, but it is not a panacea for the sorting problem, and of course it cannot be used universally.

To make matters worse, most fairness agreements rely on honest assumptions and do not have strong economic arguments to support their operation, which is necessary to make them suitable for operation in an environment such as cryptocurrency. This is a key area of ​​future work, but it is not yet an area where we can risk our financial future. Of course, it does not objectively satisfy the real world definition of “fairness” mentioned above.

Fairness is bad, MEV is justified!

Please note that this article of mine is written to refute a narrative that has prevailed recently: there is a clear moral gap between quantitative MEV, MEV extraction, and fair sorting, and the two are mutually exclusive.

I am not saying that fair sorting is useless. Under reasonable assumptions, fair ranking, especially fair ranking applicable to specific protocols, can greatly reduce MEV and increase user income. This is a key area of ​​research and investigation. However, due to the above reasons, fair ordering cannot completely eliminate MEV.

Our complete solution must go deeper and must cover more aspects of this problem in a more dynamic way.

Obviously, there is a profound relationship between MEV and fairness. Some forms of MEV seem obviously unfair. But there are some protocols that can actually incentivize users or verifiers to run fair ordering. In fact, running a fair sorting protocol on Ethereum may require rewards to be paid to verifiers, and MEV is provided directly to the first layer. Ironically, without MEV, it may not be possible to achieve the fairness of an economically safe, proof-of-work system! (This is just my guess, no one has proven it yet…)

From a research perspective, these relationships are still not well understood. However, these relationships obviously exist, and they deserve a lot of research, discussion, and thinking.

What’s up?


Now, I finally have a prescription. Yes, this is for you, you’d better follow the doctor’s advice (first clarify, I am not from Purdue Pharmaceuticals):

For DApp developers: It is necessary to make strict requirements on the extent to which MEV is restricted. Carefully consider the MEV settings in your agreement. Where does it exist? How will it harm the interests of users? What benefits can it bring to users? Can it be redistributed or reduced to a minimum? Over time, will interoperability with other systems change it? And how is this communicated to users? Find out these issues and set them up in the right way, otherwise your distributed system will crash.

For users: the above requirements are required for DApp. Do not use DApps with predatory MEV. Understand what MEV means to you and your transactions. Learn the relevant knowledge of MEV and have a deep understanding of the system you are using.

For L1/L2: redesign and take MEV into consideration. Think about the use case you are designing and how you can better manage MEV. Think about it if MEV incentives change after DApps are deployed, what changes will this have on your economic incentives? Do you have a plan to deal with it? And regarding the assumptions made around network participants, in what way might MEV break those assumptions?

For miners: Extract MEV as much as you want, don’t be embarrassed. For any MEV network, its feature of ensuring network security with the help of game theory requires miners to continuously extract MEV. I also suggest that if necessary, by implementing the code of conduct for other miners/network participants to further adjust the incentives and expectations, because the short-term MEV may harm the long-term interests of all users in the ecosystem.

For everyone: to help us democratize MEV profits, while avoiding damage to the interests of users of the entire system as much as possible. Participate in this conversation and constantly try to mitigate negative externalities.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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