How to face the Ethereum MEV gracefully?

Since Lately, ATA, and pull explosion of EDEN, on Ethernet Square MEV’s (Miner Extractable Value) also continued popular topic, how to solve this problem there has been a huge controversy in the community. So what is MEV?

In the existing design of Ethereum, miners have the power to choose transaction channels and determine the order of transactions. MEV refers to the total value extracted by miners through mastering these two capabilities. Subsequently, an organization called FlashBots appeared and began to conduct public MEV-related research and development. The MEV auction is a solution proposed by Karl Floch, Vitalik , Philip Daian and others in January 2020.

Should arbitrage MEV exist?

What the MEV auction will auction is the “sequence” ability among the two abilities of miners: in the future, miners are only responsible for “whether to choose transactions to enter the block”, and no longer control the order of transactions in the block. The real solution to this problem is not to encourage professional Front Run auctions, but to design a mechanism to “avoid” anyone from arbitrarily arranging the order of transactions. This is the so-called fair ordering problem.

In Arbitrum ‘s plan, such a “fair ordering” will be introduced in Arbitrum Layer 2. The actual details are not clear yet, and a single sorter will basically decide the sorting of all transactions. Fair ranking is the real solution to this problem. In addition to some of the latest Layer 2 solutions that will introduce a fair sequencing design, oracle projects such as ChainLink can also solve the fair sequencing problem through a centralized sequence role.

Is MEV really that bad for Ethereum? It depends on what role you are in the Ethereum transaction. Since January 2020, miners have “squeezed” nearly $750 million in value from Ethereum users. Due to the design of the Ethereum Virtual Machine (EVM) memory pool, the value extraction of the MEV type is performed by miners who have the sole authority to organize transactions within the block.

MEV “Dark Forest” brings two intertwined problems:

1. DeFi users continue to suffer from various types of MEV problems. For example, even if the user pays to execute the transaction, the user’s transaction will fail in advance.

2. Even if the transaction tries to prevent possible protocol loopholes, it can still cause bigger problems, because the existence of the transaction itself indicates the weakness of the protocol to others.

In short, every transaction submitted to the chain on Ethereum is monitored to check whether it is possible to exploit it. In the dark forest, there is often a confrontational relationship between Ethereum mainstream community users and miners. The most common form of MEV users is preemptive transactions. An early transaction occurs when a party takes action based on information about a transaction that has been confirmed but not yet executed and uses this information to execute its transaction beneficially in advance.

This can be very beneficial, because the trade rush runner can execute the trade before the asset price changes significantly and profit from the difference. But its ultimate impact on Ethereum is a higher Gas price, but the MEV that runs in advance will hurt the DEX the most, because traders may encounter transaction failures and the transaction price is lower than the initial order quotation. Preemptive transactions mainly occur in the field of Ethereum arbitrage robots. However, the current situation is that miners can directly run block transaction orders in advance, then the situation is very bad.

How to solve the MEV problem of Ethereum?

Not all hopes are dashed. Unless Ethereum designs flexible components for users, MEV will not disappear. Solving this problem requires critical infrastructure and the right DeFi tools. At present, the transition from Ethereum to proof of equity is unlikely to solve the MEV problem, because changing the core protocol of Ethereum requires a very high consensus, which will most likely not happen. 

However, DApps or users can fight against MEV in a variety of ways. The most realistic method is to have a transaction mechanism or agreement that enforces batch auctions. Batch auction or batch transaction refers to the centralized processing of orders within a time range in the order book of the exchange, and the goal is to execute all transactions in this batch at the same time. This is a price discovery mechanism used to correctly price token pairs at the same clearing price for each block.

In traditional markets, batch auctions are used during market opening to process all orders placed during non-market hours. In DeFi, batch auctions help to execute a large number of transactions in the same block at the same time. In a system where miners or verifiers have the power to reorganize transactions, batch auction settlement can deprive them of their power. This is because batch settlement forces miners to execute transactions regardless of their order size. In a batch auction mechanism with a unified clearing price, the order of transactions cannot change the price. 

Submitting chain orders through signed messages is a new transaction method that has not been widely used before. DApp users do not need to submit an on-chain order to take effect. Instead, they can submit off-chain orders by signing transactions using order preferences.

Since the orders have been off-chain, the transactions will not be sent to the memory pool separately until they are sent and settled at one time through the batch auction settlement transaction later. This means that they can all be settled in the same batch, which increases the difficulty of copying and makes the reorganization of transactions irrelevant, because all transactions have the same price regardless of the order.

At the same time, off-chain orders can allow the protocol to not rely on transaction routing, so that even if miners can obtain signed messages and try to use them, it has nothing to do with miners. Since the agreement does not force users to bind a specific transaction path, it can focus on obtaining better prices rather than executing transactions the fastest. 

An agreement with a price-seeking mechanism based on batch auctions, unified clearing prices, and coincidence of demand (CoW) can provide its users with the best level of MEV protection to date. (Demand coincidence refers to an economic phenomenon in which two parties each hold items that the other wants, so they can directly exchange these items without the need for a third party to provide liquidity to facilitate transactions.) 

At a deeper level, this means that if the protocol uses batch auctions instead of a constant market maker design, they can provide users with the opportunity to settle transactions directly based on CoW. Therefore, such an agreement can optimize the price according to the different orders received in each batch, so as to always provide traders with the best price while protecting them from MEV. As I mentioned before, batch auctions can also allow agreements to establish a unified clearing price, which, together with CoW, can help users avoid the impact of MEV.

This protection comes from the fact that the protocol does not match the liquidity transactions on the external chain. In other words, in the case of CoW, the protocol does not need to execute on-chain transactions for automatic market makers (AMM) to make transactions liquid. In addition, if no CoW is found, the uniform clearing price in the batch auction makes the order of auction transactions irrelevant, because all transactions of the same token pair get the same settlement price, thus eliminating the opportunity for MEV participants to restructure transactions To increase the possibility of value extraction. 

Even more exaggerated is that there are now some projects and tools specifically designed to monitor MEV capture opportunities, and work with cooperating miners to share profits. Once miners capture MEV based on the information provided by these individuals, they will share the acquisition with them. profit. Obviously this makes Ethereum transactions no longer pure, but more speculative. Such arbitrage will only undermine the efficiency of the Ethereum network, and ultimately harm the interests of ordinary users.

Noteworthy project comparison

  • Gnosis Protocol

Gnosis Protocol uses bulk auctions to provide MEV protection and integrates with cross-DEX liquidity sources to provide traders with the best prices. Gnosis V2 is the missing DeFi component required by the Ethereum infrastructure. It allows users to enjoy the benefits of MEV protection because it considers three important factors when constructing. Make it stand out from other protocols:

  1. Access the liquidity on the chain and strictly eliminate malicious behaviors.
  2. Orders are placed through the chain of signed messages.
  3. Based on the pricing mechanism of batch auctions, it has a unified clearing price and CoW.

Gnosis V2 solves the MEV problem by using its batch auction mechanism, combining off-chain order placement and access to on-chain liquidity on Ethereum. In GPv2, when two traders each hold the assets that the other party wants, orders can be settled directly between them, without the need for external market makers or liquidity providers. This will bring better prices to traders because it will reduce spreads.

Only the excess order amount that cannot be directly settled with other GPv traders will be sent to the underlying AMM (automatic market maker). In the end, the batch auction mechanism settles orders in successive and repeated batches in the agreement, and the size of these batches is only limited by the Gas block. A uniform clearing price is enforced for each batch, which means that all orders executed within a given batch will receive the same priced assets as other orders. It is guaranteed that they will get the same or better price as other existing DEX.

These unique design qualities of GPv2 can provide MEV protection for traders in the following two situations:

1) If GPv2 finds CoW, there is no need to use other on-chain liquidity sources to settle transactions, because the liquidity itself is in the batch. Since other mechanisms (such as transaction ordering) cannot be used to copy transactions, the possibility of MEV attacks is completely eliminated. Due to the unified clearing price of GPv2, the results of transactions within a batch do not depend on the relative order.

2) If GPv2 does not find CoW, it will enter the on-chain liquidity pool that provides the best price for auction settlement, and since the solver of Gnosis Protocol V2 enforces strict slippage, it is more difficult for MEV participants to copy transactions because The transaction is unprofitable for them, and only an authenticated solver can submit a batch settlement solution.

  • Automata Network

Automata Network puts the focus of MEV mechanism design on anonymous transactions. Automata believes that a completely anonymous design is the only long-term solution. This ensures that no participants with privileged access rights can observe and therefore affect the way transactions are settled on the chain.  

They have designed a “conveyor belt” mechanism to ensure that orders are placed in a first-in, first-out order and prevent block producers from preempting transactions. Specifically: they inject new transactions into the Conveyor (conveyor belt). Because the signatures do not match, anyone Can detect skipping transactions that bypass Conveyor. Unless all block producers collude to review the broadcast transaction at the same time, the transaction cannot be deleted. At the same time, the user’s data will not be known to any third party including Automata and the node operator.

In essence, it is more like a tool for private transactions and anonymous voting. As a middleware layer, Automata Network can quickly and seamlessly link platforms and applications. The goal is to provide privacy services for the entire Web3 ecosystem. In addition, compared to Gnosis Protocol, privacy transactions will not become the first choice of mainstream DeFi at this stage. At the same time, in terms of user-friendly experience, it is unlikely to be more integrated than Gnosis Protocol in the future.

  • Eden Network

Eden Network is an anti-MEV network that integrates Flashbots. Flashbots is a research and development organization, the original intention of its establishment is to ease the “miner-extractable value (MEV)”. The currently designed block structure of Eden Network is divided into four layers according to the order of transactions: Slot Tenant, Transaction Bundle, Staked EDEN (Pledged EDEN transaction), and public pool.

The essence of Eden Network design is to affect the transaction itself, which is actually unfriendly to individual users of the terminal. Participants in the first three slots of the Eden Network are called “slot tenants”. In the blocks mined by Eden Network, the transactions of slot tenants will be placed at the forefront. Therefore, in essence, it does not get rid of the prioritization design. Eden Network has reached cooperation with multiple mining pools. Although it can improve the MEV problem, it is prerequisite to establish cooperation with large mining pools or leading projects to establish its own ecological moat. Essentially, it complicates the transaction of Ethereum , although large projects such as SUSHI do not have to worry about sandwich attacks and preemptive transactions when conducting transactions. But the premise of all this is that the block is mined through a mining pool integrated with Eden Network.

This kind of “clearly fair, secretly intermediary” approach actually creates another centralization obstacle invisibly. Only users who pledge EDEN can get faster transaction speed, and the pledged tokens will not be destroyed. Of course, if you don’t want to speed up transactions, but just want to resist MEV, you can also set up Eden RPC in the MetaMask wallet, and then all transactions will be broadcast through the Eden private network. This approach is a bit similar to Taobao Mall. Although the original intention was to solve the trade problem of small and medium-sized businesses, it created a barrier-Alipay, invisibly. As for the high efficiency of the Ethereum community itself and the value spirit of fairness and common people, the author does not agree with this approach.

Of course, Eden Network was listed on FTX recently, and there must be financial support from SBF behind it, and the market performance will not be too bad.

Summarize

The entire MEV topic will always be a continuous debate. Whether it will be more intense in the next stage and whether someone will put forward a new point of view is a question worthy of everyone’s attention. This is a very academic debate. At the consensus level, the Ethereum community has successively made some very bright proposals to solve the MEV problem. It can be said that the above solutions are all temporary choices. In the future, with the wisdom of the Ethereum community, MEV will definitely be resolved at the consensus level. .

MEV is a growing problem for Ethereum, but it can be alleviated for now. The author believes that protocols that focus on batch auctions have these features and can help DeFi automated market makers to fight MEV. As investors, we need to ensure that we only use DApps that put the interests of users at heart and allow them to coordinate transactions in a smarter and more effective way.

 

Text | Punk9527

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-face-the-ethereum-mev-gracefully/
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.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-08-26 12:43
Next 2021-08-26 12:45

Related articles