MEV App: For Fair Extraction of EtherNet Value

What is MEV?

MEV App: For Fair Extraction of EtherNet Value

With the development of DeFi protocol applications, more and more complex smart contracts are deployed in the Ethernet network. The interaction process between contracts and contracts is not only complex and frequent, each contract interaction hides wealth opportunities, such as arbitrage, such as liquidation, and the prosperity of on-chain applications also increases the value that can be captured by on-chain transactions, which is collectively called Maximum Extractable Value, or MEV for short.

According to the MEV data site Flashbots, from January 2020 to June this year, the MEV of the ethereum network reached $749 million, and the value extracted in the last 30 days reached $239 million, which has become a market that cannot be ignored.

However, miners can extract value in the process of network transactions, there is a rush and trailing transactions, which often leads to too high GAS of Ether, bringing problems such as chain congestion and high transaction slippage, affecting the experience of other users on the chain.

As a result, more and more professional developers are dedicated to solving the opaque and disorderly status quo in the process of value extraction by miners to protect the interests of ordinary users’ transactions, and such solutions even appear in the form of applications, MEV-Explore, keeperDAO, CowSwap are such applications.

In this issue, DeFi Honeycomb will bring a compendium of MEV and its related applications.

What is MEV?
MEV is the abbreviation of MinerExtractable Value, which originally refers to the extractable value of miners.

As the packer of Ethernet block data, miners have a lot of initiative. In the process of packing blocks, they can include or exclude transactions, to sort them, and this operation also allows miners to extract value in addition to normal transaction fees and block rewards, and this value is MEV.

And currently on the ethereum ecology, MEV is not only extracted by miners, there are also DeFi-focused traders and also robot operators, who get MEV through arbitrage strategies, leaving miners with only the transaction fees paid by traders in the process of mining MEV, so miners can get only a small portion of the on-chain MEV.

DeFi traders and arbitrage bots have joined the ranks of on-chain extractable value, so the definition of MEV is no longer just Miner Extractable Value, it has changed to Maximum Extractable Value.

Before understanding MEV, it is necessary to understand the flow of operations on the Etherchain. There are three main roles in this blockchain network, which we illustrate with an image analogy – miners are producers, mining pools are like auction houses, and users are equivalent to bidders.

Whenever a user initiates a transaction, the transaction information is broadcast to the node, and each transaction comes with a fee, or GAS fee. The fee represents the user’s willingness to buy block space, enabling him to have this transaction included in the block. The pool will assign this transaction information to miners, who, in pursuit of revenue, will prioritize packing transactions with high GAS fees.

At this point, transaction users will bid high GAS fees in order to have their transactions prioritized, an act known as “Priority Gas Auction” (PGA for short).

Before the DeFi app boom, this is how Ether operated in block order, with the MEV value on the chain concentrated on the miners. As the DeFi protocol exploded, the combination and interaction of smart contracts such as over-collateralized lending, AMM, revenue mining strategies, and derivatives became increasingly complex. The Ethernet network is no longer just supporting on-chain transfer transactions, the value that can be captured will become more and more abundant, and MEV becomes richer with every interaction of smart contracts that conceals great wealth.

MEV is generated in the DeFi space, mainly in the two main scenarios of arbitrage transactions and clearing.

Arbitrage trading – In the case of Uniswap, for example, when a large trade generates slippage on that DEX, if there is an arbitrage opportunity worth $10,000, DeFi traders or robotic arbitrageurs will pounce on this information and execute an arbitrage trade. They would submit this trade to the miner. In order for the submitted trade to be packaged and processed by the miner first, they will usually offer a high price for GAS, even if it is worth $3,000. At this point, the remaining $7,000 is the MEV that the DeFi trader or bot arbitrageur can withdraw. and that $3,000 GAS fee is the MEV that the miner receives on this trade.

Arbitrage opportunities don’t just exist in large trade scenarios, but also arise between different DEXs. For example, when ETH/SHIB appears at different prices on Uniswap and Bancor, arbitrageurs move bricks between the two DEXs so that the prices eventually converge.

Liquidation transactions – In DeFi collateralized lending agreements, when the value of collateral declines, failure to make up or sell the collateralized assets triggers a liquidation process where the liquidator can obtain collateralized assets such as ETH at a 3%-5% discount to the market price, which is also the value of the 3%-5% discount to MEV.

There are many pain points in the MEV market
Unfair distribution of benefits due to rush behavior

The current Ethernet network capturing MEV mainly includes DeFi traders, arbitrage bot operators, but also ordinary users, who are MEV searchers, looking for revenue opportunities in various contract interaction scenarios on the chain.

If a DeFi trader finds an arbitrage opportunity on Uniswap and submits the transaction to a miner, but since the data on the chain is all public, everyone can monitor the arbitrage transaction information submitted by this trader, when the value of MEV is very substantial, searchers, including miners, may “jump the gun” with a higher GAS fee – copying this transaction information and offering a higher price for the Gas fee to “take a ride”.

Thus, a scene of bidding for this arbitrage opportunity with a GAS fee emerges, which seems unfair to the first trader who finds the arbitrage opportunity, and if he cannot afford a higher GAS fee, then he finds this “treasure” and has to give it to the “rich”.

Excessive GAS fees waste block space

OK, if you think that DeFi, which advocates freedom of trade, should follow the market (bush) law of survival of the fittest – once MEV is found by a searcher, he should submit this gain with a high GAS fee as soon as possible and compete for the opportunity.

Think what miners will do? The biggest possibility is to pack the deal that offers the most money (GAS fee). This creates the problem of reduced block space due to priority packing, at which point the network is likely to become congested and the GAS fee for on-chain transactions is jacked up.

Sandwiching

In addition to the problems mentioned above, there is a controversial way to profit from large DEX transaction scenarios, such as “sandwich sandwiching”. Some of the more scripted ‘scientist’ traders profit by sandwiching a target trade between two specific trades.

Again using the Uniswap AMM-style exchange scenario, if ETH is worth $1,000 and user A buys ETH with $1,000 USDT, the scientist has his eye on A. He constructs a deal to buy ETH with 1,100 USDT before A; the next in line, A, wants to close and has to buy ETH with more USDT, say 1,150 USDT. At this point, the scientist sells ETH, thus earning a spread, while the real user of the transaction has to suffer greater slippage losses.

Miners’ dual role challenge

In the ethereum ecosystem, miners’ main income consists of four parts: block rewards, uncle block rewards, transaction fees, and MEV revenue. Did you find out? As a miner who handles the order of transactions, he has the opportunity to be both a referee and a player.

When the MEV gain submitted by other users on the chain is higher than the block reward and transaction fee, the miner is in a dilemma – whether to choose to grab this transaction or to choose to remine the block to capture the MEV in the block. it is a temptation for the miner, in order to make the next block build on his own arbitrage success block. He will try to make the block containing his arbitrage transaction the longest chain.

Applications emerge to solve MEV pain points
While the order of on-chain transactions and even network efficiency is disadvantaged by the abundance of MEVs, some developers have tried to solve the pain points with a number of solutions.

MEV-Explore Browser

MEV-Explore is an Ether MEV trading real-time information panel and browser to display MEV value, classification, latest MEV transactions, MEVGas fee consumption and other related information, and the website data is updated every 3 hours. The app is designed to help the community understand and quantify MEV and thus observe its impact on the ethereum network.

MEV-Explore was developed by Flashbots – an organization that specializes in Miner Extractable Value (MEV). Since MEV objectively exists and cannot be avoided, Flashbots hopes to establish an order for the distribution of MEV benefits for searchers and miners, and reduce the impact and risk of MEV on the public chain.

Flashbots’ solution to mitigate the impact of MEV is divided into three parts: lighting up the dark forest, democratizing value mining, and distributing profits.

Since MEV is currently opaque to Ether users, ordinary transaction users cannot feel the presence of MEV even if they have suffered from robocalls or sandwich attacks, and understanding it requires a lot of data analysis and in-depth knowledge of smart contracts. metrics and visualize these metrics.

For the high GAS fees during MEV extraction, Flashbots’ proposed solution is MEV-Geth, which simply means isolating MEV transactions and using an exclusive channel for miners and searchers to bid on transactions, which is commonly understood as moving these transactions off-chain to alleviate high GAS fees and congestion on-chain.

Alchemist Solution

Alchemist (MIST) launched the first decentralized exchange mistX based on Flashbots technology, called the first FlashDEX, which is mainly to solve the problem of robocalling and is used to protect ordinary users from robocalling attacks and sandwich attacks during the trading process. In case of failure to resist the robocall, no fees are payable.

This means that on mistX, your transactions, either trade successfully without a robocall transaction or pay no fees. Unlike traditional on-chain transactions, where you not only face a pre-empted transaction, but also lose the GAS fee for submission.

mistX transactions claim that there is no GAS fee for transactions and that the GAS price for all transactions is 0. But this does not mean that there is no fee, just that the payment method is different from traditional transactions – mistX users are paying tips to miners during the transaction, and these tips are paid in ETH. If the transaction includes ETH, the spending is included in the transaction; if the transaction does not have ETH, then it needs to be deducted from your wallet’s ETH.

In short, there is no GAS fee for the transaction, but a percentage of the tip needs to be deducted from each transaction. The most important point is that there is no fee when mistX cancels a submitted transaction.

What makes mistX unique is that it utilizes the solution proposed by the Flashbots organization to bundle user transactions. That is, information about transactions through mistX is not posted to the public pool, which effectively hides the information from the robocallers, thus preventing the transactions from being manipulated, or robocalled, or caught in the middle.

KeeperDAO Solution

KeeperDAO (ROK) is designed to maximize the interests of DeFi users and deal seekers (Keepers) in a way that also emphasizes not protecting the interests of miners.

KeeperDAO creates a pool of money specifically for arbitrageurs: anyone can borrow money from this pool to arbitrage and receive a portion of the arbitrage proceeds.

It is the equivalent of an on-chain liquidity underwriter, where the liquidity provider deposits funds into the pool and the arbitrageur or clearer (Keeper) will use the funds in the liquidity pool to capture on-chain arbitrage opportunities. When an arbitrage opportunity occurs, the arbitrageur will borrow funds from the liquidity pool in the form of a lightning loan and return the principal back to the liquidity pool after a successful arbitrage. The proceeds from the arbitrageur will be deposited into the community pool and then await distribution of rewards, and the user providing the liquidity will also receive a native token, ROK, as a reward.

Throughout its arbitrage or liquidation process, the main challenge Keeper faces is to submit the PGA bid for the arbitrage transaction process. For example, when you capture an arbitrage opportunity, you are faced with the question of whether to offer a high GAS fee to bid for the transaction order in order to get this transaction packaged by miners first. If a high GAS fee is offered, and this endless chaotic scramble for GAS fees results in little profit for the arbitrageur compared to the original profit.

It is always the miners who have control of the transactions that benefit, and who get the most value out of MEV. If a high GAS fee is not offered, will the deal be stolen by the competition? To avoid such a situation, KeeperDAO encapsulates this transaction through a dedicated smart contract that eliminates MEV.

That is, when an arbitrage opportunity arises, the searcher (Keeper) submits it to KeeperDAO for it to analyze whether there is an arbitrage opportunity (by preempting or trailing the trade). If there is an arbitrage opportunity, KeeperDAO gets the arbitrage and clearing priority, while being able to reduce the risk of Ether miners controlling the transaction sequencing in order to capture the MEV value. After the transaction is completed, KeeperDAO rewards the searcher with ROK.

Although the searcher (Keeper) receives less profit, the loss is less than the GAS loss of PGA competition. This is a win-win for both KeeperDAO and the searcher.

Currently users can gain by providing liquidity from pools of ETH, WETH, USDC, renBTC, DAI, etc. The initial supply of ROK totals 1 million, and as of June 9, it has a market cap of $210 million, a provisional offer of $179$, and 18,777 addresses held in coins.

ArcherDAO Solution

ArchrDAO (ARCH) aims to increase miners’ revenue, looking to increase miners’ revenue and optimize the trader experience by federating strategy providers to provide high-value on-chain trading opportunities (e.g. arbitrage/clearing) and then reordering the trades on ethereum.

There are 3 main roles in the ArcherDAO ecosystem, namely strategy providers, miners, and liquidity providers. While the latter two are better understood, the strategy provider is the party that identifies and submits on-chain revenue opportunities, which include arbitrage, loan liquidation and other opportunities in DEX.

After evaluating these revenue opportunities, the ArcherDAO system sends the high-value opportunities to miners, who package them into blocks and generate revenue.

Overall, ArcherDAO is a platform that allows arbitrageurs and miners to work directly together to generate new revenue streams for miners by uniting strategy providers and miners with the execution of profitable on-chain opportunities. Unlike the PGA solution, ArcherDAO allows both arbitrageurs and miners to collaborate, thus maximizing MEV benefits and avoiding wasted GAS fees to achieve arbitrage.

CowSwap Solution

CowSwap uses bulk auctions to defend against MEV attacks and integrates with various decentralized exchanges as a source of liquidity to provide traders with optimal prices.

CowSwap uses a unique demand matching CoW (Coincidence of Wants) approach to aggregate trades. When two parties have assets that they both need, they can trade directly without the use of a monetary medium, which can be understood as an on-chain “barter”.

In other words, when a batch of transactions occurs, CowSwap first matches orders for the trader off-chain, and if it does not find a matchable demand transaction, it submits the transaction to another DEX on the chain.

On CowSwap, two people who both hold the assets they want from each other can match trades directly without the need for a market maker or liquidity provider to broker the trade. This allows for the best price for the individual trader and eliminates the fees incurred through market makers or liquidity providers.

CowSwap requires external liquidity on the chain and therefore uses a bulk order format, settling at a single price. All orders are priced the same and there is no trade sequencing, so no value can be extracted by sequencing trades in a specific order, essentially eliminating the MEV situation.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/mev-app-for-fair-extraction-of-ethernet-value/
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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