Preliminary exploration of MEV in Eth2 (below)

Qualitative analysis of eth2 new consensus participants to understand the interaction with MEVs

New Consensus Participants

While the quantitative analysis above is important to begin thinking about the MEV problem in eth2, it is incomplete without a qualitative analysis of its participants. As mentioned earlier, hash rates left the eth2 arena, where pledged ETH was required. Miners and mining pools were replaced by new players – exchanges, protocol pools, investment funds, and verifier pools that hold control over large amounts of ETH, among others. This can be seen in the distribution of eth1 deposit addresses in the eth2 verifier set, based on the data currently available on beaconcha.in.

Preliminary exploration of MEV in Eth2 (below)

It is worth noting that this pie chart does not distinguish between the end entity that holds the consensus voting power and the infrastructure on which it operates. While the centralization of consensus voting power is a concern, the centralization of infrastructure is less so, as the economic incentives of PoS encourage decentralization of facilities to minimize the associated risk of forfeiture.

Specifically, this means that exchanges like Kraken that hold large amounts of ETH may reduce forfeiture risk by pledging their deposits to multiple infrastructure providers, in different regions, and running with different hardware and clients, rather than taking on this huge infrastructure investment and O&M in-house.

Exchanges

The most obvious change in power relations in eht2 is that exchanges, as the largest ETH holders, have become the largest validators. Centralized companies like Coinbase, Binance and Kraken will likely control the largest number of validator slots. these players are legally regulated differently than mining pools and have reputations in many ways. These differences will likely have a new impact on the verifier landscape that differs from the miner landscape, potentially affecting the activities that verifiers engage in, such as the type of MEV they receive revenue from.

Interestingly, these entities are also engaged in several activities beyond pledging, which may present new opportunities for synergies between the existing services offered by these exchanges and MEV withdrawals. Those mentioned here include the provision of express transactions, private cryptocurrency withdrawals before the transactions are even packaged on the chain, and lower on-chain fees equivalent to cryptocurrency local payments used as order flow.

The provision of these services may initially be advantageous and attract users to migrate to exchanges that offer them, with the result that exchanges that do not offer them or are unable to do so for regulatory reasons will suffer. In addition, the vertical integration of exchanges in the MEV game (e.g., exchanges running their bots to submit transactions to their verifier nodes) is a concern that deserves deeper examination.

Validator pools

Another important shift in eth2 is the emergence of verifier pools, which offer benefits such as reducing the minimum amount of ETH required for pledging, launching customer-facing verifiers, offsetting the variance from the luck of the block offer (MEV + transaction fees), and providing additional services such as pledge derivatives based on their managed funding base.

The emergence of metapools like Rocketpool and Lido is an interesting phenomenon. These entities are connected to a very large number of validator pools and can be a significant source of pledge volume and therefore can exert influence on the validator pools, such as their adoption of MEV types and the share of profits offered to pledgers.

These metapools typically offer pledge derivatives. An example of this is the ability of metapools to provide users with liquid tokens representing pledged deposits (typically locked in a beacon chain) that can be used elsewhere in the network. Allowing the use of liquid pledged ETH tokens in DeFi would further increase the revenue earned by verifiers on MEV.

Reviewing the discussion of infrastructure decentralization above, it is easy to see that exchanges are another type of metapool, as they can also be connected to the verifier infrastructure on the back end. Exchanges are also likely to offer pledged derivatives services, and these traditional institutions will compete with pledgers of locally run nodes on several dimensions, such as decentralization, liquidity moats, and regulatory flexibility. [4]

Openness issues

Our exploration of the MEV problem in eth2 has revealed a number of open questions that we plan to investigate in the coming months. Four of them are listed below.

eth1 block proponent market

Since there are now effectively two clients to run (eth1+beacons), eth1 nodes that are separate verifiers are likely to just choose a service provider like Infura by default, because of the high overhead of running it themselves. This may be implicit at the outset that the eth1 and eth2 nodes have separate runners. Assuming that this situation spreads out and develops, it is conceivable that eth1 node operators running high performance hardware and MEV emulation software would create a competitive market to meet the needs of eth2 block proponents.

New Limits on MEV Search Optimization

There will still be MEV opportunities like price arbitrage and clearing in eth2, but the system where MEV extraction takes place has some new parameters that may change or introduce restrictions on MEV extraction.

The block-out time is now fixed at 12 seconds, unlike in eth1 where it is variable, and the proposer slot is assigned at the beginning of each epoch, which means that proposers have at most 6.4 minutes to compute their tasks (proposers assigned at the beginning of an epoch must have less than 6.4 minutes) [5]. This not only provides verifiers with more time to run optimal MEV extraction computation jobs on eth1 client transaction pools, but simulation and execution becomes easier due to the predictability of block-out times.

This suggests that MEV extraction may require more complex and voluminous computations if longer, more predictable time intervals are used to compute and execute MEV extraction strategies.

Leader election mechanism changes

Validators will know in advance whether they have a chance to make a block offer (unless it is the first slot of a new epoch). They can even (albeit with low probability) be the proposer of multiple blocks in a single epoch. How does the block proponent guarantee change MEV withdrawals? What about guarantees for multiple block proponents or multiple consecutive block proponents?

In particular, large verifier pools or exchanges are likely to have multiple contiguous slots in the same epoch, and when a single entity holds multiple contiguous slots and puts them into a “meta slot”, there may be multiple block MEV withdrawals, which may create a new attack vector. 6] [7]

Layer 2 Networks and Fragmentation

Most of this article assumes that the contents of eth1 blocks remain as they are now. However, the reality is that a large number of transaction flows will be moved to layer 2, and layer 1 will be used as a data availability layer, with zk-rollup and optimistic rollup submitting sequenced batches of transactions.

Intuitively, this will reduce the value that the verifier gets from MEV. However, the situation can be unpredictable, as multiple Layer 2 networks introduce additional complexity and new forms of MEV (e.g., across Layer 2 networks, between Layer 1 and Layer 2) may emerge. In addition, transaction batch ordering within eth1 may still be important in cross-layer 2 interactions.

Similarly, as eth2 evolves and slicing reaches maturity, the ordering of slices within beacon blocks will become important and MEV may become an incentive to promote interleaving of slices. 8]

Translator’s Note: The following translation of “Preliminary Exploration of MEV in eth2 (above)” has been corrected.

In the paragraph “Analysis with time and REV distribution as variables”.

Now add the average of the detected Realized Extractable Value (REV) for each block recorded in Flashbots

Changed to: Now add the average of the Realized Extractable Value (REV) to miners for each block recorded in Flashbots for each block

There is now no difference in the performance of these 3 levels without MEV extraction compared to the case with MEV extraction. This suggests that MEV extraction exacerbates the inequality brought about by the luck of the block proposal.

Replace with: The three levels without MEV withdrawals are not discernible in this chart. This suggests that MEV extraction exacerbates the inequality brought about by the luck of the block offer.

Finally, we fear that MEV will exacerbate the oligarchy in eth2 – entities with up to 32 ETH as deposits will gain wealth faster than those with less (the rich get richer dynamic).

Read: Finally, we fear that MEV will worsen the oligarchy in eth2 – entities with up to 32 ETH as deposits will get richer faster than those with fewer (rich get richer dynamic).

[4]. To learn more about pledge pools and pledge derivatives, read this article “Ether 2.0 Pledge Pools and Pledge Derivatives

[5]. https://benjaminion.xyz/eth2-annotated-spec/phase0/beacon-chain/#compute_proposer_index

[6]. If a pool has k validators out of the total number of validators N, the probability of generating an independent slot is p=k/N. The probability of generating two consecutive slots in a pool in an epoch is

Preliminary exploration of MEV in Eth2 (below)

(Because unique verifiers can now generate adjacent slots in different epochs, the probability of generating two consecutive slots will actually be slightly higher after the single epoch limit is relaxed – a minor effect for the larger k values we care about here). . If we take a similar number, N = 120k being the total number of verifiers and the largest pool (Kraken) running k = 20k of these verifier nodes, we obtain p ≃ 0.17 and p2 ≃ 0.026, or 2.6%.

[7]. Also, Vitalik mentions in this paper that there are concerns about the randomness manipulation of the continuous slot control at the end of the epoch

[8]. This study by Vitalik has more incentive for slice interleaving

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/preliminary-exploration-of-mev-in-eth2-below/
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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