The trend of MEV’s script: deadlock, armistice, or will continue to write an endless legend

The rise of miner extractable value (MEV) is shaking the foundation of the Ethereum community, and now some people call it a “crisis.” Although there is some truth to the increasingly worrying situation, it should not be shocking.

After all, MEV is a downstream product of the growth of decentralized finance (DeFi). As more financial activities trade on Ethereum, more arbitrage and clearing opportunities will follow.

Therefore, as long as DeFi can become the power engine of the global financial system one day, MEV will increase with the growth of the market size. In view of this relationship, the importance of addressing MEV and its impact is becoming more and more urgent.

The most worrying thing is that this influence is also expanding. MEV comes from the ever-increasing transfer of economic value on Ethereum. Before the rise of MEV activities, blockchain miners were rewarded with incentives inherent in the agreement: obtaining newly issued block rewards or transaction fees paid by users. The rise of MEV has created another incentive layer for miners-or more precisely block producers, which is a more profitable layer. But in the end, these miners need to mine the industry to survive. Will they really do something to destroy their foundation in order to make quick money?

crisis

MEV has been a hot topic of discussion in the past few years. In the past six months, the DeFi world has felt more strongly about MEV. However, in the past few weeks, a more extreme MEV vulnerability, especially the threat of block reorg or time bandit attacks, has made the Ethereum community quite uneasy.

The main concern of the community is that if miners can reorder transactions to extract value, there will theoretically be an opportunity for MEV, which may bring very attractive profits, enough to cover the hash power investment required for the reorganization. The Block’s wrote an excellent explanation about the reorganization drama:

In short, miners may see lucrative transactions in the new block, and then return to the chain to reorganize the block before the transaction, creating a new sequence—replace the original transaction with their own transaction to get Take the profit from it. This is also called a “time robber attack” because it is like a time travel in the blockchain.

This possible threat has long hung over all blockchains-Double Flower. But just because DeFi has experienced such rapid growth, the value of transactions is so huge that it now seems to pose an existential threat to Ethereum (and the public chain).

Obviously, this severely undermines confidence in the security and censorship resistance of Ethereum. This will deal a serious blow to the process of large capital pools entering the encryption field.

More than five years ago, the community still heard the news of DAO’s block rollback, but if the miners powering the network can thoroughly manipulate the market, there is no more shocking news than this.

The current concerns are so strong that many people in the Ethereum community have begun to draw a line with those software developers who suggest building cross-blocks to find MEV opportunities. Flashbots have clearly expressed their opposition, as have major mining pools and well-known searchers (developers who write MEV robot software). At the same time, Ethereum co-founder Vitalik wrote an article last week about how Ethereum’s shift to a Proof of Stake (PoS) consensus mechanism will mitigate these attacks because it introduces finality. A few days after the article was published, the EIP-3675 proposal appeared on the Ethereum github. This is the long-awaited transition to the PoS consensus mechanism, which is often referred to as “merger”.

The ETH2 beacon chain has been in existence since December 2020. However, due to growing community concerns about restructuring, and the possible destabilizing disaster caused by restructuring, mergers that are expected to occur within six months will accelerate. Because the impact of the new MEV reorganization software is so dangerous, the Ethereum community needs to fight back to ensure its immutability.

All of this looks like a chapter ending, but it may only be the first act of the MEV legendary drama.

Among all the concerns, there seem to be several key facts:

MEV is the foundation, and a network with economic value transfer will always have value leakage.

The public memory pool is dead, and smart traders will directly contact the miners.

This emerging model has become a huge black box for the fair distribution of value, which has shaken the transparency and permissionlessness of the blockchain.

MEV stunned everyone, but the possibility of restructuring is very low-because miners will not self-destruct the foundation.

The role of Flashbots

Flashbots are at the core of the MEV story. One of its founders, Phil Daian, discovered MEV for the first time in a seminal paper in 2019. He coined the term in this article to describe the preemptive trading activities of Ethereum DEX.

Flashbots bills itself as “a research and development organization designed to mitigate the negative externalities and survival risks brought by MEV.”

Flashbots have long realized that the Ethereum network is being blocked by bots, and they compete for liquidation or arbitrage opportunities through priority gas auctions (PGA).

Before the advent of Flashbots, if a searcher found an opportunity on the chain, setting a high gas fee was the only way to ensure the passage of arbitrage transactions, which resulted in high gas prices for everyone on the network.

Then, Flashbots appeared, which intervened between searchers and miners. Miners run MEV-GETH, which is a fork of the general GETH client, with independent communication and payment networks connecting miners and searchers. Searchers will not send MEV opportunities to public memory pools in the form of high gas fees, but will send transactions to Flashbots, which connect them to miners running MEV-GETH. For each MEV opportunity, the searcher will add a certain percentage of MEV revenue, which is distributed between the miner and the searcher.

Out of sight out of mind

The design of Flashbots bypasses the public memory pool, and the public memory pool is where most users’ transactions fall in the Ethereum block. This approach eases network congestion and reduces gas prices, because the transactions with the highest gas fees are being rerouted through Flashbots. Both miners and searchers profit, and the gas paid by other users in Ethereum also decreases. In short, a multi-win positive sum game.

This model has been greatly developed; the MEV-GETH mining software is now run by nearly 70% of the computing power of the Ethereum network. This means that Flashbots is in an extremely important position, piercing the needle between the fastest trading robot in Ethereum and the miners that power the network.

So far, Flashbots has done a good job of restricting MEV and has become a phenomenal educational resource in the industry. Other decentralized applications (DApps) and protocols also help limit MEV. Every on-chain transaction submitted through the public memory pool will trigger an opportunity for a preemptive transaction, runback, or sandwich attack.

Gradually, DApps like Archerswap allow traders to bypass the memory pool and send transactions directly to miners, just like Robinhood’s order flow payment (PFOF) system. Other options are designed to maintain permissionless public transaction submissions, but rely on some type of fair ranking system. Gnosis’s batch auction and Chainlink/Arbitrum’s fair sorting network are typical examples.

However, the question of how to “make MEV extraction popular” has not yet been answered, although Optimism hopes to auction it to “fund public goods.” Identifying and redirecting high-value network traffic is now benefiting DeFi and Ethereum, but what kind of rules will govern this new network? Will this become a dark pool of liquidity?

Trust and reputation: the cornerstone of DeFi scaling

The MEV crisis and the armistice facilitated by its diplomacy show the extent to which DeFi and Ethereum have expanded. The market value of Ethereum and ERC20 tokens is close to 500 billion U.S. dollars, and investors, traders, and miners earn billions of dollars in revenue every year. Many people have become extremely wealthy, or have received investment because of seeing the further development opportunities of Ethereum and DeFi. No one wants to kill this goose that lays golden eggs.

More importantly, the success of DeFi has made the main players in this legend—miners, developers, Flashbots and their VC investors—have become famous in the real world, instead of being unknown. These crypto giants will not engage in disruptive activities that disrupt the industry; in fact, they will act quickly to defend DeFi. Ethereum is very lucky. The beacon chain has been running for nearly 8 months without major incidents. The switch to PoS seems to be just around the corner. The MEV reorganization is much easier in PoW than in PoS.

If the Ethereum merger can proceed quickly and avoid restructuring, the question of how to restrict MEV and popularize MEV distribution will still exist, but its urgency is not as urgent as it has been in the past few months. Since the Ethereum community has unanimously rejected the reorganization, how it will solve the problem of maintaining permissionless and fair access to the network will be a point worthy of long-term attention.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-trend-of-mevs-script-deadlock-armistice-or-will-continue-to-write-an-endless-legend/
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