Value Extraction on Ether: Introduction and Projects

One of the main reasons why the DeFi space is so vibrant and innovative is that people can write flexible smart contracts on Ether and create cryptocurrency building blocks with composability.

One of the main reasons why the DeFi space is so vibrant and innovative is that people can write flexible smart contracts on Ether and create cryptocurrency building blocks with combinability.

However, due to the complexity that comes with combining these building blocks, blockchain miners have the opportunity to extract value by culling transactions, packaging transactions, or reordering transactions when creating blocks. This is known as MEV (Miner Extractable Value). In the future, as more transactions are made across chains, the complexity will only increase.

To better understand MEV, let’s take a simple example: on an automated market maker platform such as Uniswap, a single large trade will often lead to an imbalance in the price of the liquidity pool, creating an arbitrage opportunity. Say you see this opportunity and send an arbitrage trade with a gas price of 80 Gwei. At that point, the arbitrage bot notices your trade and sends an identical trade, but sets the gas price to 120 Gwei, allowing its trade to execute ahead of yours. In the end, you either end up buying at a higher price, or you miss the arbitrage opportunity altogether. This type of MEV activity is common and is known as a pre-emptive trade.

Value Extraction on Ether: Introduction and Projects
  • Exponential growth in MEV (Source: Flashbots Dashboard) –

According to Flashbots’ data tracking dashboard, MEV has accumulated $559 million. MEV has the potential to be one of the biggest narratives going forward as the volume of transactions in the DeFi space increases. If left unaddressed, MEV will create an even bigger problem. In this article, we will introduce some projects that are working to solve the MEV problem.

  1. Flashbots
    Flashbots is an open source research and development organization. They are dedicated to building tools that allow everyone to analyze and access MEV. theoretically, MEV is often present in any complex trading environment that requires significant knowledge of smart contracts to understand. flashbots reduces complexity in three ways.

Providing tools to explore and quantify the impact of MEV – this helps reduce information asymmetry and allows for a better understanding of MEV issues and their impact. (MEV-Inspect)

Democratize MEV extraction – Given that the power to extract MEV is concentrated in the hands of a few, Flashbots provides tools to everyone that can extract MEV. (MEV-Geth)

Redistribute MEV revenue – Currently, miners and validators are the largest beneficiaries of MEV. Therefore, it is important to redistribute the proceeds among all participants.

Flashbots are mentioned whenever there is a discussion about MEV. Flashbots have played an important role in drawing public attention to the MEV issue and will continue to do so in the future.

  1. KeeperDAO($ROOK)
    To take advantage of arbitrage and clearing opportunities on decentralized exchanges and derivatives platforms, you need to have the resources to consistently seek out these opportunities and the capital to take advantage of them when the time comes. keeperDAO has created a pool of money specifically for arbitrageurs: anyone can borrow money from this pool to arbitrage and receive a portion of the arbitrage proceeds. keeperDAO There are two types of stakeholders in the ecosystem: managers and liquidity providers. The manager adopts strategies to take advantage of arbitrage and liquidation opportunities, and the liquidity provider funds these opportunities.

Let’s take an example to understand how KeeperDAO works. Suppose you notice an arbitrage opportunity and you can get a zero-interest flash loan from the KeeperDAO pool of funds. You take this loan and execute an arbitrage/rebalancing trade. Once the arbitrage is successful, the principal and proceeds are returned to the agreement. The agreement issues you a share of the proceeds in the form of $ROOK tokens (KeeperDAO’s native tokens). Lightning loans are a special class of instant loans with zero pledge, where the loan is returned to the pool within the same transaction.

But are lightning loans safe? In most cases it is safe. The funds lent must be returned to the pool within the same transaction, and if the lender does not follow this rule, he or she will not get the loan. I emphasize “in most cases” because there is smart contract risk with any DeFi application. If you come from a traditional finance background, then this may all seem a bit ridiculous to you. If you want to learn more about lightning loans, you can watch this video.

  1. Secret Network ($SCRT)
    Blockchains like Etherscan are public, which means that anyone can view all Etherscan transactions on etherscan. Secret Network solves these problems by giving privacy to smart contracts. These private smart contracts are called Secret Contracts. A platform built on Secret Network (using its native token standard SNIP-20) encrypts all transaction information to provide complete privacy.
Value Extraction on Ether: Introduction and Projects
  • –
    Doesn’t that sound great! But how does this help solve the MEV problem?

Take the example of Secret Swap, a platform based on the Secret Network, which is a cross-chain automated market maker. However, unlike other automated market makers, the input, output and status of all transactions on the Secret Swap platform are encrypted to avoid leaking any transaction information to the outside world. This effectively prevents miners from reordering transactions within blocks based on transaction fees, and also protects against robocall attacks from evil doers.

Secret Network has two tokens within its ecosystem, $SCRT and $SEFI, in which the gas fee for transactions is paid in the form of $SCRT tokens, which are used to incentivize network validators. The $SEFI is a governance token whose holders can create and vote on proposals to determine the direction of the Secret Network ecosystem. secret Network also provides cross-chain bridges to support the circulation of multiple assets in its ecosystem. Overall, Secret Network has an ambitious vision and aims to enable everyone to build applications on top of it. I’m excited to see how the Secret Network ecosystem will evolve in the future.

  1. ArcherDAO($ARCH)
    Both Secret Network and KeeperDAO are dedicated to eradicating the MEV problem, but ArcherDAO does the opposite by helping miners get harmless MEV. by providing trader-friendly MEV trading, ArcherDAO enables positive-sum gaming, allowing miners to profit without sacrificing traders. ArcherDAO builds on and optimizes the existing Flashbots trading reorder system, allowing miners to arbitrage without hurting traders.

It takes miners just 5 minutes to integrate ArcherDAO and leverage sustainable MEV to boost their earnings. eip 1559, once implemented, will dramatically change the way trading is done in the ecosystem. Of the transaction fees paid in ETH, the base fee portion will be destroyed to reduce the supply of ETH, and the tip portion will be paid to miners as compensation. By identifying MEV on the chain, ArcherDAO provides a sustainable source of risk-free income for miners and will play an even more important role in the future.

Value Extraction on Ether: Introduction and Projects
  • Archer Swap –
    ArcherSwap is a demo of the ArcherDAO product that allows users to use liquidity from Uniswap/Sushiswap to execute zero-gas-fee, zero-slip arbitrage trades and pay miners a small tip. ArcherDAO hopes to soon partner with Sushiswap and ArcherDAO hopes to start working with Sushiswap and 1Inch soon. Projects like ArcherDAO are interesting because they are compatible with the KeeperDAO ecosystem’s manager strategy. Vitalik Buterin recently unleashed a massacre on SHIB and ELON coins, using ArcherDAO to dump ELON coins after his first deal fell through (and what better endorsement than one that Vitalik Buterin himself has used! ArcherDAO’s future development is worth watching.

Expanded Reading
MEV is a tricky problem. I expect many projects will work together to solve this problem in the future. Since MEV is a technical problem, it may be difficult for those who don’t understand the inner workings of smart contracts to understand it. Here is some material to understand MEV (with increasing difficulty).

Enter the Dark Forest: the terrifying world of MEV and Flash bots

MEV and Me

Ethereum is a dark forest

FlashBoys 2.0

Please note that the projects discussed above are not exhaustive, as there are other projects such as Chainlink that also address MEV. However, this article is intended to give the reader a deeper understanding of what MEV is, how important it is to solve the problem, and how some projects are solving it. If you find this article helpful, you can follow me on Twitter where I will present the main narrative of the cryptocurrency ecosystem in an easy-to-understand way.

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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