An article to understand the Ethereum MEV crisis

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc), Author: Alex Obadia, Compiler: Free and Easy, released with authorization.In this article, we will introduce the background and motivation of the project, while the technical details of the solution can be found at

ethrearch forum

found on

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Miner-extractable value (MEV) literally refers to the profit value that a miner (or validator, sequencer, or other privileged protocol participant) can gain through the ability to include, exclude, or reorder transactions.

MEV includes regular profits from transaction fees and block rewards, as well as unconventional profits for miners through transaction reorganization, transaction insertion, and transaction censorship.

However, the term MEV can be somewhat misleading, as one might think that only groups of miners are extracting the value. In fact, the MEV on Ethereum today is mainly obtained by DeFi traders through structural arbitrage trading strategies, while miners indirectly profit from the transaction fees of these traders. An example of such a structural arbitrage opportunity is the Uniswap price arbitrage trade: when assets in a Uniswap pool are mispriced, a profit opportunity is created, and traders then arbitrage the price of the Uniswap pool with prices on other trading venues. smooth. Of course, instead of asking traders to pay a fee for arbitrage, miners can also implement this arbitrage strategy themselves to maximize profits.

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MEV crisis

Traders on the Ethereum platform need to pay gas fees to miners to include their transactions in blocks. Miners, as economically rational participants, will choose the transaction with the highest gas price and sort it according to the gas expenditure of the generated blocks. The financial system built on Ethereum creates many "pure" profit opportunities, such as liquidation and various arbitrage.

However, these opportunities are limited and contingent, and therefore, traders compete with each other for these opportunities. Now, this competition is mainly through frontrunning and backrunning:

"Front-running transactions (also known as priority gas auctions (PGA): for example, if the gas price broadcast by a transaction A is higher than the gas price of another transaction B waiting to be confirmed, then transaction A must be confirmed before transaction B .)

An example of this would be snatching a Uniswap price arbitrage trade to rebalance a pool of assets.Backrunning: The broadcast price of transaction A is slightly lower than the gas price of another transaction B waiting to be confirmed, so that transaction A can be included in the same block following transaction B.An example of such an application would be executing a DyDx liquidation transaction after a price oracle update triggers a DyDx loan with a lower than required collateralization ratio. "

Unfortunately, both front-running and trailing transactions are inefficient and lead to negative externalities such as network congestion (i.e. p2p network load) and blockchain congestion (i.e. block space usage). In addition, this competition for MEV opportunities can lead to instability in the security of Ethereum consensus, because it will create

1. time warp attack

2. incentives, and a permissioned communication infrastructure between traders and miners. Such an infrastructure undermines the neutrality, transparency, decentralization, and permissionless nature of Ethereum today.

3. While these risks and negative externalities are nothing new, we found that they could lead Ethereum down a different path. A series of events in the past 6 months has brought the use of the network to a tipping point:

4. ever-increasing contract interactions (i.e., transactions on Ethereum have become more complex than before, which increases the sheer amount of MEV available for arbitrage);

5. The market cap of tokens on the Ethereum platform exceeds the market cap of ETH (i.e., the MEV revenue of ERC-20 tokens starts to compete with transaction fees paid in ETH);

Adoption of generic front-running bots (i.e. indicators of increased complexity for MEV extraction);

Adoption of permissioned mempools (i.e. another indicator of MEV extraction complexity);

These events show that the expected risks and negative externalities are accelerating.

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1. Mitigating the MEV crisis

2. Flashbots is a research and development organization that aims to mitigate the negative externalities and risk impact of MEV on smart contract blockchains. The organization proposes a permissionless, transparent and fair MEV extraction ecosystem that maintains the core properties of Ethereum.

3. This approach to mitigating the MEV crisis can be broken down into three parts:

light up the dark forest;

democratized extraction;

distribute benefits;

In our opinion, all three components are necessary for the success of flashbot. 1. Light up the dark forest MEV is currently opaque to Ethereum users. It requires a lot of data analysis and a deep understanding of smart contracts, because it involves multiple meta-layers (users, traders, front-runners, miners) complex and sometimes obscure adversarial trading games.

This problem will only get worse as more and more security-critical infrastructure is off-chain, and as the chain grows in state and size, it becomes increasingly difficult to take advantage of one of the original promises of cryptocurrencies: transparency . By illuminating the dark forest, we aim to uphold this original promise. More practically, our goal is to objectively assess the negative externalities of the MEV crisis and the impact of Flashbots technology, and quantify the harm MEV withdrawals cause to users, in order to provide builders with the tools to reduce the impact their dApps suffer from MEV withdrawals .

The first step in illuminating a dark forest is quantifying its impact, and to this end we built MEV-Inspect, which scans Ethereum blocks and visualizes MEV metrics over time. We use it to better understand the MEV ecosystem and make it available to the community to remove information asymmetries.

2. Democratized withdrawals MEV withdrawals may move towards a concentration of a small number of participants, for example, limited to permissioned dark trading pools with access to large amounts of computing power, or through unilateral off-chain transactions between large traders and miners .

This concentration of power and capital is a key point of security weakness, and it erodes Ethereum's core properties: permissionlessness and decentralization. We believe that without the adoption of a neutral, open, open-source code infrastructure for permissionless MEV extraction, MEV risks becoming a game for the few. By democratizing MEV extraction, we aim to ensure that low-level financial primitives are equally accessible to any participant, and that core Ethereum properties are preserved.

Fundamentally, MEV-Geth creates a more efficient communication channel between miners and traders bidding on transactions. However, it should still be noted that the MEV-Geth proof-of-concept client is still subject to further testing and verification. If it is widely adopted, it may effectively alleviate the network and blockchain caused by front-running and following trading bots. congestion situation.

3. Distribution of benefits MEV involves the entire Ethereum ecosystem, including miners, traders, DeFi developers, and the most important Ethereum users. According to the researchers' preliminary research, MEV extraction currently has certain benefits for both arbitrage traders and miners. As the scale of MEV extraction continues to expand, we expect that some value will need to be redistributed to users and system stability.

We believe that for Flashbots and the community we work with, we must have a thoughtful redistribution of value to maximize community benefit. This is especially true given the inherently dangerous economic incentives of MEVs mentioned above.

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• About Public Commitment

• Flashbots originated from the MEV-Pi-Rate-Ship, a neutral, interdisciplinary research collective that supports theoretical and empirical research related to MEV. As an open research organization, Flashbots will work on:

• Maintain Ethereum’s core values ​​of openness, permissionlessness, and decentralization in response to the upcoming MEV crisis;

Open up our research and Flashbots code infrastructure so any community member can contribute and benefit;

Create sustainable alliances among key players in the ecosystem by considering the needs of users, miners, developers, node operators, public infrastructure operators, contract/dapp developers and ecosystem researchers;

Contribute to research in the field of MEV and publish 100%;