Does the MEV application enable the fair extraction of the value of the Ethereum network?
With the development of DeFi protocol applications, more and more complex smart contracts are deployed in the Ethereum network. The interaction process between contracts is not only complicated but also frequent. Every contract interaction hides wealth opportunities, such as arbitrage, such as Clearing and the prosperity of on-chain applications also increase the value that can be captured by on-chain transactions. These values are collectively referred to as Maximum Extractable Value, or MEV for short.
According to statistics from the MEV data website Flashbots, from January 2020 to June this year, the MEV of the Ethereum network reached 749 million US dollars, and the value extracted in the past 30 days was as high as 239 million US dollars, which has become a market that cannot be ignored.
However, miners can extract value in the network transaction process, there are front-running and trailing transactions, which often lead to too high Ethereum GAS, causing problems such as chain congestion and high transaction slippage, and affecting the experience of other users on the chain.
As a result, more and more professional developers are committed to solving the opaque and chaotic status quo in the process of miners extracting value, so as to protect the transaction interests of ordinary users. This solution even appears in the form of applications, MEV-Explore, keeperDAO , CowSwap is such an application.
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What are MEVs?
MEV is the abbreviation of MinerExtractable Value, which originally refers to the value that miners can extract.
As packers of Ethereum block data, miners have a lot of initiative. In the process of packaging blocks, they can include or exclude transactions. To sort transactions, this operation also allows miners to extract value in addition to normal transaction fees and block rewards. This value is MEV.
Currently, in the Ethereum ecology, MEV is not only extracted by miners, but also by traders who focus on DeFi, and robot operators. They obtain MEV through arbitrage strategies, and only traders are left to mine MEV for miners. The transaction fee paid in the process, therefore, the miners can get only a small part of the MEV on the chain.
DeFi traders and arbitrage robots have joined the ranks of extracting value on the chain. Therefore, 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 operation process on the Ethereum chain. There are three main roles on this blockchain network. We use a vivid metaphor to illustrate—miners are producers, mining pools are like auction houses, and users are equivalent to bidders.
Whenever a user initiates a transaction, the transaction information will be broadcast to the nodes, and each transaction is accompanied by a handling fee, which is the GAS fee. The fee represents the willingness of the user to purchase block space, enabling his transaction to be included in the block. The mining pool will distribute these transaction information to the miners, and the miners will give priority to packaging transactions with high gas fees in order to pursue profits.
At this time, transaction users will pay high gas fees in order to make their transactions prioritized. This behavior is called "Priority Gas Auction", or PGA for short.
Before the prosperity of DeFi applications, Ethereum operated in an orderly manner in block order in this way, and the MEV value on the chain was concentrated on the miners. With the explosive growth of DeFi protocols, the combination and interaction of smart contracts such as over-collateralized lending, AMM, yield mining strategies, and derivatives are becoming more and more complex. The Ethereum network no longer only supports transfer transactions on the chain, and more and more values can be captured. Every interaction of smart contracts hides huge wealth, and MEV becomes richer.
In the DeFi field, MEV is mainly produced in two main scenarios: arbitrage trading and liquidation.
Arbitrage trading - Take Uniswap as an example, when there is a slippage in a large transaction on the DEX, if there is an arbitrage opportunity worth $10,000, DeFi traders or robot arbitrageurs will capture this information and execute the arbitrage trade. They submit this transaction to the miners. In order to allow the submitted transactions to be packaged and processed by the miners, they usually offer a high price of GAS, even if it is worth 3,000 US dollars. At this point, the remaining $7,000 is MEV that can be withdrawn by DeFi traders or robot arbitrageurs. And the $3,000 GAS fee is the MEV that the miners got in this transaction.
Arbitrage opportunities not only exist in the scene of large-value transactions, but also between different DEXs. For example, when ETH/SHIB has different prices on Uniswap and Bancor, arbitrageurs will move bricks between the two DEXs , so that the price will eventually converge.
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There are many pain points in the MEV market
The unfair distribution of benefits brought about by the preemptive behavior
On the current Ethereum network, those who capture MEV mainly include DeFi traders, arbitrage robot operators, and ordinary users. They are all MEV searchers, looking for profit opportunities in various contract interaction scenarios on the chain.
If a DeFi trader finds an arbitrage opportunity on Uniswap and submits the transaction to the miners, but since the data on the chain is public, everyone can monitor the arbitrage transaction information submitted by the trader. When the value of MEV is very considerable , searchers, including miners, may "preemptively" with a higher gas fee - copy this transaction information, and "take a free ride" with a higher gas fee.
As a result, a scene of bidding for this arbitrage opportunity with gas fees appeared, which seemed very unfair to the first trader who discovered the arbitrage opportunity. If he could not afford a higher gas fee, then he found this "treasure "It can only be handed over to the "rich people".
Excessive GAS fees waste block space
OK, if you think that DeFi, which advocates the freedom of transactions, should follow the market (conglomerate) field (forest) law of survival of the fittest—once MEV is found by searchers, it is necessary to submit this income with high gas fees as soon as possible to compete for opportunities.
Think about what the miners would do? The biggest possibility is the transaction that packs the most money (gas fee). This will cause the problem of reduced block space due to priority packaging. At this time, the network may become congested, and the gas fee for on-chain transactions will also be raised.
sandwich sandwich
In addition to the above-mentioned problems, there will also be a controversial profit-making method of "sandwich attack" in the large-amount DEX trading scene. Some "scientist" traders with more scripting skills profit by sandwiching a target trade between two specific trades.
Also take Uniswap's AMM-style exchange scenario as an example. If ETH is worth 1,000 US dollars, user A buys ETH with 1,000 USDT, and scientists are eyeing A. He constructs a transaction to buy ETH with 1100 USDT before A; if A wants to make a deal, he needs to buy ETH with more USDT, such as 1150USDT. At this time, the scientist sells ETH, thereby earning a price difference, while real trading users have to bear greater slippage losses.
Miner Dual Role Challenge
In the Ethereum ecosystem, the main income of miners consists of four parts: block rewards, uncle block rewards, transaction fees, and MEV revenue. Did you discover it? As a miner who handles the order of transactions, he has the opportunity to be both a referee and an athlete.
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Applications that solve MEV pain points emerge
When the order of transactions on the chain and even network efficiency are disadvantaged by the abundance of MEV, some developers try to solve the pain points through some solutions.
MEV-Explore browser
MEV-Explore is a real-time information panel and browser for Ethereum MEV transactions. It is used to display MEV value, classification, latest MEV transactions, MEVGas consumption and other related information. The website data is updated every 3 hours. This app is designed to help the community understand and quantify MEV to observe its impact on the Ethereum network.
MEV-Explore was developed by Flashbots, an organization that specializes in Miner Extractable Value (MEV). Since MEV exists objectively and cannot be avoided, Flashbots hopes to establish a MEV benefit distribution order 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 Ethereum users, ordinary trading users will not feel the existence of MEV even if they have suffered a rush or sandwich attack. Understanding it requires a lot of data analysis and an in-depth understanding of smart contracts. Flashbots hopes that MEV-Explore can make MEV activities transparent and reduce information asymmetry. At the same time, it hopes to quantify MEV, have measurement indicators and visualize these indicators.
For the high gas fee in the process of extracting MEV, the solution proposed by Flashbots is MEV-Geth. Simply put, it is to isolate MEV transactions and use exclusive channels to conduct transaction auctions for miners and searchers. The popular understanding is to move these transactions to Off-chain to alleviate excessive gas fees and congestion on the chain.
Alchemist Solutions
Alchemist (MIST) launched the first decentralized exchange mistX based on Flashbots technology, known as the first FlashDEX, mainly to solve the problem of front-running, and to protect ordinary users from front-running attacks and sandwich attacks during the transaction process. If the anti-running fails, there is no need to pay any fees.
This means that on mistX, your transaction will either be successful without front-running the transaction, or you will not need to pay any fees. Unlike traditional on-chain transactions, not only are they facing pre-emptive transactions, but they also lose the submitted GAS fees.
The mistX transaction declares that no gas fee is required for the transaction, and the gas price of all transactions is 0. But this does not mean that there is no handling fee, but the payment method is different from the traditional transaction method - mistX users pay tips to the miners during the transaction process, and these tips are paid in ETH. If the transaction contains ETH, the consumption will be included in the transaction; if there is no ETH in the transaction, then it needs to be deducted from the ETH in your wallet.
In simple terms, there is no gas fee for transactions, but a certain percentage of tips will be deducted from each transaction. The most important point is that there is no fee when mistX cancels a submitted transaction.
The unique feature of mistX is that it uses the solution proposed by the Flashbots organization to bundle user transactions together. That is to say, the mistX transaction information will not be released to the public pool, which effectively hides the information from the front-runners, thereby preventing the transaction from being manipulated, or being front-runners, or being caught in the middle.
KeeperDAO Solution
KeeperDAO (ROOK) aims to maximize the interests of DeFi users and transaction searchers (Keepers). This approach also emphasizes that it does not protect the interests of miners.
KeeperDAO has created a fund pool specifically for arbitrageurs: anyone can borrow money from this fund pool for arbitrage and get a part of the arbitrage proceeds.
It is equivalent to an on-chain liquidity underwriter. Liquidity providers deposit funds into the fund pool, and arbitrageurs or liquidators (Keepers) will use the funds in the liquidity pool to capture on-chain arbitrage opportunities. When an arbitrage opportunity occurs, the arbitrageur will borrow the funds in the liquidity pool in the form of a flash loan, and return the principal to the liquidity pool after the arbitrage is successful, and the proceeds of the arbitrageur will be deposited in the community pool and wait for distribution Incentives, users who provide liquidity will also receive the native token ROOK as a reward.
Throughout its arbitrage or liquidation process, the main challenge Keeper faces is to submit the PGA auction of the arbitrage transaction process. For example, when you capture an arbitrage opportunity, in order to let this transaction be packaged by the miners first, you will be faced with whether to offer a high price Gas fee auction transaction order. If a high gas fee is provided, and in the endless chaos of gas fee competition, the profits of arbitrageurs are much less than the original profits.
The beneficiaries are always the miners who control the transactions, and they can obtain the maximum value of MEV. If high gas fees are not provided, will the transaction be snatched away by competitors? In order to avoid this situation, KeeperDAO encapsulates this transaction through a special smart contract to eliminate MEV.
That is to say, when an arbitrage opportunity arises, the keeper (Keeper) submits it to KeeperDAO to let it analyze whether there is an arbitrage opportunity (through front-running or trailing trading). If there is an arbitrage opportunity, KeeperDAO gets arbitrage and liquidation priority, and at the same time reduces the risk of Ethereum miners controlling the ordering of transactions to obtain MEV value. After the transaction is completed, KeeperDAO rewards the searcher with ROOK.
Although the Keeper gains less profit, the loss is less than the GAS loss of the PGA competition. This is a win-win for KeeperDAO and Seekers.
At present, users can obtain income by providing the liquidity of ETH, WETH, USDC, renBTC, DAI and other fund pools. The initial supply of ROOK is 1 million. As of June 9, its market value is 210 million US dollars, the temporary quotation is 179 $, and there are 18,777 currency-holding addresses.
ArcherDAO Solutions
ArchrDAO (ARCH) aims to increase the income of miners, hoping to provide high-value on-chain trading opportunities (such as arbitrage/clearing) through joint strategy providers, and then reorder transactions on Ethereum to increase miners' income and optimize trader experience .
There are three main roles in the ArcherDAO ecosystem, namely strategy provider, miner, and liquidity provider. The latter two are easier to understand, and the strategy provider is the party that discovers and submits profit opportunities on the chain, these opportunities include arbitrage in DEX, loan liquidation and other opportunities.
After the ArcherDAO system evaluates these income opportunities, it will send high-value opportunities to miners, who will pack them into blocks and generate income.
On the whole, ArcherDAO is a platform that allows arbitrageurs and miners to cooperate directly. By combining strategy providers and miners, they can use profitable opportunities on the chain to bring new sources of income to miners. Different from the PGA solution, ArcherDAO allows arbitrageurs and miners to cooperate to maximize the benefits of MEV and avoid wasting gas fees for arbitrage.
CowSwap scheme
CowSwap uses batch auctions to resist MEV attacks, and integrates various decentralized exchanges as liquidity sources to provide traders with the best prices.
CowSwap uses a unique CoW (Coincidence of Wants) method to match transactions. When both parties to the transaction own the assets that each other needs at the same time, the two parties can conduct the transaction directly without going through a monetary medium, which can be understood as a "barter transaction" on the chain.
That is to say, when a batch of transactions occurs, CowSwap first matches orders for traders off the chain, and if it does not find a matching demand transaction, it submits the transaction to other DEXs on the chain.
On CowSwap, two people hold the assets they want at the same time, and they can directly match transactions without the need for market makers or liquidity providers to match transactions. In this way, since it can bring the best price to individual traders, it also avoids the handling fees generated by market makers or liquidity providers.
CowSwap requires external liquidity on the chain, so it adopts the method of batch orders and settles at a uniform price. All orders are priced the same, there is no transaction ordering issue, so no value can be extracted by ordering transactions into a specific order, essentially exempt from the MEV situation.
