Analyzing how to face Ethereum MEV gracefully?
Recently, ATA and EDEN have exploded, and the topic of MEV (Miner Extractable Value) on Ethereum has also continued to become popular. How to solve this problem has caused huge controversy in the community. So what are MEVs?
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Should an arbitrageable MEV exist?
What the MEV auction will auction is the "sorting" ability among the two abilities of miners: in the future, miners will only be responsible for "whether to choose transactions to enter the block", and will no longer control the order of transactions in the block. The real solution to this problem is not to encourage professional Front Run auctions for this ability, but to design a mechanism to "prevent" anyone from arbitrarily arranging the order of transactions. This is the so-called fair ranking problem.
In Arbitrum's plan, such a "fair ordering" will be introduced in Arbitrum Layer2. The actual details are still unclear, and basically a single orderer will determine the ordering of all transactions. Fair sorting is the real solution to this problem. In addition to the latest Layer 2 solutions that will introduce fair sequencing designs, oracle projects such as ChainLink can also solve fair sequencing problems through centralized sequence roles.
Is MEV really that bad for Ethereum? It depends on which role you are in for Ethereum transactions. Since January 2020, miners have "squeezed" nearly $750 million in value from Ethereum users. Due to the Ethereum Virtual Machine (EVM) mempool design, MEV-style value extraction is performed by miners who have the sole authority to organize transactions within a block.
The MEV "Dark Forest" presents two intertwined problems:
1. DeFi users are constantly suffering from various types of MEV problems, such as front-running attacks that eventually make users' transactions fail even though they pay to execute them.
2. Even if a transaction tries to prevent possible protocol vulnerabilities, it can still lead to bigger problems because the very existence of the transaction indicates to others the weakness of the protocol.
In short, every transaction on Ethereum submitted to the chain is monitored for the possibility of exploiting it. In the dark forest, there is often an adversarial relationship between Ethereum mainstream community users and miners. The most common form of MEV users is front-running. Front-running occurs when one party acts on information about a trade that has been confirmed but has not yet been executed and uses this information to pre-execute its trade advantageously.
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How to solve Ethereum's MEV problem?
Not all hope is lost. MEV will not disappear unless Ethereum designs resilient components for users. Solving this problem requires critical infrastructure and the right DeFi tools. The current transition of Ethereum to proof-of-stake is unlikely to solve the MEV problem, because changing the core protocol of Ethereum requires a very high consensus, which is likely not to happen.
But DApps or users can fight MEV in many ways, the most realistic way is to have a transaction mechanism or protocol that enforces batch auctions. A batch auction or batch trade is when an exchange's order book centralizes orders for a time frame, with the goal of executing all trades within the batch at the same time. This is a price discovery mechanism used to correctly price token pairs at the same liquidation price for each block.
In traditional markets, lot auctions are used during market opening to process all orders placed during non-market hours. In DeFi, batch auctions help to execute a large number of transactions simultaneously in the same block. In systems where miners or validators have the power to reorganize transactions, batch auction settlements can disempower them. This is because batch settlement forces miners to execute transactions regardless of their order size. In the batch auction mechanism with a unified clearing price, the order of transactions cannot change the price.
Submitting off-chain orders via signed messages is a new way of doing transactions that wasn't widely used before. DApp users do not need to submit an order on the chain to take effect. Instead, they can submit off-chain orders by signing transactions with order preferences.
Since the order is off-chain, transactions are not sent individually to the mempool until they are later sent and settled in one go via batch auction settlement transactions. This means they can all be settled in the same batch, which increases the difficulty of replication and makes reorganization of transactions irrelevant since all transactions have the same price regardless of order.
At the same time, off-chain orders could allow the protocol to not rely on transaction routing, so that even if a miner is able to obtain signed messages and try to exploit them, it has nothing to do with the miner. Since the protocol does not force users to be bound to a specific transaction path, it can focus on getting better prices rather than the fastest execution of trades.
A protocol with a price-seeking mechanism based on batch auctions, uniform clearing prices, and coincidence of demand (CoW) can provide its users with the best level of MEV protection to date. (Demand coincidence refers to an economic phenomenon in which two parties each hold items that the other wants, so they can exchange those items directly, without the need for a third party to provide liquidity to facilitate the transaction.)
On a deeper level, this means that if the protocol uses a batch auction instead of a constant market maker design, they can provide users with the opportunity to settle transactions directly based on CoW. Thus, such a protocol could optimize prices based on the different orders received in each batch, thereby always being able to offer traders the best price while protecting them from MEV. As I mentioned before, batch auctions could also allow protocols to establish a uniform liquidation price, which, along with CoW, could help shield users from MEV.
This protection comes from the fact that the protocol does not match transactions with liquidity on external chains. In other words, in the case of COW, the protocol does not require automated market makers (AMMs) to execute on-chain transactions to make the transactions liquid. Furthermore, if CoW cannot be found, a uniform liquidation price in a batch auction makes the transaction order of the auction irrelevant, as all transactions for the same token pair receive the same settlement price, thus eliminating the opportunity for MEV participants to restructure transactions to increase the possibility of value extraction.
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Notable Project Comparisons
1.Gnosis Protocol
Gnosis Protocol utilizes batch auctions to provide MEV protection and integrates with liquidity sources across DEXs to provide traders with the best prices. Gnosis V2 is the missing DeFi component required by the Ethereum infrastructure. It allows users to enjoy the benefits of MEV protection because it was built with three important factors in mind. Make it stand out from other protocols:
1) Access to on-chain liquidity and strictly prevent malicious behavior.
2) Off-chain orders via signed messages.
3) A pricing mechanism based on batch auctions with a unified clearing price and COW.
Gnosis V2 solves the MEV problem by leveraging its batch auction mechanism, combined with off-chain order placement and access to on-chain liquidity on Ethereum. In GPv2, when two traders each hold an asset the other wants, orders can be settled directly between them, without the need for external market makers or liquidity providers. This results in better prices for traders as it reduces spreads.
Only overorder amounts that cannot be settled directly with other GPv2 traders are sent to the underlying AMM (Automated Market Maker). Ultimately, the batch auction mechanism settles orders on the protocol in consecutive, repeating batches whose size is limited only by gas blocks. Each batch enforces a uniform liquidation price, meaning that all orders executed within a given batch receive the same priced asset as other orders. Guarantee that they will get the same or better price than other existing DEX.
These unique design qualities of GPv2 provide traders with MEV protection in both cases:
1) If GPv2 discovers CoW, there is no need to use other sources of on-chain liquidity to settle transactions, because the liquidity itself is within the batch. Since transactions cannot be replicated using other mechanisms such as transaction ordering, the possibility of MEV attacks is completely eliminated. Due to GPv2's uniform clearing price, transaction outcomes within a batch do not depend on relative order.
2) If GPv2 doesn't find CoW, it goes to the on-chain liquidity pool that provides the best price for auction settlement, and since Gnosis Protocol V2's solver enforces strict slippage, it's harder for MEV participants to copy trades because Transactions are unprofitable for them, and only authenticated solvers can submit batch settlement solutions.
2.Automata Network
Automata Network focuses on the design of MEV mechanism on anonymous transactions. Automata believes that a completely anonymous design is the only long-term solution. This ensures that no participant with privileged access can observe and thus influence how transactions are settled on-chain.
They designed a "conveyor belt" mechanism to ensure that orders are placed in first-in-first-out order and prevent block producers from front-running transactions, specifically: they inject new transactions into the conveyor (conveyor belt), and due to signature mismatches, no one Both can detect queue-jumping transactions that bypass Conveyor. Unless all block producers collude to censor the broadcast transaction at the same time, there is no way to delete the transaction. At the same time, user data will not be known to any third parties including Automata and node operators.
In essence, it is more like a tool for private transactions and anonymous voting. As a middleware layer, Automata Network can quickly and seamlessly link platforms and applications, with the goal of providing privacy services for the entire Web3 ecosystem. In addition, compared with Gnosis Protocol, private transactions will not become the first choice of mainstream DeFi at the current stage, and at the same time, in terms of user-friendly experience, its integration surface is unlikely to surpass Gnosis Protocol in the future.
3.Eden Network
Eden Network is an MEV-resistant network integrated with Flashbots. Flashbots is a research and development organization founded with the intention of mitigating the problems caused by "miner-extractable value (MEV)". The block structure of the currently designed Eden Network is divided into four layers according to the order of transactions: Slot Tenant (slot tenant), Transaction Bundle (transaction bundle), Staked EDEN (pledged EDEN transaction), and public pool.
The essence of Eden Network design is to affect the transaction itself, which is not friendly to individual terminal users. Participants in the first three slots of Eden Network are called "slot tenants". In blocks mined by Eden Network, transactions of slot tenants will be placed at the forefront. So in essence, there is no design to get rid of the prioritization right. Eden Network has reached cooperation with multiple mining pools. Although it can improve the MEV problem, the premise is to establish cooperation with large mining pools or leading projects to build its own ecological moat. In essence, it complicates the transactions of Ethereum, although large-scale projects such as SUSHI do not need to worry about sandwich attacks and front-running transactions when conducting transactions. But the premise of all this is that the block is mined through the mining pool integrated with Eden Network.
This "clear fairness, secret intermediary" approach actually created another centralization obstacle virtually. Only users who pledge EDEN can obtain faster transaction speed, and the pledged tokens will not be destroyed. Of course, if you don’t want to speed up the transaction and just want to resist MEV, you can also set up Eden RPC in the MetaMask wallet, and then all transactions will be broadcast through the Eden private network. This approach is a bit similar to Taobao Mall. Although the original intention is to solve the trade problems of small and medium-sized businesses, it has created a barrier invisibly-Alipay. The author does not quite agree with the Ethereum community's high efficiency and the spirit of fairness and civilian values.
Summarize
Summarize
The entire MEV topic will always be a continuous debate. Whether it will be more intense in the next stage and whether someone will put forward new ideas are all issues worthy of everyone's attention. This is a very highly academic debate. At the consensus level, the Ethereum community has successively proposed some very eye-catching proposals to solve the MEV problem. It can be said that the above solutions are all temporary choices. In the future, with the intelligent contributions of the Ethereum community, MEV is bound to be resolved at the consensus level .
MEV is a growing problem for Ethereum, but it can be mitigated for now. The author believes that protocols focused on batch auctions have these characteristics and can help DeFi automated market makers fight MEV. As investors, we need to ensure that only those DApps are used that have the interests of their users at heart and allow them to coordinate transactions in a smarter and more efficient manner.
