How to solve the pain points of MEV? Speaking from MEV-Explore, keeperDAO, ArcherDAO, etc.

Time:2021-12-25 Source: 1166 views DeFi Copy share

With the development of DeFi protocol applications, more and more complex smart contracts are deployed in the Ethereum network. The interaction process between contracts and contracts is not only complicated and frequent. Every contract interaction hides wealth opportunities, such as arbitrage. Liquidation and the prosperity of on-chain applications have also increased 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 U.S. dollars, and the value extracted in the past 30 days was as high as 239 million U.S. dollars. It has become a market that cannot be ignored.

  However, in the process of network transactions, miners can extract value. There are preemptive and trailing transactions, which will often lead to too high Ethereum GAS, causing problems such as chain congestion and high transaction slippage, which affects the experience of other users on the chain.

  As a result, more and more professional developers are committed to solving the opaque and disorderly status quo in the process of extracting value by miners to protect the trading interests of ordinary users. This solution even appears in the form of applications, MEV-Explore, keeperDAO , CowSwap is such an application.

  This issue of DeFi Cellular will bring a review of MEV and its related applications.

What is MEV?
  MEV is the abbreviation of MinerExtractable Value, originally referring to miners' extractable value.

  As the packager of Ethereum block data, miners have a lot of initiative. In the process of packaging blocks, they can include or exclude transactions, and order transactions. This operation also allows miners to extract value in addition to normal transaction fees and block rewards. This value is MEV.

  At present, in the Ethereum ecology, MEV is not only withdrawn by miners, but also by traders who focus on DeFi, as well as robot operators. They obtain MEV through arbitrage strategies, and only traders are left to mine MEV. The transaction fees paid in the process, therefore, the miners can obtain 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 the Miner Extractable Value (Miner Extractable Value). It has undergone a word change and becomes the Maximum Extractable Value (Maximum Extractable Value). .

  Before understanding MEV, one needs to understand the operation process on the Ethereum chain. There are three main roles on this blockchain network. We use an image 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 node, and each transaction is accompanied by a handling fee, which is the GAS fee. The fee represents the user's willingness to purchase the block space, so that his transaction can be included in the block. The mining pool will allocate these transaction information to the miners, and the miners will prioritize the packaging of transactions with high GAS fees in order to pursue revenue.

  At this time, transaction users will pay high GAS fees in order for their transactions to be processed first. This behavior is called "Priority Gas Auction" (Priority Gas Auction), abbreviated as PGA.

  Before the prosperity of DeFi applications, Ethereum operated in an orderly manner in block order, and the value of MEV on the chain was concentrated on miners. With the explosive growth of DeFi agreements, the combination and interaction of smart contracts such as excess mortgage lending, AMM, income mining strategies, derivatives, etc. have become more and more complex. The Ethereum network no longer only supports on-chain transfer transactions, but more and more value can be captured. Every interaction of smart contracts hides huge wealth, and MEV becomes richer.

  In the DeFi field, MEV is mainly produced in the two main scenarios of arbitrage trading and clearing.
Arbitrage trading -Taking Uniswap as an example, when a large-scale transaction causes slippage 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 will submit this transaction to the miner. In order for the submitted transaction to be packaged and processed first by miners, they usually give a high price of GAS, even if it is worth $3,000. At this point, the remaining $7,000 is the MEV that DeFi traders or robot arbitrageurs can withdraw. The $3,000 GAS fee is the MEV obtained by the miner in this transaction.

  Arbitrage opportunities exist not only in large-value trading scenarios, 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 eventually converges.

  Liquidation transaction -In the DeFi mortgage loan agreement, when the value of the collateral drops, if the mortgage assets are not filled or sold, the liquidation process will be triggered. The liquidator can obtain a discount of 3%-5% below the market price, such as Mortgage assets such as ETH, and the discounted value of 3%-5%, are also MEV.

  There are many pain points in the MEV market

  Runaway behavior brings unfair distribution of benefits

  On the current Ethereum network, the capture of MEV mainly includes 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.

  Suppose a DeFi trader finds an arbitrage opportunity on Uniswap and submits the transaction to the miner, but since the data on the chain is public, everyone can monitor the arbitrage transaction information submitted by the trader. When the MEV value is very considerable , Searchers, including miners, may "get away" with a higher gas fee-copy this transaction information and give a higher gas fee to "free ride".

  As a result, a scene of bidding for this arbitrage opportunity with GAS fees appeared. This was unfair to the first trader who discovered an arbitrage opportunity. If he could not afford a higher GAS fee, then he found this "treasure". "They can only hand it over to "the rich."

  High GAS fee wastes block space

  OK, if you think DeFi that advocates freedom of transaction, you should follow the market (cluster) rule of survival of the fittest-once MEV is found by searchers, you must submit this income with high GAS fees as soon as possible to compete for opportunities.

  Think about what the miners do? The most likely to be the transaction with the most packaged 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

  In addition to the above problems, there will also be a controversial way of profiting "sandwich strikes" in large DEX trading scenarios. Some "scientists" traders with stronger scripting skills make a profit by sandwiching the target transaction between two specific transactions.

  Similarly, taking 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 the scientist focuses on A. He constructs a transaction of 1100 USDT to buy ETH before A; if the next A wants to trade, he needs to buy ETH with more USDT, such as 1150USDT. At this time, the scientist sold ETH, thus making a difference in price, and 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.

  When the MEV revenue submitted by other users on the chain is higher than the block reward and transaction fee, the miner will enter a dilemma-whether to choose to grab the transaction or to re-mine the block to capture the MEV in the block . This is a temptation for the miner. In order to make the next block build on the block where his arbitrage is successful, he will try to make the block containing his arbitrage transaction the longest chain.

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