Discussion Post: What are the current major topics of discussion and research in MEV?

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Core Research Question

What are the current major topics of discussion and research in MEV?

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MEV has been one of the most fascinating subjects to me as a relative newcomer to the cryptocurrency ecosystem. To me, as a ‘researcher’ the dark forest seems like a gigantic ecosystem with survival strategies pushing the system toward price equilibrium but as a retail investor I’ve been completely hosed by these wretched bots and it’s certainly given me pause before using DEXes and DeFi pools. What’s going on?

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I was having a side conversation with @Eric regarding this. I consider myself to be pretty scientific process-oriented and it’s one of the things I enjoy about SCRF as well. As MEV gets brought up often, I’m interested in us as a community sorting through what are “settled” questions versus open questions regarding MEV.

From my understanding so far, it appears that this is ultimately about gas price. Claim 1 is that higher gas prices are a generally negative thing. This seems to be the consensus of the space.

Claim 2 is that MEV strongly contributes to higher gas prices. Maybe not its existence, but as a practice in in situ. There doesn’t seem to be as much consensus about this, so maybe this is still an open question. For example, the post Discussion Post: Flashboys to Flashbots seems to give some voice to both sides of this issue. I think the open question here has to do with the manner of how MEV (or maybe if) contributes to gas price increases.

Claim 3 is a little more generic. I think of it more of a “X solves the MEV problem.” type of claim structure. For example, “TEX solves the MEV problem” (Research Post: TEX - A Securely Scalable Trustless Exchange. I think these are the types of general claims that we can be discussing and evaluating that help answer questions like what @jmcgirk asked above.

Ultimately, I’m interested in this discussion because it seems like MEV occupies the mind of and drives the decision-making of several projects and initiatives. I would even make the cautious argument that changes like EIP 1559 could be analyzed as being a response to MEV concerns.

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In terms of other works that can help provide context on MEV, Charlie Noyes’ work for Paradigm MEV and Me is an excellent primer, and Philip Daian’s MEV… wat do? is also a real thinker.

A current topic of conversation is providing Chain Reorganization / Time Bandit Attacks as a Service.

Charlie Noyes’ article I posted above describes Time Bandit Attacks as such:

MEV Can Harm Ethereum

MEV inherently encourages consensus instability.

Imagine there are two miners, Sam and Dan, who are paid a $100 reward for each block they find. Sam has found 3 blocks, the first of which contained our $10,000 Uniswap arbitrage.

Now, Dan has a choice: he can either mine on top of Sam’s 3 blocks, or he can attempt to re-mine the first block in order to take the Uniswap arbitrage for himself. The $10,000 is much more lucrative than the $100 block reward, and Dan is more rational than honest, so he decides to re-mine the first block.

While Dan’s at it, since the current longest chain is height 3, he also re-mines the second and third blocks (and captures any MEV that was in those, too). After the re-org, Dan owns the longest chain and he and Sam can progress from the third block.

This is known as a “time-bandit” attack: if block rewards are small enough compared to MEV, it can be rational for miners to destabilize consensus.

Our example was a two-party system. In the real multiplayer world, it is possible that every rational miner would attempt to re-org the third block and essentially halt progress. However, this could destroy the value of the miners’ hashrate investments. If we see this behavior at all, it will more likely be in the form of shorter, more frequent re-orgs that do not halt progress entirely.

A conversation has been developing on twitter, stemming from discussions around searchers (MEV researchers/developers). A quick selection:

@edgararout indicating they’ve begun the work, and links their repo

Philip Daian shares his thoughts:

Its an enormously complicated issue.

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@jasonanastas - I’d be intrigued to read whatever you have to say about MEVs, and @Albert if you can think of some parallels with high frequency trading, and how that’s affected CEXes, I’d love to see what you have to say

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Here is MEV extraction may through block re-org tool, someone name “0xbunnygirl” release this GitHub. I think the Slashing mechanism will not happen in the current Ethereum, but has the potential for slashing on Ethereum 2.0. It was discussed in MEV and Me “PoS-based blockchains can slash validators who attempt to re-org and thus make time-bandits significantly more costly, especially when combined with strong finality. However, with enough MEV the incentive to re-org could still be greater than the slashing penalty.”

Also, it was discussed in Cosmos Slashing when the slashing happens validator (usually the stakeholder) would cause penalizing to disincentivize any attributable action.

If the re-org revenue is still greater than the penalty, I believe it would be a big problem for the future EIP 1559 upgrade. It needs to have a dynamic slashing penality solution.

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Great observations about the dynamic slashing penalty solution. Is that approach being used by any project currently, or have you seen anyone describe what that might look like?

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A similar approach of a dynamic slashing penalty is Polkadot’s NPoS GRANDPA and BABE equivocation slashing penalty that means the number of offenders(MEV) compared to the total number of validators in the network increases, the penalty charged for the incident also increases.

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I have a theory that it’s only a matter of time until block templates are sold as NFTs.

Time-bandits are not going to be incentivized if there exists established markets for block space, where the highest bidders can get their transactions prioritized – a tokenized mempool, if you will.

There’s an argument to be made that the only reason that time bandit attacks are being considered now is that MEV relies on too much off-chain coordination between mining pools and traders. It’s all closed doors. Small to mid/scale miners and traders don’t have these relationships, so they need to rely on high fees and flashbots. Making MEV into a market of block templates will democratize order flow – whether embracing it is good or bad is to be determined.

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Fun thought experiment: what if more than 33% of block producers want to engage in MEV?

As a coalition, they can attempt to reorg any slashing penalty that is enacted at the protocol level. And depending on where the network sits in the CAP theorem, they would have the power to halt the network to make a political point :thinking:

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Polkadot combines two consensuses as hybrid consensus: GRANDPA and BABE. The new transaction generates in the BABE consensus layer. If more than 33% of block producers want to engage in MEV with Polkadot. First, it will depend on the validators are block producer candidates or not. Second, if the block producers node is more than 2/3 of all the nodes can reach GRANDPA agreements. Following the longest fork chain and they continue MEV successful. I think it is possible to reorg any slashing penalty.

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Generally, miners can extract additional profits from users by taking advantage of their ability to order transactions included in the new block, creating what is commonly known as miner-extractable value (MEV). Although it comes in different types, most forms of MEV seen today are taken not from miners themselves, but from third-party bots which are really far from the concept that miners actively take advantage of their ability mentioned above. Therefore, MEV can be extracted even when miners order transactions according to the highest gas prices, which is the most common way.

Among various types of high-frequency trading tactics, arbitrage is one of the simplest and also most used strategies. Therefore, the most common form of MEV seen today is third-party bots performing arbitrage between two or more decentralized exchanges (DEXs). Because of the increasing popularity of decentralized finance, the arbitrage opportunities increased accordingly, which results in fiercer competition between arbitrage bots. What’s more, arbitrage usually happens between some very liquid decentralized exchanges, the time window is only a few microseconds. Therefore, a lot of bots by increasing transaction fees (gas) make it more possible for the miner to pick their transactions first.

The result is raising the transaction fees for everyone else on the network, and transaction fees paid by the arbitrage bots, which is often a large percentage of the final profits generated from the arbitrage, go directly to the miners.

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