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Flashbots that light up the dark forest

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Help Ethereum ease the MEV crisis

Original title: "An article to understand the Ethereum MEV crisis"

Original source: Free and Easy

Note: Flashbots is about miners A research and development organization for the Extractable Value (MEV) issue, which aims to mitigate the negative impact of MEV on the smart contract blockchain. It is reported that the organization proposes to establish a permissionless, transparent and fair MEV extraction ecosystem to strengthen Ethereum. The core characteristics of the workshop.

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.

What is Miner Extractable Value (MEV)

Miner Extractable Value (MEV) Literally, it refers to the value of profit that a miner (or validator, sequencer, or other privileged protocol participant) can gain from the ability to include, exclude, or reorder transactions.

MEV includes regular profits from transaction fees and block rewards, and unconventional profits from 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: a profit opportunity is created when assets in the Uniswap pool are mispriced, 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.

MEV Crisis

Traders on the Ethereum platform need to pay gas fees to miners in order to Include their transactions in the block. 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:

" Frontrunning (also known as priority gas Auction (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 transaction 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 for confirmation, so that transaction A can follow transaction B in the same block Included.

An example of such an application would be executing a DyDx loan after a price oracle update triggers a DyDx loan with a lower collateralization ratio than required Clearing transactions."

Unfortunately, both front-running and trailing transactions are inefficient, and they can lead to problems such as network congestion (i.e. p2p network load) and negative externalities such as blockchain congestion (i.e., block space usage). Additionally, this competition for MEV opportunities can lead to instability in Ethereum consensus security because it creates Time Distortion Attack Incentives, and a permissioned communication infrastructure between traders and miners. Such an infrastructure undermines the neutrality, transparency, decentralization, and permissionless nature of Ethereum today.

While these risks and negative externalities are not Nothing new, but we found that they could lead Ethereum down a different path. A series of events over the past 6 months have brought network usage to a critical point:

1. Increasing contract interactions (i.e., Ethereum Transactions on the platform have become more complex than before, which increases the sheer amount of MEV available for arbitrage);

2. The market cap of tokens on the Ethereum platform exceeds the market cap of ETH (ie, ERC-20 MEV revenue from the coin, starting to compete with transaction fees paid by ETH);

3. Transaction fees exceed block rewards (i.e. transaction fees have reached unprecedented levels, partly due to traders competing for transaction opportunities

4. Adoption of general front-running bots (i.e. an indicator of increased MEV extraction complexity);

5. Permissioned mempool adoption (i.e. another indicator of MEV extraction complexity);

These events show that, Anticipated risks and negative externalities are accelerating.

Mitigating the MEV Crisis

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

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

1. Light up the dark forest;

2. Democratized extraction;

3. Distribution of benefits;

We believe that all three components are necessary for the success of flashbot.

1. Illuminate the Dark Forest

MEV currently supports Ethereum users is opaque and requires extensive data analysis as well as a deep understanding of smart contracts as it involves complex and sometimes obscure adversarial trading games at multiple meta-layers (users, traders, front-runners, miners) .

As more and more safety-critical infrastructure moves off-chain, and as the chain grows in state and size, The problem will only get worse, and it will become 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 as well as the impact of Flashbots technology and quantify the harm MEV extraction poses to users in order to provide builders with the tools to reduce the impact their dApps suffer from MEV extraction .

The first step in illuminating the dark forest is to quantify its impact, for which we built MEV-Inspect , which scans Ethereum blocks and Visualize 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 extraction

MEV extraction may move towards concentrating on a small number of participants development, for example, limited to permissioned dark trading pools with access to large amounts of computing power, or through single-sided off-chain transactions between large traders and miners.

This concentration of power and capital is a key point of security weakness, and it erodes core features of Ethereum: That is, permissionless and decentralized. 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.

MEV-Geth was the original effort to democratize MEV extraction, a client with some improvements over go-ethereum to enable sealed block space auctions Mechanism for passing transaction ordering preferences.

Fundamentally, MEV-Geth is for miners and bidding Trading traders creates a more efficient communication channel. 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, transactions developers, DeFi developers, and most importantly Ethereum users. Based on the researchers' preliminary research, MEV withdrawals currently have some benefits for both arbitrage traders and miners, and as MEV withdrawals continue to scale, we anticipate 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 Maximize the realization of community interests. This is especially true given the inherently dangerous economic incentives of MEVs mentioned above.

About public commitment

Flashbots originated from the MEV-Pi-Rate-Ship, which is A neutral, interdisciplinary research collective that supports theoretical and empirical research related to MEVs. As an open research institution, Flashbots will be committed to:

1. Maintain the core values of Ethereum, which is open, permissionless and decentralized , to deal with the upcoming MEV crisis;

2. Open our research and Flashbots code infrastructure, any community member can contribute and benefit;

3. By considering users, The needs of miners, developers, node operators, public infrastructure operators, contract/dapp developers, and ecosystem researchers to create sustainable alliances among key players in the ecosystem;

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

As an organization and as individuals involved, we firmly believe that decentralization DeFi is at a critical crossroads. Manipulating the vast amount of value generated by user transactions can trigger a centralizing force that compromises the stability of consensus and is harmful to users of the system. MEV may benefit the few at the expense of the many, and the value of the cryptocurrency itself.

Alternatively, this value can benefit all users, thereby improving the security of the new generation of financial infrastructure, by integrating MEV extraction and By making tools public, by funding public research to answer open questions around MEV, and by using our organizational capital to align incentives for all ecosystem participants, we aim to lay the groundwork for a new generation of fair infrastructure.

As of now, Flashbots is managed by Scott Bigelow, Phil Daian, Stephane Gosselin, Alex Obadia, and Tina Zhen. The research organization is also supported by the MEV Pi-Rate Ship and the Paradigm investment arm.