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Founder of Neo, Da Hongfei, discusses how Neo's new sidechain, Neo X, eliminates malicious MEV.

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Founder of Neo, Da Hongfei, delves into the innovative solution of Neo X, a new sidechain of Neo, in addressing the prevalent issue of malicious MEV in the blockchain industry.

Original Title: "Neo Founder Da Hongfei Talks About How Neo X, a New Sidechain, Eliminates Malicious MEV"

Original Author: Da Hongfei, Founder of Neo

First of all, thank you for your strong interest in our Neo X sidechain that is compatible with EVM!

Neo X has currently released an Alpha version testnet, and the Neo development team is actively testing its performance with developers who have signed up.

The developers of the Neo team and community have jointly decided to add anti-malicious MEV features to the new Neo sidechain, taking into account various aspects of technology and governance. Through this step, our goal is to trigger a deep reflection and discussion within the community on the persistent problem of malicious MEV. I hope this article can be a starting point to inspire more people in the community to participate in our discussion on MEV, and even reach substantive cooperation with us. The future path of Neo needs to be shaped by all of us, and your opinions and suggestions are invaluable.

Malicious MEV belongs to a form of censorship

MEV stands for Maximal Extractable Value, which refers to the strategies that miners or nodes use to add, delete, or reorder transactions when creating new blocks. Malicious MEV is a form of censorship that undermines the security, permissionlessness, and decentralization of blockchain. Let's take a look at the harm that malicious MEV causes to the industry, as well as the huge profits it generates for speculative traders.

How does malicious MEV harm the blockchain ecosystem?

MEV can take many forms. One part of MEV is neutral trading, such as arbitrage on decentralized exchanges (DEX). This behavior can provide better liquidity for long-tail markets or promote the liquidation efficiency of lending protocols.

However, some MEV attacks are initiated by miners or validators who review the content of user transactions and change the order of transactions in the block in order to steal the additional value generated by rearranging the transactions. These are malicious MEV attacks. Common malicious MEV attacks include:

· Block Withholding Attack: By occasionally delaying the release of completed blocks, miners can manipulate the timing of transaction confirmations. This technique is particularly advantageous when dealing with time-sensitive transactions, where delays in transactions or predictions of market trends can lead to huge profits.

· Time-Bandit Attacks: Miners may use "time-bandit" attacks to reorder transactions within a block to create favorable outcomes, especially when interacting with predictable smart contracts. By doing so, they exploit the deterministic nature of blockchain technology to optimize transactions and maximize their financial advantage.

· Front-running: Searchers use robots that specialize in tracking transactions in the memory pool to monitor and discover potentially profitable trades, and replace their addresses with their own addresses.

· Sandwich attack: The sandwich attack is a common form of MEV attack that combines front-running and back-running by placing orders before and after transactions that change the price.

(All front-running and sandwich attacks can be classified as transaction reordering.)

Therefore, malicious MEV is a form of censorship that may result in the reordering of transaction sequences and other issues, affecting the transaction outcomes of decentralized finance (DeFi).

Due to the impact of malicious MEV on the fairness and efficiency of transaction processing, Neo is attempting to eliminate this issue. Eliminating malicious MEV will lead us to the next major leap for Neo, which is Neo X. Neo X will become the first blockchain to rid itself of the harm caused by malicious MEV.

恶意 MEV 已然造成巨额的损失

translates to

Malicious MEV has already caused huge losses

According to estimates, the total revenue generated by malicious MEV on the Ethereum blockchain alone in 2022 is approximately $400 million. As of the Ethereum merge in September 2022, the cumulative revenue generated by malicious MEV throughout history can reach around $900 million to $1 billion.

The estimated total addressable market (TAM) for measurable MEV is between $300 million and $900 million. This mainly includes easily identifiable transactions such as sandwich attacks, arbitrage, and liquidation. The above data is from Flashbots and Dune.

However, it is worth noting that the actual losses caused by MEV are even higher. For example, the long tail of MEV in NFT and other DeFi applications is not captured by the data. Competition among market participants is becoming increasingly complex. For instance, off-chain hedging is untraceable, and MEV that spans multiple blocks is also difficult to identify. Node service provider Chorus one estimates that the actual cumulative profit of MEV transactions is about $1.9 billion. Chorus further breaks down this number into benign MEV and malicious MEV. The profit of benign MEV, including arbitrage and liquidation, is about $714 million, while the profit of malicious MEV, including sandwich attacks, is about $1.206 billion. Therefore, we believe that the total revenue of malicious MEV is close to $1 billion.

Currently, the market trading is becoming increasingly complex and the competition is intensifying. Sandwich attacks (a simple combination of front-running and back-running trades) will no longer provide enough competitive advantage for MEV initiators to outcompete other profit-seeking MEV actors. Therefore, MEV initiators need to design their trading strategies more carefully, which may require combining dozens of on-chain and off-chain trades to complete a profitable MEV attack. Therefore, it is difficult to identify these trades as part of a MEV attack by looking at them individually.

There is also an estimate about the impact of MEV, which predicts that the revenue from sandwich attacks is 1.20611 billion US dollars. Sandwich attacks are often seen as malicious MEV. The goal of most decentralized exchanges with MEV protection mechanisms is to control the harm of MEV within a controllable range and to democratically share the profit. In the bull market of 2021, the total revenue ceiling is 476 million US dollars. According to a conservative 10x PS calculation, the total size of traceable MEV is close to 5 billion US dollars.

Since the Ethereum merge, the growth of MEV on Ethereum has slowed down. However, we still believe that MEV revenue is continuing to grow on emerging L1 and L2 networks.

Neo X will achieve resistance to MEV through dBFT consensus and sealed transactions

Neo's goal is to make this new sidechain the first blockchain with anti-MEV properties. In order to systematically address the issue of MEV, Neo has divided malicious MEV into two categories:

· The first type of MEV refers to miners/validators/consensus nodes utilizing their privileges and loopholes in the consensus mechanism, or delaying block production, or altering the results in previous blocks, disrupting the normal block production process.

· The second type of MEV refers to the situation where miners/validators/consensus nodes continue to produce blocks normally, seemingly everything is normal, but in fact they use the privilege of "front-running" to rearrange/insert transactions for profit.

Neo X can solve the above two types of malicious MEV. For the first type of MEV, Neo's dBFT consensus mechanism can fundamentally eliminate the opportunity and motivation for these miners/validators/consensus nodes to disrupt the block generation process. For the second type of MEV, by sealing the transactions, the person processing the transactions cannot see the content of the transactions, ensuring that the processing of these transactions is neutral and unbiased.

Essentially, DKG and threshold decryption serve as powerful privacy protection mechanisms in blockchain networks. They ensure that even if individual consensus nodes hold partial information about a transaction, complete transaction data can only be securely reconstructed when a sufficient number of nodes participate in cooperation, thereby ensuring confidentiality and integrity of the blockchain ecosystem.

Neo's current design seamlessly combines dBFT consensus and threshold decryption without sacrificing too much blockchain performance. The decryption process may cause some delay as key exchange is required, but it only takes a few seconds and won't cause significant issues.

Some chains based on BFT consensus may quickly replicate our design, but this may introduce the risk of errors into the consensus algorithm. Non-BFT chains will require a third-party aggregator that receives a large number of encrypted transactions, decrypts them, and then sends the batch of transactions together to the final consensus. Since EVM chains cannot execute arbitrary multiple contract calls in a single transaction (without deploying new contracts), running threshold decryption by a third party may be too expensive. For most EVM chains, a more practical solution is to run another sidechain.

Threshold decryption is a classic cryptographic tool that has been around for some time, at least since before 2010. However, to our knowledge, only Neo has used it to address the issue of combating malicious MEV. Some papers in the 2020s have mentioned the idea of using it in the blockchain field, but we have not seen any actual applications in the industry.

Threshold decryption is a simple and effective way to combat MEV. Of course, we can also use zero-knowledge proofs to make the resistance to MEV more thorough.

Threshold decryption is a simple and effective way to combat MEV and greatly improve security. Looking ahead, if zero-knowledge proofs (ZKP) are implemented on Neo X, it can provide even higher security. This idea is still under consideration.

Join us to build Neo X and open up new paths for the blockchain industry

These points discussed in this article represent the essence of Neo's deep thinking and extensive discussions over the past few months. Our goal is to build a platform that is not only compatible with EVM, but also has unique features to better serve the Neo community and achieve the larger goal of smart economy. I am proud of Neo's next steps and believe that we are leading the blockchain industry towards significant improvements in overall security and performance.

As our team and community work hard to turn these new sidechain ideas and visions into reality, we sincerely invite your participation - whether it's suggestions, insights, or constructive criticism, we welcome it all. You can contact us on Twitter or Discord to share your views. Neo has always been a community-driven blockchain platform, and your involvement drives us forward.