Thread by @Thyborg_

Like it or not, the Cosmos ecosystem is bound to become the ultimate MEV bots fun park

Interchain accounts, interchain security etc. are all making the playground space bigger & better

Let's kickoff a series of reasonably short Cosmos MEV threads with Part 1: the Basics

MEV stands for miner extractable value & represents the profit that a "miner" can make through its ability to include, exclude or re-order transactions within the blocks

The term Miner comes from the Proof-of-Work world - for Cosmos, that'd be the validators & relayers

In practice, MEV isn't necessarily extracted by validators but by also by independent network participants who run algorithms on blockchain data to find profitable opportunities

This is almost always done through automated bot strategies

There are different forms of MEV, including but not limited to:
- Arbitrage (good)
- Liquidation (good)
- Sandwiching (bad)

All these opportunities are born the fact that:

1- a block can only contain a limited number of transactions
2- block producers have autonomy in selecting pending txs

These pending (i.e unconfirmed) transactions are stored in an off-chain location called the mempool

Let's quickly go through some MEV forms:

DEX arbitrage is "good" MEV: bots profit by purchasing an asset on an exchange (e.g Osmosis) offering a lower price & selling it on the exchange offering a higher price (e.g Sifchain)

The result is both exchange prices are now the same

Liquidations are "good" MEV that happen in lending protocols like #Kava (and soon Umee & Mars)

Imagine a user has borrowed too much $USDX (Kava's stablecoin) and that value now exceeds the value of the $ATOM collateral

In that case, Kava allows anyone to liquidate the collateral to pay off the $USDX lenders as fast as possible

MEV bots will quickly determine that the user can be liquidated and fight to be the first to submit a liquidation transaction

The winner will be able to sell the $ATOM collateral to pay back the $USDX loan & collect a significant liquidation fee for the effort

The result is that the protocol is solvent and lenders got their $USDX back quickly & efficiently

Sandwiching is "bad" MEV that combines two others MEV forms: front-running & back-running

Front-running happens when MEV bots monitor large trades, copy them and pay a higher transaction fee to get their transaction processed first

Back-running happens after the original user’s trade is processed: the market price has now shifted in the frontrunner’s favour and he can take profits by selling thee asset

Sandwiching creates invisible fees for regular users, as they incur a larger amount of slippage

The result is that the actual price paid by the user was much larger than the expected price without the MEV bots

There are several interesting solutions to optimise the effects of good MEV and mitigate the effects of bad MEV

In the next threads, we'll go over these solutions and see how the game theory behind their respective implementation & potential success might hugely impact the way Cosmos develops

if that sounds interesting, you may consider re-tweeting & giving me a follow @Thyborg_ ✌️

https://twitter.com/Thyborg_/status/1547898785933639684