Thread by @SalomonCrypto

(1/25) MEV, Flashbots ⚡️🤖 and the Future of @ethereum

Looking to understand Maximum Extractable Value and the existential risk it presents to The World Computer? Want to know what's being done to address it?

Your primer for the next market-defining narrative of crypto.

(2/25) MEV = Maximum Extractable Value, the profit an actor with privileged access (miner, validator, sequencer, etc) to a system can make through their ability to arbitrarily include, exclude or re-order transactions from the blocks they produce.

https://twitter.com/SalomonCrypto/status/1537908651112878085

(3/25) MEV can manifest in many different ways, but in general it follows a similar pattern:

- Users generate pending txns, sending them to the public mempool
- Searchers watch the mempool
- When MEV opportunity is identified, the searcher races to reorder txns to extract value

https://twitter.com/SalomonCrypto/status/1540870370437107712

(4/25) The first (and most obvious) issue becomes apparent immediately: MEV is a zero-sum game, if a searcher successfully extracts value, it is taken from the person who generated the txn

Over time, users wont use the network: the costs (expressed as MEV taken) become too high

(5/25) But even more pernicious is the centralization risk MEV creates.

Imagine two nodes (miners/validators). The first does not leverage MEV strategies while the second is an MEV expert.

(6/25) The first simply grabs the highest priority transactions in the mempool, builds a block and proposes it to the network. The node will earn the following revenue:

- A reward for proposing a block to the network
- Tips, paid by users to prioritize their transactions

(7/25) The second is also searching for MEV. In the worst case, they will earn the exact same revenue as the first.

In most cases, the node will find opportunities to extract value, boosting their yield.

These nodes get more value for the same hash rate/stake.

(8/25) If two nodes are doing the same work but one is producing higher yield, over time the higher producer will take over a larger and larger share of the network.

This risk also occurs in PoW, but it's easier to see in PoS. More yield = more $ETH = more stake.

(9/25) This is the dystopian future. Block building centralizes into a few actors across all chains, allowing them to act as owners, admins and gatekeepers of all PoS chains.

At that point, you might as well just call it an inefficient database.

(10/25) In 2022 it's painfully obvious that the global system is designed to concentrate capital, decision making and power. @ethereum, The World Computer, is the answer to 500 years of centralization.

The magic is the decentralized nature of the network.

https://twitter.com/SalomonCrypto/status/1555762199016062982

(11/25) From decentralization flows:

- credible neutrality
- censorship resistance
- trustless commerce
- inherent transparency
- reduced vulnerability
- increased reliability
- and so much more

Put simply, the network derives its value from decentralization

(12/25) The stakes of MEV are incredibly high, both for users and for the network. A failure to address MEV would be catastrophic

Fortunately, crypto's best gigabrains are on it. @thegostep, @hasufl and the builders at Flashbots ⚡️🤖 are charting our path through the Dark Forest

(13/25) Flashbots is a cutting edge research group that is both discovering and defining MEV and building the solutions @ethereum needs to answer these existential questions.

The thread below will give you more detail, but let's talk high level.

https://twitter.com/SalomonCrypto/status/1548279550664052736

(14/25) To understand Flashbots is to understand that MEV is inevitable. While the term is new, MEV existed long before blockchain and cannot be solved with clever technology.

Any attempts to "remove" will only cause it to metastasize and appear in other layers of the stack.

(15/25) If you remove MEV from the consensus layer, you will push it to the application layer.

If you think developing solutions for a single system is difficult, imagine if we need to deploy bespoke solutions for every individual application.

(16/25) Today, MEV extraction currently disproportionately benefits traders and miners. As MEV extraction continues to grow in scale, Flashbots anticipates there will be a need for some value redistribution towards users and towards system stability.

(17/25) Therefore, Flashbots embraces MEV and is building censorship-resistant, open and fair marketplaces.

The idea is to create the permissionless infrastructure where MEV is captured. All players, large and small, have equal access to low-level financial primitives.

(18/25) Neutral infrastructure is a breeding ground for robust competition. Robust competition drives down price, increases the selection and provides more access to services.

More actors share more profit, reducing the risk of centralization.

(19/25) Short/medium term, Flashbots is building a suite of tools that work towards the dream of open, fair MEV markets. Products like mev-geth, mev-boost and mev-protect are beginning to capture and channel huge amounts of MEV.

(20/25) The long term solution: Proposer-Builder Separation (PBS)

Today, the miner/validator is responsible for ordering transactions (building blocks) and proposing blocks to the network. PBS separates these activities between two actors.

(21/25) While building blocks can be straightforward, builders with MEV in mind deploy incredibly sophisticated and specialized strategies. Many node operators (particularly solo-stakers) are not willing and/or capable of this work.

(22/25) PBS allows all nodes to participate in MEV, regardless of their capabilities. Specialized builders can compete to build the highest value blocks and bid to have them included on the chain. Proposers are able to simply pick the highest bid, sharing the MEV with the builder

(23/25) PBS is a very exciting and promising development for MEV on @ethereum. However, PBS isn't a fix-all solution. There are still huge amounts of unsolved (and even unidentified) issues for MEV

The two biggest areas of research: cross domain MEV and order flow consolidation

(24/25) 2022 is an interesting year. In the real world, things are getting more and more chaotic every day...

But on-chain? Things are finally starting to come together. The Merge is nigh. Execution is moving to L2s. ZK-tech is being deployed as we speak...

(25/25) MEV, an issue that seemed existential and unsolvable just 2 years ago is becoming the hottest, highest value technology in all of crypto.

If you aren't excited, you aren't paying attention.

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https://twitter.com/SalomonCrypto/status/1556448359300227072