Thread by @DeFi_Cheetah

After #TheMerge, most focus on $ETH's potential deflationary impact, or ESG, but very few spot out the issue of MEV after #TheMerge! In this 🧵you will know more about:
1. complete paradigm shift of MEV
2. Why @foldfinance has been rising ~8x within 2 months!

@foldfinance 1. TL;DR: @foldfinance can generate a higher staking reward to $ETH stakers, due to its upper hand on Ethereum order flow, by generating a greater yield from MEV, which leads to a higher block inclusion rate. This causes more people to stake $ETH there, creating a flywheel effect

@foldfinance 2. Before going into details, let's do MEV 101. MEV stands for Maximal Extractable Value. It means miners, by their capacity to select and sequence txns in the network, profit from re-ordering those on-chain txns in their favour.

@foldfinance 3. For eg, miners can place their own txns in front of others’ in a block. This is called 'front-running'. Miners place 2 txns immediately before and after a user's txn. In that sense miners can buy low and sell higher, and the user suffers from this 'sandwich attack'.

@foldfinance 4. In short, re-ordering txns can be profitable. That's the takeaway. To compare and contrast the MEV dynamics before and after #TheMerge, it's important to understand the flow from a user initiating a txn by interacting with smart contracts to that txn being included in a block.

@foldfinance 5. @noxx3xxon has explained clearly in his articles. Let me explain it briefly. Before #TheMerge:
1 & 2. a user interact with smart contract of a DEX via @MetaMask
3. he specifies the trade and signs upon request to create a txn
4. this txn will be sent to the RPC endpoints...

@foldfinance @noxx3xxon @MetaMask 6. ...which by default of @MetaMask is set to Infura mainnet.infura.io/v3/
5. Infura then send txns out to all nodes in the network. Afterwards txns are placed in the public mempool, a staging area for pending txns stay before they are committed to the blockchain.

@foldfinance @noxx3xxon @MetaMask 7. 6. Miners create blocks by selecting and sequencing txns in the mempool, and mostly prioritise high gas txns first. Searchers, who monitor the mempool for valuable txns, and their bots sandwich it to give users the worst execution price and themselves the greatest profit.

@foldfinance @noxx3xxon @MetaMask 8. 7 & 8. Searchers submit bundles of txns to the Flashbots relay. Bundles are merged by Flashbots into a mega-bundle and sent on to whitelisted miners.
9. Users who changed RPC endpoint in @MetaMask default settings can switched to a private RPC endpoint that bypasses mempool.

@foldfinance @noxx3xxon @MetaMask 9. 10. The private RPC is set up to route to specific miners where (exclusive) agreements are made as to what can be done with txns.
In brief, before #TheMerge, searchers monitor txns in mempool and submit txn bundles to miners who have the final say of what to put on the chain.

@foldfinance @noxx3xxon @MetaMask 10. Things have changed after #TheMerge. With PBS (Proposer Builder Separation), miners no longer have the final say; validators have.
Miners have 2 roles in general: (i) to create blocks by including txns into it, and (ii) to put the blocks on-chain.

@foldfinance @noxx3xxon @MetaMask 11. PBS has separated miners into 2 roles after #TheMerge: block builders and proposers/validators. Validators pick whatever blocks that give them the most value. However, unlike PoW where normal crypto users can hardly be part of the miners, they could have stakes in validators!

@foldfinance @noxx3xxon @MetaMask 12. From the MEV supply chain, we understand that (i) searchers with MEV expertise submit bundles of txns to builders, hoping builders to include their bundles in a block, and (ii) builders after building blocks hope their blocks will be validated by validators.

@foldfinance @noxx3xxon @MetaMask 13. For builders to include searchers' bundles, and validators to validate builders' blocks, searchers need to split MEV rewards to builders, and builders also have to share MEV rewards to validators. What does that mean?

@foldfinance @noxx3xxon @MetaMask 14. Implication: MEV rewards, firmly held in the hands of a small group of people, are redistributed back to the general crypto users who stake $ETH in some validator nodes! This is through channeling MEV rewards along the MEV supply chain stated above!

@foldfinance @noxx3xxon @MetaMask 15. Originally, ordering/sequencing txns within a block is a game where hardware & algorithms are demanding. These requirements mean there is a high barrier to get involved in extraction of MEV reward. After #TheMerge, MEV reward is 'liberalized'.

@foldfinance @noxx3xxon @MetaMask 16. Those who stake $ETH in validator nodes could share MEV rewards via the supply chain. But unlike block rewards and gas fees, MEV rewards as part of the staking reward are not standardized. As a result, staking rewards may vary quite a bit among different nodes.

@foldfinance @noxx3xxon @MetaMask 17. In #PoS, the more the stakes a validator node has, the more likely it is eligible to propose the next block for the chain. In order to have more stakes, they need a higher staking APR to attract $ETH stakers, which in turn demands builders to share them more profits.

@foldfinance @noxx3xxon @MetaMask 18. Builders, to remain competitive among builders, need to increase the search space of txns, so that more combinations are available with more txns, which in turn are conducive to finding the highest value combination that can offer competitive rewards to validators.

@foldfinance @noxx3xxon @MetaMask 19. Pending transactions normally stay in public mempool by default, but there are private RPC that can bypass the public mempool. This is where @foldfinance comes into play!

@foldfinance @noxx3xxon @MetaMask 20. @foldfinance is both a block builder and a relay. They have their private RPC for routing txns called SecureRPC. However, creating a private RPC itself does not involve very technical stuffs. What's the edge then?

@foldfinance @noxx3xxon @MetaMask 21. The edge is, they are able to secure partnerships from @SushiSwap & @Balancer - top 2 out of 5 DEXs! By splitting MEV rewards to DEXs, both rout txns to SecureRPC to bypass the public mempool. That means, @foldfinance can have exclusive access to those txns!

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer 22. How does that improve @foldfinance's competitiveness? Imagine it has access to txns from both its Secure RPC and the public mempool, that hugely increase its search space and thus more combinations of txns by sequencing txns from both sources. As a result, it can offer...

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer 23. ... a higher reward to validators to propose their block. A higher chance of getting blocks validated simply means a higher reward than other competitors. This gives more negotiating counters to @foldfinance to get more exclusive agreements.

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer 24. Exclusive agreements mean @foldfinance can get more txns routed to its SecureRPC where it has exclusive access, which in turn leads to a greater chance of winning blocks by building blocks with higher value. Flywheel effect is created to cement its status in the competition.

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer 25. Indeed, SecureRPC is offering a 50% better block inclusion rate then Flashbots alone and it also protects users txns from MEV and front-running.
This has prompted 2 of the 5 top market makers to use SecureRPC, generating significant private order flow for @foldfinance.

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer 26. given the higher entry barrier of block builders, @foldfinance offers us an opportunity of getting involved in building blocks. As #PoS develops, it may be an important part of the whole sector, just as @LidoFinance, given that majority of staking reward comes from MEV.

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer @LidoFinance 27. “MEV can increase validator rewards by 75.3%, or give an APR of 12.86% rather than a non-MEV APR of 7.35% from staking $ETH.” writings.flashbots.net/research/mev-e…

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer @LidoFinance 28. Regarding #TheMerge, apart from $ETH's ultrasound money thesis due to the deflationary force, MEV should be something you need to pay close attention to, and @foldfinance offers a chance for laymen to join the block building process and share MEV profits by staking $FOLD!

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer @LidoFinance 29. This is a series of complicated tweets. If you find it useful for you to understand more about MEV, like and share! Inspiration is from @noxx3xxon @FloodCapital

https://twitter.com/DeFi_Cheetah/status/1570861035367845888?s=20&t=6g0qdF1FvNyGVH349h9I9w

@foldfinance @noxx3xxon @MetaMask @SushiSwap @Balancer @LidoFinance @FloodCapital @buffalu__ @segfaultdoctor @jon_charb @ben_leimberger @j_copperthwaite @0xEdgar @SiegeRhino2 @theo_diamandis @SiegeRhino2 @0xQuintus @0xAlcibiades @libevm @wireless_anon @0xmisaka