What the heck is MEV & why are Osmosis & Skip trying to capture it?

🧵👇🏻 (1/13) #OSMO Image
2. What is MEV?

•Maximal Extractable Value (MEV): the max value (not including block reward or gas fees) that can be obtained by changing the order of transactions in a block
3. But how can you change the order of transactions?

•The order in which transactions(TX) are processed in a new block depends on Gas Fees

•TXs with Higher gas fee=Higher Priority

•Thus, to change TX order, you can submit a TX with a higher gas fee & give yours priority Image
4. Why would someone do this?

•Simple Answer: Money

•Unfortunately, since profits can be made by reordering TXs, sometimes independent actors (Searchers) take advantage of every day users to make a profit. Lets look at an example 👇🏻
5. Sandwich Trading

•Imagine a Searcher runs a algorithm to find a unprocessed Large TX to buy OSMO

•Knowing this large order will raise price of OSMO, this person utilizes bots that auto submit a TX with a higher gas fee to buy OSMO right before the large TX & sell after Image
6. What are the effects of Sandwich Trading?

•The original user who submitted the large TX first gets a lot less OSMO than expected (Slippage)

•Sandwich Trading and Front running can cause higher gas prices for everyone and network congestion
7. However, there are good sources of MEV

•Liquidation: Buy collateral at a discount from unhealthy borrow positions. This ensures Lenders are paid back

•Arbitrage: Buy a token at low price on one DEX, sell high on another. This ensures Stable Prices

•more on arbitrage 👇🏻 Image
8. Enter @SkipProtocol Arbitrage

•Creating an on chain module that captures Arbitrage Opportunities on Osmosis

•Directs profits back to the community instead of leaving it concentrated in hands of a few Searchers

•Example of an arbitrage that turned 25 OSMO into 8k OSMO 👇🏻 Image
9. MEV Searchers have demonstrated that a massive market exists for Arbitrage

•Estimated $6.7M in historical revenue from arbitraging Osmosis Pools

•With Skip, current profit projections of 50-150k per month Image
10. How could these profits benefit Osmosis?

•Stakers & Validators: increase rewards to increase adoption

•Paying IBC relayer fees

•Osmosis DAO: used to fund future projects

•TX fee and Gas Refunds: reduce fees to bring Osmosis closer to a goal of a 0 fee DEX
11. Other Key Benefits

•Community will vote on how revenue is distributed

•Open Source Code: actions can be verified, no trust required

•Future Possibility of Skip to facilitate a Blockspace Auction for MEV not captured by the protocol
12. For full details go check out the proposal

gov.osmosis.zone/discussion/707…
13. If you are looking for educational content like this for Osmosis and all of Cosmos, make sure to join the Orbital Command Discord :)

discord.gg/NHBYVx5Q
Think about MEV capture on other chains outside of Osmosis. Yes, I mean Terra, Kujira, Juno, Sei. Check out 🧵 👆🏻

@SkipProtocol
@Flowslikeosmo
@churchkey
@danku_r
@wagmigently
@technologypoet
@simonch00
@cryptrus
@FarmerTuHao
@Casa_Intern
@CryptoChem0000
@KujiPeruggi

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