MEV 101 : How to dive into MEV

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en
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MEV
date
Dec 3, 2023
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mev-101
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Post
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Published
Author: ywzx and vita , update 4/10

Background

The 3rd MEVTokyoSalon was held on November 21, 2023. Nearly 90 people registered for the event, and nearly 60 people attended at the venue in Tokyo. We also received a lot of feedback on Twitter and felt that it was a very meaningful event where we were able to share our knowledge of MEV.
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MEV Tokyo Salon
However, we feel that we were not able to achieve our goal for the event, which was to increase the number of people contributing for Ethereum.
The reason for this is that it requires extensive knowledge to understand MEV, and we did not know where to start researching or getting involved, and we were not able to encourage people to take the next action.
Therefore, we wrote “Open Questions,” a list of ploblems related to MEV, as a starting point for people to get involved in MEV.
We hope that those interested in MEV will use Open Questions as a guidepost to take the next step.
MEV are deeply related to the Ethereum block building and are very important for Ethereum to become a GlobalStateMachine. It is not too late to get involved in MEV, and it is a very interesting area that is about to move in a big way.

MEV Basics

Before reading Open Questions, let’s start with an overview of MEV to get a good idea of what they are all about.
Below are some articles that you may find helpful.

MEV-Boost

Nearly 90% of Ethereum’s blocks are built using MEV-Boost. However, each party involved in MEV-Boost has problems. Let’s analyze those problems and think about solutions, and if we can see a solution, let’s think about how that solution can be used.

Searcher

In MEV-Boost, when the Searcher finds revenue opportunities, it passes those transactions to the builder as a bunlde. Currently, it is necessary to trust that the builder will not unbundle the bundle passed to the builder.
If the bundle is from a high-impact searcher or a bundle with a small revenue opportunity, the incentive for the builder to unbundle is not great. However, there is a good chance that a builder will unbundle a bundle that is highly profitable in a way that the searcher does not know about.
How can you trustlessly trade a bundle that has a particularly large profit opportunity?

Builder

In MEV-Boost, auctions are held between builders, and the winning builder’s block is passed on to the proposer to be built as an Ethereum block.
However, more than 90% of the blocks built by MEV-Boost are occupied by the top 4 builders, and if the builders become monopolistic, arbitrary rules may be created among the top builders to protect their competitive advantage, making the block building process opaque.
The builder monopoly is a result of the monopoly of the top builder. Why does a block builder monopoly occur, what is the problem, and how can it be resolved?
Reserence (about builder)
Reference(about blockspace)

Relayer

The full block constructed by the builder is sent to the relayer. Therefore, the relayer can censor the block. Relayer plays an important role in facilitating block construction in MEV-Boost, but it has high machine-spec requirements and requires a lot of money to operate, while relayer does not receive any revenue sharing.
Is censorship of Relayer all bad, and how can censorship be prevented? What problems will occur if there are no incentives for the relayer, can the relayer’s operating costs be reduced, and can the relayer be incentivized?
Reference (Relayer Issues and ePBS)
Reference (Relayer’s proposed solution)

ePBS (enshrined PBS) / in protocol PBS

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Image by Mike Neuder
There are two types of PBS: in protocol PBS (sometimes called ePBS : enshrined PBS), which requires protocol modification, and out-of-protocol PBS, which does not require protocol modification. MEV-Boost is an out-of-protocol PBS.
The out-of-pf-protocol is characterized by a fast implementation speed, but as seen in MEV-Boost, it requires some trust. ePBS is a hot topic of discussion in the Ethereum community, as no definitive implementation has been proposed.

The need for ePBS and how it should be done

We have discussed the challenges of MEV-Boost, and there is much discussion about the need to implement ePBS as a solution, especially around Relayer. Let’s analyze the current ePBS discussion and make some suggestions. Is ePBS really necessary? And if so, what form of ePBS would be desirable?
Reference (Overall impression of PSS)
Reference (major ePBS proposals)
out-of-protocol solution
inclusion list
Execution Tickets

How to handle bid cancellations by builders

In a block auction between builders, if a bid is submitted that is lower than the previously submitted bid, the block with the lower bid is considered the latest block, effectively cancelling the bid.
This is particularly useful for DEX-CEX-arbitrage, and plays a role in increasing MEV revenues and shaping the DEX price. However, it is said that nearly 90% of the bids submitted by builders are unnecessary bids, wasting relayer resources.
In addition, due to latency issues, ePBS proposals are basically considered in a way that does not take bids into account. What are the problems and importance of bidding, and how should we handle bid cancellations in the future?

MEV-burn

MEV revenues are not distributed equally among all validators, but rather the most profitable blocks are biased. Therefore, if the profitable blocks cannot be proposed, the validators will not be able to earn the expected revenue.
Therefore, MEV-Burn is discussed to return MEV revenues economically and to prevent MEV spike by burning MEV revenues.
However, it is difficult to accurately calculate MEV revenues due to DEX-CEX arbitrage and Intent. In addition, the structure of MEV may have changed when MEV-Burn is introduced due to the possibility that MEV revenues may decrease.
Is MEV-Burn the best solution to the challenge?

The whole MEV experience

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https://writings.flashbots.net/mevm-suave-centauri-and-beyond

What to do with bad MEV

There are three main types of MEV earnings: Arbitrage, Liquidation, and Sandwich attack. Among these three, Sandwich attack is called “bad MEV” because it directly disadvantages some entities. There are solutions such as MEV-Share and MEV-Block, which do not make transactions public, but there are data that show that transactions passed to them are more disadvantageous.
What are the causes of bad MEVs? And how can bad MEVs be prevented?

LVR

One of the indicators to evaluate LPs is loss versus rebalancing. The essence of Loss versus Rebalancing is the outflow of value outside the application due to arbitrage caused by information asymmetry between arbitrager and liquidity provider. LPs are losing money.
What are the causes of LVR? What are the causes of LVR and how can we deal with LVR?

Future MEV revenues and block construction

MEV revenues are expected to decline due to a variety of factors, such as the DEX protocol upgrade, the rise of Intent-Based Applications, and the transition of the Ethereum execution environment from L1 to L2.
What will happen to the MEV market in the future? What will happen to block construction when MEV revenues decrease?

Other open questions

How to dive into

If you have read this far, thank you. If you are interested in MEV and want to DIVE INTO MEV, I hope you will practice 1~4.
  1. from Open Questions
First of all, let’s do some in-depth research on what you are interested in from the Open Questions in this article, as MEV require a variety of knowledge such as game theory, financial engineering, cryptography, and so on. It may be easier to start with an area where you can make use of your background. Then try to identify the problem or open question and figure out why you can’t do.
2. Summerize your research
Once you have made some progress in your research, summarize your findings based on your problem solving. Also, try to summarize the hypotheses you developed during the research process. If you can turn it into a paper, even better.
3. Hypothesis testing
Hypothesis testing is a good way to test your hypothesis. Read additional articles or discuss with others who have knowledge based on the articles you have written.
4. Next Action
Summarize the results of your hypothesis testing and write down your next action. The MEV community is very open, and many people are attracted to the Ethereum philosophy. Therefore, even if you are a newcomer, as long as you have interest and knowledge in the field, everyone is welcome.
When conducting 2~4, you can use EthereumResearch and Flashbot Collective to deepen the quality of your thoughts.

Open Questions as Titania Research

  • Generalization of PBS (allocation mechanism & market structure)Is there a way to generalize PBS to support more allocation mechanism such as slot auction, partial block auction, include lists etc or support market structure such as PEPC?How do we pricing preconf tips and is censorship resistance reduced by the entity performing the preconfirmation or not?Does the inclusion list work well? How to prevent attack vectors?How to prevent latency in partial block auction and how to risk increasing the proposer’s task?Is there a way to enhance pbs with minimal consensus changes?
  • Generalization of ePBS (Trust Assumption)How to resolve ePBS trade-offsHow do we ensure builder safety in ePBS?What is or needs to be done to prevent ways to avoid ePBS?
  • Generalization of exectution ticketsIs exectution tickets really necessary?how dose exectution tickets interact with the PBS or ePBS?How do we pricing exectution tickets?What is the impact of the centralization of execution tickets?
titania research is also conducting research on PBS. If you are interested or would like to discuss, please contact me at telegram (keccal255).

© Titania Research 2024