The Ethereum Dark Forest is spreading faster. How can Flashbots alleviate the “miners can extract value” crisis?

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The competition of DeFi arbitrageurs has caused external influences and actual risks such as block chain network congestion. Flashbot aims to reduce these risks.

Written by: Alex Obadia, researcher at Cambrial Capital Compiler: Leo Young

Flashbots is a research and development organization that aims to reduce the negative externalities and risks that miners extractable value (MEV) has on the smart contract public chain. We propose a permissionless, transparent, and fair ecosystem for MEV value extraction to ensure the ideal of Ethereum. This article covers the background and motivation of the Flashbots project.

What is “MEV”?

“Miner extractable value” (MEV for short) refers to miners (or verifiers, sequencers, or other privileged persons in the protocol) that are obtained by arbitrarily including, excluding, or reordering transactions when generating blocks. It can be evaluated and designed to study the measurement method of consensus security. MEV includes “conventional” profit methods such as transaction fees and block rewards, as well as “unconventional” profit methods such as miners reordering, skipping queues, and reviewing the transactions in the generated block.

The term MEV can make people mistakenly think that it is the miners who extract value. In fact, the MEV in the Ethereum ecosystem is mainly obtained by DeFi traders through structured arbitrage strategies; while the miners profit indirectly by obtaining the transaction fees paid by these traders. The typical case of structured arbitrage trading is Uniswap price arbitrage trading: when a Uniswap fund pool asset has a price deviation, an arbitrage opportunity arises to make the price of the Uniswap fund pool return to similar prices with other exchanges. Of course, miners can also decide to run this arbitrage strategy without giving up arbitrage opportunities to traders for handling fees.

MEV crisis

Traders on Ethereum express their willingness to pack their transactions into a block by adjusting the gas fee. Mining is a rational person, and naturally chooses the transaction with the highest gas cost to be processed first, and packs the transactions into the produced block according to the order of gas cost. The financial system built on Ethereum has created many net profit opportunities such as liquidation and arbitrage. But these arbitrage opportunities are limited and fleeting, so traders will compete to obtain them. At present, this competitive relationship is mainly manifested as “frontrunning” or “backrunning”:

  • “Priority Gas Auctions”: That is, Priority Gas Auctions (PGA). Transaction A gives a higher gas fee than transaction B that is waiting, so transaction A is packed into the block before transaction B. (For example, get Uniswap price arbitrage trading to balance the trading pool price)
  • “Trailing transaction”: Transaction A gives a slightly lower Gas fee than transaction B that is waiting, so transaction A can be packaged into the block immediately following transaction B. (For example, the update price of the oracle machine causes DyDx to execute an asset liquidation transaction after a certain loan mortgage is lower than a certain mortgage ratio)
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However, “preemptive transactions” and “trailing transactions” are inefficient and will cause network congestion (such as p2p network load) and chain congestion (such as block space occupation) and other negative externalities. In addition, due to the creation of time-bandit attacks (time-bandit attacks) profit motives, and MEV opportunity competition, resulting in unstable security of the Ethereum protocol, this competition also gave birth to a permissioned communication infrastructure between traders and miners. The emergence of such infrastructure will erode the neutrality, transparency, decentralization, and permissionlessness that Ethereum now upholds.

Although these risks and negative externalities have long existed, we are at a critical turning point in the future development of Ethereum. A series of events in the past six months have caused internet usage to reach a tipping point:
• Stable growth in contract interactions (for example, Ethereum has more complex transactions than before, and the absolute number of MEVs obtained has increased)
• The market value of the token exceeds the market value of ETH (for example, the MEV income of ERC-20 tokens starts to compete with ETH transaction fees)
• Transaction fees exceed block rewards (for example, traders competing for trading opportunities push up Gas prices. This indicates that the MEV-related income of miners will exceed the block reward.)
• Adopt the normalization of preemptive transactions (for example, an indicator that is becoming more adept at mining MEV value)
• A mempool that accepts permission (for example, another indicator that is more adept at mining MEV value)

These situations show that the above-mentioned risks and negative externalities are becoming more and more serious.

These conditions indicate that the aforementioned existing risks and negative external influences are accelerating.

Solving the MEV crisis first

First, let us understand what Flashbots are.

Flashbot is a research and development organization that aims to reduce the negative external influence and risk of the miner’s extractable value (MEV) on the smart contract blockchain. We advocate a permissionless, transparent, and fair ecosystem for MEV value mining to ensure the ideal of Ethereum.

Our solution to alleviate the MEV crisis is divided into three parts: “light up the dark forest”, “democratize value mining”, and “distribute profits.” We believe that every part is critical to the success of Flashbots.

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Light up the dark forest

Ethereum users do not feel the existence of MEV now. This requires a lot of data analysis and deep knowledge of smart contracts to understand, because MEV involves complex transactions, sometimes confused logic, and different levels of opposing games (users, traders, general preemptive traders, miners) .

As more and more critical security infrastructures are transferred off-chain, and the state and scale of the on-chain grow, this problem becomes more serious. It will be more difficult to realize the original promise of cryptocurrency-transparency. The purpose of “Lighting Up the Dark Forest ” is to protect the original promise. More practically, we need to objectively evaluate the negative externalities of MEV and the impact of Flashbots technology, and quantify the harm of MEV to users, so as to provide developers with development tools that can reduce MEV grabbing from the DApp level.

The first step in “lighting up the dark forest” is to quantify the impact of MEV. For this, we created MEV-Inspect. By scanning the Ethereum block, the MEV indicator display is visualized. We can use it to better understand the MEV ecosystem and contribute to the community to eliminate information asymmetry.

Democratization of value mining

MEV value mining is likely to fall into a centralized situation where a few players are concentrated. For example, it is limited to a permissioned “trading dark pool” that has a large amount of computing power, or large traders and miners single-line off-chain transactions.

This centralization of power and capital is the key to weakened security and will erode the core characteristics of Ethereum: permissionless and decentralization.
We believe that without using a neutral, open, and open source MEV value mining infrastructure without permission, MEV may become an insider’s game. “MEV value mining democratization” is to ensure equal access to basic financial modules by large and small participants, so that the core features of Ethereum can be retained.

“MEV-Geth” is our first step towards “democratizing value mining”.

MEV-Geth is an upgraded version of go-ethereum client. The block space sealed bidding auction mechanism is enabled, and the transaction priority communication is carried out. Essentially, MEV-Geth creates a more effective communication channel between miners and traders bidding for priority transactions. Although MEV-Geth’s proof of concept is based on incomplete trust guarantees, we believe this is a significant improvement from the status quo. The use of MEV-Geth will alleviate network and chain congestion caused by “preemptive transaction” and “trailing transaction” robots.

Distribution of profits

MEV involves the entire Ethereum ecosystem: from miners, traders, DeFi developers to the most important Ethereum users. Our preliminary research shows that the current profit distribution of MEV value extraction by traders and miners is uneven. With the increasing frequency of MEV value extraction, we anticipate the need for user-oriented value redistribution to help maintain system stability.

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We believe that Flashbots and the community need to consider value distribution in order to maximize social welfare. In particular, the inherent incentives of the above-mentioned MEV bring risks. We not only hope to alleviate such risks, but also believe that MEV will encourage all system participants to replace such risks with a virtuous economic cycle and strengthen the core value of Ethereum.

Our public commitment

Flashbots originated from MEV Pi-Rate Ship (MEV Pi-Rate Ship), which is a neutral, multi-blockchain cross-field research cooperative that supports MEV-related theories and empirical research. As an open research institution, we promise:

  • Our products will retain the core values ​​of Ethereum, such as openness, permissionlessness, and decentralization to prevent the coming MEV crisis.
  • Open source our research and Flashbots core infrastructure code to benefit everyone.
  • Fully consider the needs of users, miners, developers, node operators, public infrastructure operators and developers, contract/DApp developers, and ecosystem researchers to create a sustainable ecosystem that coordinates the main participants.
  • Contribute to the unresolved public issues of ethics research in the MEV field.

At this critical turning point, as institutions and individuals participating in decentralized finance, this is our belief. Manipulating user transactions to obtain a large amount of value will become a centralized force and damage consensus stability. As long as any system has room to manipulate prices for profit, it will hurt the interests of users. MEV may develop into sacrificing the interests of most people, sacrificing the value of cryptocurrency itself, and allowing a small number of people to profit.

Or, you can choose to use MEV to benefit all users, improve the security of the new generation of financial infrastructure, and avoid the structural unfairness of the previous generation of products. By opening up MEV value extraction and tools, funding public research to solve MEV problems, and coordinating incentive measures for all ecosystem participants through Flashbots’ capital, working together to lay the foundation for a new generation of fair infrastructure.

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Flashbots was initiated and advocated by Scott Bigelow, Phil Daian, Stephane Gosselin, Alex Obadia, and Tina Zhen. At the same time, I also thank MEV Pi-Rate Ship members and Paradigm for their continuous support.

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