ChainLinkGod Podcast - Exploring Miner Extractable Value (MEV) with Pmcgoohan

Primer: ChainLinkGod and Crypto Oracle interviews Pmcgoohan, who first raised up the issue of Miner Extractable Value (MEV) in year 2014. In this episode, they discuss what is MEV, its examples, its negative impact on Ethereum users, and some possible solutions to the problem.

Pmcgoohan's Background

• Analyst Coder

• Worked for various scientific bodies, corporations, and financial firms

• Doing algorithmic trading by writing his own code. Done it for 20 years in highly adversarial market environments

• Predicted MEV would occur way back in 2014. Called it miner frontrunning back then

Bringing The Topic Of MEV Up In 2014

• A mixture of opinions

• Some understood it straight away

• Others said that it will get sorted out later

How Did He Know MEV Will Become An Issue

• Heard about Ethereum before its launch. Looked at the draft documents and realized that block creation was largely borrowed from Bitcoin

• For Bitcoin, transaction order does not matter because people are not accessing a shared resource. Therefore, Satoshi did not have to solve fair ordering

• In Ethereum, there is a competition for accessing a shared resource with other participants. Most smart contracts are shared resources. This opens it up to exploits and attacks

Definition Of MEV

"MEV is the profit to be made from reordering and censoring transactions." - P Mcgoohan

• Content of each block is chosen by just one miner. This gives them the freedom to frontrun and exploit transactions

• What MEV is not:

  • Making money through block rewards

  • Making money through gas fees

  • Latency arbitrage

  • Cross-chain arbitrage

Examples Of MEV

• Frontrunning: Attacker sees a victim's transaction, inserts their transaction in front of it, and profits

• Sandwich Attack: Attacker frontrun to open a trade, and then the victim's transaction in the middle, and the attacker back around to close out

• Arbitrage: Profiting from the price difference of the same asset across different markets

• Liquidations: A kind of application-specific frontrunning or backrunning

When Miners Replace The Arbitrage With Their Own Transaction, Is It MEV Or Arbitrage?

• Have to carefully distinguish between arbitrage and MEV

• At this moment, replacing arbitrage transactions with the miner's own transaction is done as a form of MEV

Frontrunning Liquidity Provisioning On Uniswap V3

• ChainLinkGod shares about an interesting case he has observed

1. Person saw an incoming trade on Uniswap V3

2. Before the trade, they added liquidity at a particular price range of the incoming trade

3. Trade occurs and the person got all of the fees

4. Withdrew liquidity afterwards

Are There Good And Bad Forms Of MEV?

• No, they are all bad

• Both frontrunning and backrunning are equally bad

• He would argue that MEV potentially reduces market efficiency because the victim is forced to overpay

"You know, even the greatest MEV apologists sort of agree that there's no price discovery going on, there's no greater market efficiency that comes out of it [MEV]. Value is taken without concern from the victim transaction, and no information is transferred to the market in return." - P Mcgoohan

• Wrote his own code to analyze Ethereum and found that ~43% of all MEV includes frontrunning, backrunning, and sandwich attacks

• Some argue that latency arbitrage is a good form of MEV. In TradFi, there could be the same asset trading at different prices across two different exchanges (e.g. NASDAQ and London Stock Exchange). In such cases, arbitrage aids in price discovery

• However, in Ethereum, you cannot do latency arbitrage. Miners do not order transactions by time, but by their self-interest. They could rearrange transactions if it benefits them

"Miners are in control of time on Ethereum. They warp time to their advantage. It's a way that you can put it they control time, they're time lords." - P Mcgoohan

• Relevant to liquidations as well. A user could try to add collateral to avoid liquidation but an attacker could censor that transaction in order to liquidate the victim and take the reward

• Can only have good MEV if all transactions are fair. However, at that point, it is no longer called MEV but latency arbitrage

MEV And The Long-Term Success Of Ethereum

• Extrapolating from the ratio of trade volume and global adoption of Ethereum, MEV would cost around $2 trillion per annum. Nobody would tolerate this cost

• As Ethereum use cases expands, the attack vectors for MEV increases

• Example of MEV in an open marketplace:

1. Send shopping list as transaction to the blockchain

2. Local grocery store can offer you the best price

3. Megacorp pays the MEV auction winner and censors everyone's transactions but their own

4. Local grocery store closes down

"I think that the thought experiment of a megacorp stepping in and using MEV to enact their monopolistic policies is like the anti-thesis of what a blockchain was supposed to be in the first place." - ChainLinkGod

• Have to fix MEV at the base layer

MEV Auctions

• Solves the transaction bloat that comes from gas price auctions

• MEV auctions are not a solution to MEV extraction. They actually maximize the extraction of MEV

• Did research and found that people with the most money/resources win MEV auctions

• If MEV is solved, there is no use for MEV auctions anymore

Best Way To Get Your Transaction Included Quickly?

• Some examples of getting your transaction included quickly:

  • Put a high gas price to bribe the miner

  • Put a minimal gas price in and hope that the MEV value of your transaction is enough to bribe the miner

  • Create a flashbots bundle and bid directly

  • Use an aggregator to bid directly

Possible Solutions For MEV

• In a decentralized network, blocks are validated and propagated by consensus

• However, at that last critical millisecond, the network gives all the power to one miner to choose transactions for that block. During this exact point, Ethereum is centralized

• Instead of allowing only one miner to choose what the content of that block should be, he suggests that block creation should be decentralized

• Proposes content layer solutions: chunk up pending transactions as they arrive at the mempool. If this is done quickly enough, transactions end up being batched together and ordered by time. This is the 1st step to fair ordering

• Content layer solutions reduces MEV. It does not eliminate it

L2s, Oracle Networks, And MEV

L2s

• L2s need to have fair ordering of transactions as well

• Important to have their own validators to prevent censorship by an attacking MEV auction winner

• Users could send encrypted transactions to the mempool and a timelock encryption mechanism could be set to decrypt transactions once they have chunked up. This allows transaction order to be fixed and solves MEV

• One threat to fair ordering is collusion. Some nodes could be bribed to send a certain transaction order

Oracle Networks

• There will be a lag (because previous transactions are already batched together), but oracle updates will be processed in the correct time order

• Transactions that were submitted before an oracle update will be processed before the oracle update; transactions submitted after an oracle update will be processed after

"In the Ethereum miner/validator community, you know, you don't kind of go, oh, I trust blocks from this miner. That doesn't really happen. So if you've got a mechanism [Chainlink Oracle Network] that works for allowing reputation to be used in that way, that I think that can be really powerful." - P Mcgoohan

• Oracles do not just deliver data. They are generalized off-chain agents who can be hired to do hybrid tasks involving off-chain systems like the mempool

EIP-1559 And MEV

• Could consider not burning all the base fee and give some of the base fee to the miner to recompensate them

• For Eth 2, there's no need to pay validators as much as they are not doing as much work as miners in proof of work

• EIP-1559 benefits the content layer solution he proposes. It would work on the base fee for EIP-1559

Visibility Of MEV To The Community

• MEV Explorer does a good job in visualizing MEV

• Could be improved to display the different types of attacks

• Need more visibility so that people realize how much they are losing from MEV and treat it as a priority

Community Response To MEV

• Fatalistic response of MEV is inevitable and there's nothing that can be done about it. He does not see any academic or theoretical basis for this position

• The double spending problem used to be thought of as unsolvable, but was eventually solved using the blockchain. MEV could be similarly solved as well

• Devs are currently focused on solving scalability. MEV will most probably be the next issue they tackle after solving scaling

Last Words To Listeners

"Take MEV seriously. Left unfixed, it is an existential threat to Ethereum but don't be paralyzed by fear and fatalism. You know, at the end of the day, MEV is just a vulnerability. And we're developers, and we fix vulnerabilities in our software. It's what we do." - P Mcgoohan

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