Is the MEV auction mechanism favored by God V a disruptive innovation or a kind of "exploitation" of miners?

Written in front: Karl Floersch, an Ethereum researcher from Optimistic (formerly Plasma Group), proposed a mechanism called MEV Auction (MEVA), which aims to solve the potential problem of miners using "privilege" for profit. The auction rewards will be taken from the miners 'hands and then rewarded to other participants in the community, resulting in a decrease in the miners' income.

(Picture from: tuchong.com)

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First of all, I would like to thank Vitalik for his help in this article, as is Phil Daian (and thank him for his amazing research on MEV). Barry Whitehat also put forward this idea , and finally thank Ben Jones and others!

Blockchain miners (also known as validators, block producers, or aggregators) reward their services by combining block rewards and transaction fees.

However, being a block producer responsible for generating specific blocks, you can enjoy great power, which allows you to reorder transactions at will, such as inserting your own transactions before and after other transactions, and postponing transactions directly to In the next block, there will be many ways to profit. For example, participants can conduct advanced transactions (either Uniswap type or order book type) on a decentralized exchange (DEX), first-come can claim rewards, and have a favorable position in ICO activities, similar to There are many more applications. Recent research has shown that the income that participants can withdraw (called "miner extractable value" or MEV ) can be much higher than transaction fee income.

Frequent batch auctions (FBA for short) is a traditional way to deal with market manipulation through reordering. In FBA, instead of processing transactions "as is", the market collects all transactions submitted within the same time frame (possibly shorter than 100 milliseconds, or one minute or longer), re-based on standard algorithms that do not depend on the order of submission Sort and process them in the new order. This makes micro timing manipulation almost irrelevant.

We propose a technique similar to FBA removal of micro-opportunity manipulation, but with one major difference. In FBA, there is only one application, so there is a natural "best" order for transactions (orders): process them in price order. In the general blockchain, there will be many applications with arbitrary attributes, so for fixed algorithms, it is almost impossible to propose the "correct" order. Instead, we just auction the rights to reorder the transactions in the N block window to the highest bidder . That is, we created a MEV auction (MEVA), where the winners of the auction have the right to reorder submitted transactions and insert their own transactions as long as they do not delay any particular transaction by more than N blocks.

This forms a form of "managed centralization": a mature party wins the auction and gets all MEVs. We call this party a "sequencer". Having a single sorter reduces the benefits of other block proposers using "smart" algorithms to near zero, thereby increasing the chances of "stupid" block proposers, thereby promoting decentralization of the block proposal layer.

In theory, this technology can be applied to the base layer (layer 1). Of course, we have also shown how it can be applied to the second layer system (layer 2), especially the Optimistic Rollup , zkRollup, or Plasma systems.

MEV auctions one step further than Gas price auctions

We recognize that control over the order of transactions has become very profitable, especially as smart contracts like Uniswap become more and more popular. On Uniswap, high slippage transactions have repeatedly resulted in tens of thousands of dollars of free arbitrage profits.

These arbitrage opportunities are used by arbitrage robots that monitor the blockchain and participate in gas price auctions. As long as the price paid by these robots for the transaction does not exceed the money they can make, they will bid at high frequency to surpass each other.

Frontrun.me collects a lot of information about these auctions, which happen daily in the context of Ethereum.

Contrary to intuition, the real winners of these auctions are actually Ethereum miners, as the constantly bidding robots increase the price of Gas . The increase in Gas prices has increased mining fees and income. By introducing MEV auctions in addition to Gas price auctions, we can use the same market mechanism to extract prepayments for miners and redistribute profits to the community.

Implement MEV auction

Auctions can be used to separate two functions that are often confused, and then extract MEVs from miners: 1) transaction inclusion; 2) transaction sequencing. To implement our MEVA, we can define a role for each function. Determine the block producers included in the transaction and the sequencer that determines the order of the transactions.

Block Producer // Transaction Contains

Block proposers are most similar to traditional blockchain miners. Crucially, they retain the anti-censorship characteristics we see today in blockchains. However, these proposers did not propose blocks with ordering, but simply proposed a set of transactions, and they were eventually included before N blocks.

Sorter / Transaction Sort

The sorters are selected through the auction process of smart contracts. This auction grants the right to sort the most recent N transactions. If the sorter does not submit the order contained in the block proposer within the timeout period, a new sorter is selected.

Sorter and instant transactions include

In addition to extracting MEV, MEVA also provides the current sorters with the ability to provide instant cryptoeconomic guarantees on transaction inclusion. They sign the order as soon as they receive the user's transaction (even before the transaction is sent to the block producer). If the orderer is ambiguous and does not include transactions at the index they promised, the user can submit a fraud certificate to the MEVA contract to punish the orderer. As long as the loss of the sorter exceeds the gains it gets from bad behavior, we can expect the sorter to provide real-time feedback on the state of the blockchain, such as providing real-time price updates on Uniswap.

Implementation in Layer 2

We can write this MEVA contract directly on the first layer (L1) blockchain consensus protocol.In addition, we can also add this mechanism non-intrusively in the second layer (L2) and use it to manage the Optimistic Rollup Sort transactions.

In layer 2, we just need to repurpose the L1 miner and use it as a block proposer. We then execute the MEVA contract, specifying one sorter at a time. (Note: Interestingly, single-orderers can also run through a sub-consensus protocol if needed)

In fact, using MEVA for layer 2 is very suitable, because it allows us to experiment with different parameters of the auction unconditionally, while readjusting Ethereum's incentive mechanism to direct revenue back to the ecosystem. This may be the main source of revenue for blockchain self-sustainment.

Precautions

1.MEV auction collusion

One of the concerns is the issue of auction collusion. Bidders colluded to reduce competition and artificially lowered auction prices, which would undermine the ability to accurately detect and tax MEVs.

One mitigation is to increase the convenience of entering the aggregation market by releasing open source sorter software, which helps to establish a lower price limit, because of the low threshold entry, we can expect enough competition, which will lead to at least an honest sort Bidding.

2. Long-term incentive adjustment

The most clumsy way to achieve MEVA is to hold a first-price auction once a day, and let the winner of the auction monopolize the block production of the day. All proceeds from the auction are remitted to the Public Goods Fund. Unfortunately, this method has a serious problem: the attacker only needs to bid on the aggregation cost for more than one time period, and can become the selected sorter and reduce the network quality.

Adding security-equivalent content to sorters can help alleviate this problem. If the sequencers reduce the quality of the network at any time during their period, they should be punished accordingly according to the degree of harm they cause to the network. This can be realized as a simple bond that can reduce misconduct by subjective judgments or lock in the price of assets with a healthy network. Note that the wrong behavior of a sorter is usually a non-unique attributable error, so unfortunately requires subjective judgment to perform.

3. Parasitic L2 problems

Layer 2 mining has received bad pressure because it has transferred the income of L1 miners who protect the network. Moving revenue from L1 implicitly reduces the security budget, which reduces the cost of executing a 51% attack.

Although I hope for a clear mitigation measure, the problem of parasitic L2 is worth more research and risk analysis.

Way forward

A design like this is crucial for the formation of the Ethereum upgrade wave.It is not only an innovation in scalability, but also an opportunity to readjust the incentive mechanism to make it beneficial to the community and the public. And public products.

If we don't seriously consider how to maintain blockchain technology, we may create a system structure that lacks resistance and will eventually collapse due to large-scale economic concentration, which is not the future anyone wants to see.

Thankfully, these designs show the possibility of packaging MEVs and giving them back to the community. As these systems go into production, further research and economic models will be key, let's implement it!

Ethereum Research Community Review

What Gauntlet CEO Tarun Chitra said:

This idea seems great, and it's also a good starting point for building a threat model for MEVA. Several things seem to be the main challenges facing this system:

1. Increased delay between transaction selection and sorting;
2. Bayesian optimal auction structure for efficient calculation of sequential auctions;
3. Inflation / dilution / burning mechanism of basic system;
4. This does not solve all the sources of MEV, so the tax has a non-zero deadweight loss;

The full review is in the original: https://ethresear.ch/t/mev-auction-auctioning-transaction-ordering-rights-as-a-solution-to-miner-extractable-value/6788/2

God V responded to Tarun Chitra:

Optimize ranking

Here, do you assume that the sequential auction of block N occurs after the transactions in block N are known? I think what @karl thinks is that the sorted auction was well done before the N block, for example a day ago.

In this way, the sorter will purchase the rights expected for the future MEV instead of bidding directly on the permutations (and insert and defer to the next block operation). Does this simplify the above analysis?

Impact on inflation

The third option has many internal options! One option that I'm particularly excited about is funding public goods through some DAOs, on-chain quadratic financing instruments, or similar instruments.

The simplest form of MEV not discussed is transaction elision. For example, validators do not repeatedly add a transaction to a transaction set.

I agree that this is also a MEV! Although I want to know how much of it was captured by the ability to arbitrarily reorder transactions (including inserting my own transactions before certain transactions in the original block). What do you think?

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