What is the MEV?
Behind the scenes of most major blockchains, shadowy super coders and building bots are using the transparency of the blockchain and market transaction fees to their advantage. By monitoring a database of each and every pending and unconfirmed transaction called a mempool, bots can pay higher transaction fees to turn your transaction into a profitable order, often at the expense of decentralized finance users ( challenge).
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According to the Ethereum Foundation, Maximum Extractable Value (MEV) is the general sentence for "the maximum value that can be extracted from block production beyond the standard block reward and gas fee, including, excluding, and changing the order." of transactions". in a block Particularly, arbitrage, liquidations, frontal and sandwich attacks are all forms of MEV in its current state.
The MEV is not inherently bad and exists in any transaction fee market driven chain with open access to the mempool. Decentralized exchanges and lending protocols still rely on MEV to arbitrate pools and settle unsecured loans competitively and efficiently. The ability to order transactions in a block also casts a dark cloud over MEV, as scholars can execute buy orders already before simultaneously selling to the merchant once the order has been placed. Scholars can earn an ancillary percentage in the transaction, but it is entirely at the expense of the merchant who overpaid for the asset they received.
Concentrated Liquidity and MEV
Flashbots, a development organization focused on mitigating the negative externalities of MEV, co-hosted a Twitter Spaces with the Uniswap team in late January to discuss providing "just in time" (JIT) liquidity, an increasingly MEV strategy. popular. As it appears, MEV "web browsers" scour the mempool for large swaps of outstanding swaps and liquidate the associated pool before the swap is confirmed. This allows the scholar to get a significant reduction in trading fees only to then withdraw that liquidity in the same block.
This MEV tactic has proven to be more profitable on decentralized exchanges with concentrated liquidity like Uniswap v3. Version three allows liquidity dealers to supply capital within certain cost ranges, in theory improving trading depth around current costs and increasing fees for active liquidity dealers. MEV's web browsers display your LP in a narrow range of trade costs, absorbing a significant portion of trading costs and making the trade worthwhile.
The strategy uses a non-atomic approach to MEV where web browsers are exposed to delta danger, the chance that an asset will drop in cost. Therefore, the scholar must take a short-term view of the market as their portfolio has been rebalanced from the trade, and future cost volatility could quickly wipe out gains made through trading fees. .
Potential advantages and disadvantages of an increasingly sophisticated SRM
The Uniswap team foresaw the potential of JIT liquidity in v3, but wanted to see how the strategy affected merchants and liquidity distributors in real life. If the tactic proved negative for users of the protocol, Uniswap was considering applying death sentences to liquidity distributors who deposit and withdraw liquidity in the exact same block. However, JIT liquidity was largely a positive for traders who saw an increase in liquidity in their trading range, minimizing slippage.
Flashbots product manager Robert Miller posted an eye-opening thread on JIT liquidity and an on-chain referral case. Miller highlighted the advantages that JIT liquidity brings to traders and how it differs from sandwich attacks, even though it uses a related strategy. In addition to this, LPs were able to continue to be profitable despite JIT liquidity. Since the MEV seeker cannot use this strategy in a single atomic transaction, it is not risk-free and may not fit the bots' danger profile.
A big concern is that MEV will continue to favor the few at the expense of everyday DeFi users. Passive liquidity provision will continue to be more difficult if JIT liquidity strategies prove profitable, and DEX trading will be less desirable if users are on the front lines and under attack. We face some of the same drawbacks as in traditional finance, with the flow of sell orders and high-frequency trading.
However, at both the protocol level and the application level, MEV can and is mitigated. The flashbots shed light on the misunderstood industry and created products to combat the inconvenience felt by everyday users. For example, an off-chain market where scholars can compete for a trade order ensures that on-chain gas wars are less likely. In the coming months, we may have a clearer picture of who is harmed by VPD and how users can protect themselves.
pulse check
The following is an overview of network activity on the twenty Ethereum beacon chain throughout the last week. For more information on the metrics presented in this section, see our one hundred and one explanation of the Eth twenty metrics.
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Take validated
- A Coinbase engineer assured users that the exchange was working on a solution to bring customer concentration into play. BACKGROUND: The talk of the service's customer diversity continues to escalate as Prysm-like validators take an increasing share of block production. Community members seek to hold staking dealers like Coinbase and Kraken accountable for the health of the network. Large exchanges control about thirty percent of validators and have relied heavily on the use of Prysm, which adds unnecessary danger to the network.
- The Ethereum Foundation has published a breakdown of validator distribution thresholds in light of the service's customer diversity drawbacks. BACKGROUND: The multi-tenant nature of Ethereum leaves the network and validators to guard against software failures. Ideally, no user would run on more than thirty-three to three percent of the network's validators, ensuring that a failure of one of the service's multiple clients does not break the purpose. However, if a user represents more than XNUMX% of the network as Prsym, it has the potential to wrap up failures and cause avoidable chain breaks in the future, financially punishing anyone who uses the majority user.
- OpenSea ended January with over US$XNUMX billion in NFT trading volume on Ethereum throughout the month. BACKGROUND: Non-fungible token trading rebounded strongly in January, with OpenSea volume XNUMX% higher than the previous busiest month. With just a month into the new year, OpenSea is poised to produce nearly €XNUMX billion in revenue in XNUMX. The amount is even more incredible when you consider the €XNUMX million volume generated on the recently launched platform, Looksrare.
- Blockscan introduced off-chain wallet-to-wallet communication on Etherscan. BACKGROUND: Communication between wallets has been really difficult and required on-chain transactions in the past. Blockscan allows wallet users to remain anonymous and also contact and reply to other wallets on the Etherscan site.
factoid of the week
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Valid Points incorporates information and data on CoinDesk's own Eth twenty validator into a weekly analysis. Any and all profits from this staking business will be donated to a charity of our choosing when online transfers are enabled. For a full overview of the project, check out our announcement article.
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