Bankless - 133 - Flashbots Saves Crypto with Stephane Gosselin

Episode Date: August 22, 2022

Stephane Gosselin is the Founder of Flashbots, an R&D organization that’s trying to fix the most pernicious problem in crypto—the problem of MEV (Maximum Extractable Value). Many of us are massively optimistic about crypto and aren’t worried too much about its future. However, this MEV thing could be our achilles heel. On this episode, we dive into what Stephane and his team are doing to make MEV less of a potential weak point, how MEV works, and what our industry would look like if Flashbots didn't exist. And of course—so much more. This is another fundamental Bankless episode that you won’t want to miss. ------ 📣 Chainlink | Register for SmartCon 2022 with promo code “BANKLESS” https://bankless.cc/smartcon  ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/  🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/  ------ BANKLESS SPONSOR TOOLS: 🌱 LENS | ACCESS CODE: MERGE (only valid for 24 hours!) https://bankless.cc/Lens  🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno  ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync  ------ Topics Covered: 0:00 Intro 9:28 MEV Explained & Its Importance 13:35 The Evil Side of MEV 21:26 MEV Utopia vs. Dystopia 28:54 Competitiveness, Market Structure, Equilibrium 32:10 MEV Supply Chain Crashcourse 37:24 Timeline 38:56 Flashbots Thesis 42:31 No MEV Geth Scenario 45:15 Flashbots Continued 49:10 Solutions 51:15 MEV Boost 1:00:18 MEV Boost Adoption 1:05:10 Differences in Staking APY 1:08:20 Flashbots Incentives 1:12:57 Infinite Problems to be Solved? 1:14:35 PBS 1:17:54 Relayer Role 1:20:05 Weird MEV Potential Merge Issues? 1:22:40 Byproducts of MEV Boost 1:27:17 New Builder Market Speculation 1:31:15 Stephane’s Optimism 1:32:55 Closing & Disclaimer ------ Resources: Stephane Gosselin https://twitter.com/thegostep  MEV-Boost in a Nutshell https://boost.flashbots.net/  Flashbots Blog Posts https://writings.flashbots.net/writings  Guide to Ethereum Roadmap https://newsletter.banklesshq.com/p/guide-to-the-ethereum-roadmap-jon#details  Ethereum’s Hidden Power Structure https://newsletter.banklesshq.com/p/125-matt-cutler#details  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. 

Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, great episode for you today on the topic of flashbots, on the topic of MEV, on the topic of crypto dystopia versus crypto utopia, and how we propagate the utopia. This is an insanely important topic to cover. we're going to talk about a few things, a few things to look for during this episode. Number one, why this thing called MEV, that is maximum extractable value, why it poses an existential risk to everything we are building in crypto. We are on this knife's edge between dystopia and

utopia. Number two, what the world looks like if we ignore the MEV problem. We can not afford to ignore it. Number three, the blockchain supply chain. What actually is that? How MEV can increase your eth-staking rewards by something like 6%. Crazy. That's a high number. Stefan does the map in the episode as a very high at number. Number four, how all this technology is getting embedded in the Ethereum protocol long-term in something called PBS. That is Proposer Builder separation. We get into the Ethereum roadmap a little bit. Number five, what's next for FlashBots after this thing called PBS is deployed and makes them obsolete? We talk about the FlashBots organization as well. David, there's so much.

much here. How would you rate this episode in terms of like skill level or knowledge level? Is this accessible enough for the straight beginner? Does this sveer towards a little bit expert level? I think if you have not heard the term MEV before, well, first off, I remember my first time I heard MEV, and if you like rabbit holes, I'm so envious of you. Going down the MEV rabbit hole for the first time was so much fun. If you have not yet heard of MEV, this episode should be fine. It'll start fine. It'll get challenging towards the end. But overall, it'll throw you down a fantastic rabbit hole. The MEV part of this crypto industry has attracted some of just straight up the gigabrains. Like all the gigabrains just get attracted to MEV because it's such a complex, nuanced problem to solve with so much at stake.

There's a lot at stake if we do not solve MEV or if we solve it incorrectly. And so there's just these certain types of people that have really been captivated by the MEV problem and have really put some of the high. amounts of IQ all targeting the same problem, which is solving systemically how to solve the MEV problem. Just really, really quick, the MEV problem. Maximally extractive value is this thing that we discovered back in like 2017 or 2018 as a function of smart contract blockchains where you have defy. And anytime that you make a trade on like UNISWOP, you imbalance a pool, right? Like if you are trading USC and ETH, you put in USC and you pull out ETH, that changes the pool. That changes the price. And arbitrages can come and rebalance that pool as a function of how it relates to other

exchanges. So it'll balance out like the price of these things. You can also talk about MEV in the context of like liquidations on MakerDAO or AVE. It's basically when users use a smart contract blockchain, they leave arbitrage opportunities in their wake. And so arbitrage bots will come and make transactions to pull out some of that value. They'll rebalance the pool, take a little bit of arbitrage. And this is all normal and healthy. It gets more and more malicious. as you get further down the MEV rabbit hole, there's like front running. If you were trading on Uniswap, you can get front run by a bot and they'll sell you what you were going to buy but at a higher price. That starts to get a little bit malicious. And it can go down to what some people will just define

a straight-up theft. And it can even get even more systemic than that. It can start like disrupting actual blockchains as in like a couple blocks will have passed. But there was an MEV opportunity that was so incredibly lucrative that MEV like people will try to actually unwind the blockchain and go backwards for blocks in order to capture that opportunity before going forward again. So like not only is it just about arbitrage. It's about just like, you know, bot attacks in the mempool, but also destabilizing the blockchain.

And so it's critically important that we get this right. So that's like your quick TLDR rabbit hole on MEV. And FlashBots is an organization of people that have targeted this problem directly, creating this sort of sandbox, if you will, for MEV players can play in this sandbox that doesn't, in fact, like, users maliciously or disrupt our blockchains. And Stefan here is one of the co-founders of FlashBots and has a lot to say with where FlashBots currently is in this proof of work paradigm, but also where it's about to be in this proof of stake paradigm, because proof of stake definitely changes the game of MEV and the role that FlashB has to play in this ecosystem.

Absolutely, guys. You find there's some strange God mode type abilities in the transaction ordering of our blocks, and that is the source of MEV's power where a certain party has the ability to order blocks in a certain way. Anyway, we're going to get into all of this. It's a fantastic episode in how we solve it, how it relates to the Ethereum roadmap. And by the way, guys, if you want to watch Bankless Podcasts on video,

you could do that on YouTube, but you can also do it now on Spotify. So all Bankless Podcasts are now published on Spotify with video, so you can go ahead and check that out. Let's get right in the conversation with Stefan from FlashBots. But before we do, we want to tell you about the fantastic sponsors that made this episode,

possible. ZK Sync is an Ethereum layer two network that is pushing the frontier of high-performance blockchains that don't compromise on security or decentralization. ZKSink has combined the power of zero-knowledge roll-ups in the Ethereum virtual machine, enabling developers to build the greatest Web3 projects possible, ones we haven't even seen yet. Crypto needs its killer applications to onboard the world, but crypto-killer apps need ZKSink as a platform to build on first. It's generally accepted that zero-knowledge roll-ups are the conclusion of crypto-blockchain scaling technology. And ZKSink is leading the charge into the final frontier of crypto economics. So if you're a developer who wants to build your app on a future proof foundation, which gives your

users the best Ux possible, check out ZKSink's website at ZKSink.I.O. And yes, there's also going to be a token, so give them a follow on Twitter 2 at ZKSink. Juno is bringing crypto-friendly banking straight into your checking account. With Juno, you can send money from your Juno checking account straight onto a layer two, like Polygon, Optimism, Arbitrum, and they have ZKSink, and dark net support on their way. You can skip the ACH wait times. You can skip all the gas fees and go straight from your checking account to an Ethereum layer two in seconds. Inside Juneau, you can buy and sell crypto with zero dollar fees. And your Juno checking account comes with a metal master card that gives you up to 5% cashback on your spending. Juno is also giving you $10 cash back

on your first crypto deposit and $100 when you set up a direct deposit. This ad just writes itself. So go sign up at juno.finance slash bankless. Lens Protocol is an open source tech stack for building decentralized social media applications. It is the new era for social media. We all have toxic relationships with our web 2 apps. We want to break up with them, but we can't. These applications own our digital lives and all the relationships that we've made. We need to break through to a new paradigm of social networking applications that we control rather than them controlling us. Lens isn't a social media app. It's a protocol to let a thousand Web 3 social apps bloom. Lens is a permissionless and transparent social graph that is owned by the user. In crypto,

we say not your keys, not your crypto. And on Lens, we say not your keys, not your profile. With Lens, your followers go with you to whatever social media application you want to use. And instead of being trapped by an algorithm chosen by that app, Lens lets you choose the way you want to experience your social media. Lens is the last social media handle that you'll ever need to create. So in order to get started, there is a secret code word in the show notes. Enter that code word in the Google Forum links, and you'll be well on your way to entering the world of Web3 Social. Hey, Bankless Nation. We're super excited to introduce you to our next guest on a very important topic today. This is Stefan Gosselin. He is the founder of FlashBots. What is FlashBots? It's an R&D organization that's research and development that's trying to fix what we think is one of the most pernicious problems in crypto, maybe the most pernicious. The problem of MEV. That stands for maximum extractable value. And while David and I are massively optimistic about crypto, we're not really worried about too much in crypto. I mean, we think this thing is going to be pretty much inevitable. We are kind of worried about MEV.

It's the one thing. It could really be Crypto's Achilles Heel. So we're going to talk about it today with somebody who is trying to solve this problem and actually whose work in FlashBots is getting ready to become important enough to actually get embedded in the core Ethereum Protocol. So we'll talk about that as well. Stefan, welcome to Bankless. How are you doing today? Hey, I'm doing great. Thank you so much for having me. This is exciting. Always a pleasure to talk with more people about, yes, the very scary problem of M.AV. Well, I can't promise you about the smart part, but hopefully you bring the intelligence for David and I, because in fact, you know what, we want to kind of start at the less smart level

of this MEV problem. So I called it the most pernicious problem in crypto. Do you think we're like blowing this out of proportion? Can you tell us why MEV is important at a high level and what it is for somebody who is just now hearing about it? Yes. So no, I don't think you're blowing it out of proportion, though I am very biased in saying that. We did literally get every single person that we could figure out that agreed with this point of view together sometime in 2020 and starts this organization together that's sole mission is to figure out how to solve the problem of MEV. So I am definitely in my little MEV bubble where I spend all my day and night thinking about it and worrying about it. So why did I start myself with a bunch of people who worry about this?

Well, MEV is sort of this emergent phenomenon that we've observed on smart contract blockchains when people start to actually use them. We realize is that there's a lot of different powers that miners have that they can use to extract sort of extra value out of the protocol in ways that the protocol wasn't necessarily designed for. So when the initial sort of paper by Phil Dianne came out and defined the term minor extractable value, it looked at things like reordering, censorship, and insertion of transactions within blocks, looking at basically arbitrage opportunities on decentralized exchanges, and how when you have miners that start to target these, they might do things like doing reorg attacks against the chain and

some other sort of nasty behavior. At the time, it was mostly like a theoretical paper. that looked at, okay, well, here's what would happen if these dexes would get a lot of traction. And lo and behold, a couple years later, they did. And around, you know, summer 2020, during DFI summer, we started seeing a lot of these bots becoming very active to the point where it started having sort of a negative impact on the rest of the system. The two years following that, so between summer 2020 and where we are today, has just been sort of an explosion and sophistication of bot activity on Ethereum, but also in a recent

other smart contract chain that has any sort of meaningful economic activity. And we've seen sort of the space go from very simple sort of arbitrage strategies to evolving into like very complex generalized front running, liquidations, cross-domain arbitrage, all kinds of NFT sniping and strategies that have just created a ton of demand and activity for these chains. Now, the role that FlashBots plays in all of this is we see MEP as being probably the biggest centralization risk for crypto. The way to think about it is if chains aren't actively thinking about MEV in their design,

they are guaranteed to make some fatal mistake that will have some negative externalities on their users or cause them to become very heavily centralized. So we sort of take a research first approach of saying, okay, we know that this is a risk. Let's try to understand it better. and then let's develop solutions that help blockchains deal with this risk. So we launched on Ethereum and we have this solution, MEV Geith on Ethereum that's running with all the miners. And then we're preparing as everyone is for the transition to proofsate. So fine, before we go into FlashBots and MEV Getz and some of the solutions to this problem,

I'd really just like to define the scope of the problem a little bit more. At the very basic level, MEV is just basic arbitrage opportunities. There's a difference in the ETH price between uniswap and balancer, an MEV bot can arbitrage those differences. And so, like, in theory, the idea is that some bot will come in and balance out those two pools, but then whoever's actually mining the block will see that bot come in and they will front run that bot. They will balance those two pools instead, and they will be able to pull out that arbitrage. They're just able to arbitrage faster. At this level, things aren't all that crazy. Things aren't all that evil or so.

and this is kind of actually considered healthy in the ecosystem in the defy ecosystem. You know, liquidity pools stay balanced faster. Liquidations in Ave your compound happen faster, keeping those systems more robust. So there's like a lot of good MEV that's out there that just helps stabilize the defy ecosystem. And like it's almost synonymous with just general arbitrage. And this part of MEV, we don't really have a problem with. Can you illustrate the more dark side of MEV, the evil side of MEV, down to the point

of things that are considered ethically poor or. or ethically dubious, but also down to the point of destabilizing a blockchain. Can you tackle those two things as to like the bad side of MEV? Yeah. You know, this is where even a good thing has is drawbacks. In many ways, MEV is what makes a lot of defy systems work. It's what makes AMM possible. Like AMMs, you would not be able to be a passive liquidity provider

if there wasn't someone doing arbitrage between Uniswap and Binance. Right. It just would not work as a strategy and like no one would use a system. But because there's someone doing that arbitrage, the prices on Uniswop are able to stay in sync. So it has some value there. Similarly for liquidations, right? If you run a liquidations protocol that's using some kind of Oracle system, you need some bot operator to come in and actually execute the liquidation to keep the collateral ratio of the lending platform in balance. And someone literally just needs to like send the transaction that triggers this function.

And that is MEV. It's rewarded in some way. So good MEV takes place when a protocol or like a DAP designer thinks about, okay, what are the permissionless functions in the system that we want to incentivize third parties to take? And then how much money do we need to pay them to take these? Where it starts to become a little bit more questionable and nefarious is when protocol developers and DAP developers do not think about the MEP that's exposed through just regular user interactions. So when their users start to interact with their protocol, they might actually be exposing some MEV as well. And that might have some negative sort of impact on their experience. So on Uniswap, for example, the case that happens quite frequently, right, is you set your slippage limit too high and then send a transaction for a swap into the transaction pool. Some bot operator out there sees this. They sandwich your transaction and provide you the worst execution that you accepted using your slippage limit, right? Uniswap by like allowing

users to set high slippage limits and allowing them to send it to the transaction pool might in many ways be giving them a worse price execution. And so those kinds of behavior end up being sort of less beneficial to the end users because there isn't really any reason for the system to have these kind of value exposure. Got it. So like what you just described is maybe in a bad MEV scenario, the user gets ripped off a little bit, right? There's some additional cost that they're paying to these kind of MEV rent collectors. But can you take that a little bit further? So like, what is the worst case scenario here? I'm almost like maybe talking more from a system perspective rather than the kind of the user. So the user experiences this. They're getting

ripped off in small ways here and there. Maybe they notice. Maybe they don't. I would have to get really, really bad for them to maybe like fully notice. But I think there are some more pernicious like system level attacks. And I want to ask the question. question of like, okay, so this is a problem. But what happens if we just don't solve it? Like, what happens if we just like leave it? How will the system evolve in that condition? Yes. So I sort of mentioned briefly negative externalities. I think from a system designer perspective, from the perspective of Ethereum core developers, Solana core developers, whoever, right, who's looking at how do I build a blockchain? You have to see, okay, what incentives am I

creating by these like different mechanisms I'm implementing. Three ways in which like MBV tends to be extracted is either a spam war, a latency war, or an auction. This is like different ways that you allocate opportunities or you design a system of block space and how competition for that block space ends up being targeted is using one of these three systems. And each of these have these negative externalities, right? So if you use some kind of system that says,

we're going to order transactions randomly, right? All the transactions are going to be hashed and like ordered by the hash, something like this. Then you can have bots that still target these arbitrage opportunities by sending thousands of transactions into the transaction pool and hoping that one of them is going to be the one that targets the opportunity. And what that does is it takes up a ton of block space and crowds out regular use cases. If you use a system that says, okay, we take first in, first out ordering.

And we say whoever is the first to submit a transaction is going to meet the one that gets the block space. Then all of a sudden you create sort of a race or an incentive for everyone to invest very, very heavily into co-location. So you'll have basically the most dominant validator or minor selling sort of server racks next to their Ethereum nodes saying, whoever is willing to pay me the most for this immediate access is going to be able to capture these opportunities. That creates a huge centralization vector at the validator level, right? So now all of a sudden, you have, you know, whoever is the best minor or validator at doing this arbitrage or at selling co-location services

is going to continue accruing more rewards than all the other validators and can start to sort of take over the network and start centralizing it. And then the final option on like how to deal with MEV is what we call block space markets, right, or block space auctions, which is sort of the solution space that the flashbots has been building towards, which is saying actually, Let's not focus on this latency war with validators and miners. Let them outsource completely the block construction to third parties.

Let third parties compete on price as opposed to co-location. And whoever is willing to pay the most for the block space is the one that ends up being selected and included. So, Stefan, like take one blockchain that decides to kind of like solve this, bake it into their protocol, like, you know, do something about MEV and another chain that doesn't. Like what happens to the chain that doesn't? Does this just kind of evolve back into the existing financial system we have where we do have co-location? We do have like, you know, Flashboys and all of these things. Like, I'm just trying to get a escape of the dystopia if we let MEV run wild and we actually don't make protocol changes and don't decide to build solutions to address it. You said centralization, but like sometimes

it's hard for people to get in their heads because they don't see how this abstract idea of centralization actually affects them. So, yeah, let's try to paint sort of a picture of what two different like futures looks like. We had this conference in Amsterdam a few months ago that was themed around the MEV utopia and the MEPD dystopia. And the reason why I think it's quite powerful to draw this comparison is to try to give more of a feeling for what these two different futures look like and the impact it has

on users of these systems. So we can start by the dystopia. side. Let's say you have a chain that doesn't like solve much for MEP. It doesn't implement an MEP block space auction. It has a dominant strategy of co-location and perhaps the validators start to sell sort of co-location services. What you end up having there is you have a single entity who's investing very heavily in these MEP strategies become somewhat gatekeepers to the chain. Perhaps they start running the majority of the validators on this chain and they start aggregating the majority of the order flow because they control most of the block space.

So now all of a sudden, every single entity or user that's trying to send a transaction to this chain has to route their transaction through the server of this mega fund, this mega MEV fund. You know, this mega MEV fund then has the power to arbitrarily sensor, control, sort of any protocol changes, issues, sort of, you know, soft forks that control in one direction or another. And like overall just have, you know, more influence over. the system. So it undermines this property that we want of blockchains, which is permissionlessness and makes these blockchains trend a lot more towards what traditional financial systems look like. You have broker dealers and then you have like a few internalizers and then like a few exchanges that are all

sort of permission entities with a lot of certifications and government-induced monopolies over the work that they do that restrict what they're able to do. This is the less permissionless future. dystopic future. Under the utopic future, we sort of maintain how transactions and blockchains have worked historically, right, which is you can send transactions to, you know, a local node or a local system with high confidence that it won't be censored somewhere between when you sent it and when it gets included and finalized into the chain. And you have some clear understanding over what are the different steps that this transaction took. You're not just sending it into like a black box where you don't really know how much you're paying or

like what's happening to it, but you have some transparency over every step of this system, you know, who is operating on top of it, you know, what value are they taking from it? So we call this the MEV utopia. There's also this idea of the MEV supply chain. So this is something that listeners can look up. The MEV supply chain aims to define who are the different actors that are operating on the transaction between when the user has an intent to issue a transaction and when it's finalized. And looking at if we are trending more towards utopia or dystopia is actually just looking at

how vertically integrated is the supply chain. Is it sort of a single entity that's doing all of these or is it more modular where each service added is done it by a different entity in sort of a modular way? That's good. And I think we want to talk more about the supply chain, the MEV supply chain in a little bit. but I just want to paint this picture for bankless listeners who've been with us on the journey from the beginning. The dystopia and the utopia. One way to describe that using our parlance is the dystopia is the existing banking system that we have. Centralized actors, highly permissioned, you have to ask them in order to engage with your banking services. And the utopia solution where we solve parts of MEV is the bankless system that we're striving for.

So you can see why it sounds like such a heady topic, like MEV, maximum extractable value. And we're talking about terms like PBS, protocol builder separation and all of these things. But this is really core. Like we actually need to fight for this in order to get the bankless financial system that we actually want. Like at some level, everything hinges upon this. And the outcome will decide whether we're left with the old system we left or a new bankless system where everyone can be their own bank. That's why this is so important. David, I think you wanted to say something. The only thing I'll add to that is that people that identified MEV very early on,

like Phil Diane really brought it to the world. And then with his early presentation, I believe it was the Flash Boy's 2.0 presentation, which really pulled some very similar patterns that we've seen in the stock market, which, Stefan, you've already kind of identified as like co-location, right? There are high-frequency traders in the traditional stock market that are fiercely competitive with each other and very specific on how long of a length the fiber octaves cables are between them and like the New York Stock Exchange because they can get their trades in quicker and then they can collect all the value. And so when Phil Diane and others in this base identified this thing that they dubbed MEV, they could predict this in the future that

a new equilibrium will become established as a result of MEV. And that particular equilibrium is one that capital creates capital at a faster rate than what we, we are really comfortable with in a way that does not create decentralization, it creates centralization vectors. And so when Stefan here is talking about like the supply chain of block buildings, the supply chains of a transaction, Stefan, you said it's good if it was horizontal rather than vertical with many, many different participants playing rather than one central actor. What we're trying to do is create an equilibrium that is something else than what we would just see if we just let MEV go rampant without trying to solve it. So Stefan, like,

leading into this a little bit more, like you talked about like there's like the three different outcomes of like M-A-V. There's like the spam attacks where like M-E-V extractors will try and just like fill a blockchain with all their transactions as many as possible. The other one is co-location, which we've already seen in the traditional world. And then the third one is something like flashbots and what we're going to be talking about for the rest of the podcast. The theme with flashbots is that this horizontal supply chain, really what we're talking about is we're putting something into a marketplace. everything that would otherwise be centralized, refining mechanisms to turn that into a competitive marketplace. Can you talk about this strategy of making the MEV extremely competitive and turning it

into like a public market and how this aids in our effort to make sure that the equilibrium that we are creating is one that stays in a decentralized world? It's really interesting. A lot of my background is sort of a mix of computer science and like market structure theory. And if you look at like a health of a market industry in terms of competitiveness, you know, like antitrust laws, a lot of it centers around barriers to entry. This is why I think the MEP supply chain, you know, description is quite useful. If you look at the supply chain as what's the barrier to entry for a new actor to come in and start participating in one of these like economic roles, you directly start to think about, you know, competition. How much competition is there in this market? And when you start to think about competition, you also start to think about how decentralized and

permissionless is it. This framework of competition is the most useful way to start analyzing how the ecosystem evolves on MEP. How much hash power goes through flashboards? Around 90% of miners are running flashwolds. I think is that where we want to take this next? We'll start going into MEV Geth to start and then later that can get us into MEV boost. Honestly, I don't think I fully understood what the MEP supply chain was. I don't know if that's clear yet of who the actors in the MEV supply chain are that you were just talking about, Stefan. What is that answer? Is that an allusion to MEV searchers, block builders, and then block proposers? Or is there an answer about the supply chain in the proof of work realm? Yeah, it's what you said. So it's users,

like wallets or apps, searchers, builders, validators. And that's a future case. That's a future state, not a current state, right? It's a current state. It's a current state as well. Okay. So you're talking about a competitive equilibrium. So why is this equilibrium important to maintain. There's a couple aspects to the competition that we can look at, right? There's the, just the competition between individual miners or validators, right? And we all want these validators, in the ideal case, to be extracting like a proportional amount of value to the amount of stake or the amount of hash power that they have. And really, that's like a key metric that we look at for the health of the system, the competition in the system. All the validators in a given chain, accruing value at

the same rate that's proportional to their stake, or are they agreeing value at a rate that's disproportional? In which case, we start to see trends towards more centralization. We can use this, right, same model of evaluating concentration and competition at other layers as well, right? Are wallets extracting at the same rate, fees from their users, are bot operators capturing value at the same rate as other bot operators? This concentration metric of the market is useful in each of these articles. So let's talk about that for a minute in the current state, right? So I think for the rest of this episode, we might talk about kind of like the past state where we really didn't see much MEV activity, maybe didn't need much MEV protection, but, you know, that's kind of the past.

Now we want to talk about the present state of how blocks are made in Ethereum and what the MEP supply chain looks like. And I think we'll get to kind of the future state where things get really interesting, especially in a post-merged world, something really big happens with this thing called MEV boost. We want to talk about that. And then even in the kind of the far future of incorporating some of this MEV technology is part of the Ethereum protocol. There's a lot to unpack here, but let's start with the present state. All right. How does a block get made in Ethereum? What does the MEV supply chain look like? What are the parties that are involved and how do they all work together. MEV supply chain crash course. Here we go. So when Ethereum initially launched,

the idea was everyone would run their own Ethereum node, right? And it was send transaction to their local node, propagated over the peer-to-peer network where it would reach a minor, and then the miner would include in a block, and then propagate that back to the network. So there's really only two actors involved here, right? There's the user, then there's the peer-to-peer network, and then there's the miner. And you route transactions to them and they get included. Eventually, right,

we have these intermediaries that came up to help users submit transactions and clarify the intent of how they want to operate against the chain. So I would classify these sort of parties like the metamask, the uniswaps, the infuros of the world as this wallet layer, right? They help take user intents or user preferences

and then convert those in. to a transaction that then they relate to the peer-to-peer network and then makes it all the way to a minor and then the minor includes it in the chain. So great, we have this additional entity, right, like the wallet application entity. What started happening when MEV opportunities became very big is that there was these new entities, bot operators, that emerged. And they started looking at the transaction pool and saying, oh, here's a transaction that creates an arbitrage opportunity. Let's send an other transaction that either takes this arbitrage opportunity or front runs it or back runs it or whatever and then included in the chain. Eventually they realized,

you know, we're competing on sending these transactions over the transaction pool. What if we were able to, you know, just communicate it directly to the minor and not have to use the same public transaction pool as users did? So it created a whole other side channel, right, to the public transaction pool where users are used to sending our transactions, where transactions are now being routed directly to the miners using sort of a different network. So what FlashBath did was realizing that this trend was emerging and then trying to provide more transparency to it. So create sort of this open, permissionless market where you could route these transactions with sort of more advanced preferences to the miners. So we're now have this sort of other intermediary in the system,

which is the user sends preferences to a wallet. The wallet encodes these into some transaction. Those transactions make their way over to bot operators, right? The bot operators then do their MEP thing and add transactions to it. And then they send those transactions as a bundle to the miners for inclusion. This is the current state of the world. This is how Ethereum has been working for the last year and a half, right? Now with the merge quickly approaching, we're introducing

saying yet another actor into this supply chain. And that is the one of the builder. So we're taking the role of the miner, right, and then we're untangling it into two different roles. The role of the block builder and the role of the block proposer. So a block proposer is just your average Ethereum validator, right, anyone who has 32Eth stake and is running an Ethereum full node. What they're doing is they are outsourcing the job of taking transactions and producing sort of maximal value block to this network of builders. So the builder now sits between the bot operators and the validators, collects a bunch of transactions from the transaction pool from searchers, and then creates an optimal block with

it that they then provide to the validators from inclusion. So that's going to be the world immediately after the merge. This is powered by what's called PBS, right? Block proposer block builder separation. And the specific software that's used to achieve this is called net boost. Okay. You gave us kind of the warp tour through all of that. I want to kind of, you know, double back and make sure we understand, you know, the present and then getting into kind of the future. So the present state, for the first like, I don't know, five plus years in Bitcoin, really, we didn't have an MEV problem. And the reason why is because we didn't have smart contracts. Is that the case, Stefan? So we started to notice these MEV extraction type of opportunities when in the timeline. It was this like 2017, 2018, when did Phil and other start noticing these things? So 2017 is when I started getting involved and I think some of the initial explorations of MEV started happening on the research side. I think there's always been

operators understanding where opportunities were. But in 2017 is when we started seeing ICOs and ICO sniping, which is MEV. We also started seeing sort of initial versions of Bankor and Ether Delta and sort of the MEV that gets exposed by those early Defy applications. But there wasn't really meaningful volume. It was hobbyist MEP, if you will. It was all sort of individual bot operators that were targeting this. And it was maybe like five different people doing this. When things really picked up is when, you know, smart contract and DFI really picked up, which was summer 2020. Okay, summer 2020. And then it's accelerated from there, I would imagine. Okay, so enter flashbots. It sounds like there was sort of this informal arrangement, this informal

selling of MEV or paying a minor in order to get your block through quicker. It was all very informal. But Gover, what did flashbots do? You created a marketplace, I believe, for this MEV activity and made it permissionless, transparent, and back to kind of the core idea you were talking about earlier is you made a competitive environment for it. So it wasn't an insider network, you know, talking in telegram quarters behind the scenes. make these arrangements. It was completely transparent and open. Am I getting that correct? And how would you describe that? Yeah, so the biggest risk we saw was exclusive access to hash rate, right? And we've seen this play out in other chains. So it's been really nice to see our sort of thesis be accurate here

because this exclusive access hasn't really occurred on Ethereum. But how this gets expressed is, you know, a large mining pool. And, you know, the largest on Ethereum right now is Ether mine would say, okay, we have this MEV opportunity here. We know we're in the best position to extract it. Let me a contract with some MEV hedge fund and say, you can operate our nodes for us, do any type of MEV extraction that you want, and we will split the proceeds 50-50, right?

The mine pole is happy because they're getting additional revenue. The hedge fund is happy because they get to exploit these opportunities and collect some fees from that. But ultimately, this is a closed market. There's no transparency to it. And it shrines sort of two individual parties to compete against all the other miners and all the other bot operators. Instead, what we thought was, okay, well, we need to have a system that is democratic, transparent, and is able to redistribute the revenues or the value that's accrued through MEV to the appropriate stakeholders.

And so the initial auction that was designed using the system called MEV GETH basically did this, right? It allowed any minor to start accepting these bundles from third-party bot operators and then include them into their block, thus accessing all of the MEV opportunities available. And likewise, allowing any bot operator to start sending these bundles to all the miners. So by multiplexing, right, all the bot operators and all the sudden, you can have this transparent auction and market for price to cover. MEV Geth is just like Geth is an Ethereum client, of course, that miners run. and you're just adding the MEV software on top of that.

That's basically what the minorized. Instead of vanilla geth, you're running MEV geth. Is that correct? It's a surprisingly simple change. Okay. Like 100 lines of code. Wow. And so how many miners are running this now?

So yeah, about 90% of the miners I've been running this for over the last year now. Wow. Yeah, because it's a very simple change for them. It's easy for them to maintain. And then, yeah, it allows them to connect to this marketplace. This is why. I don't know if Ethereum users are aware, but flashbots has been kind of like a silent guardian of Ethereum at the protocol layer,

protecting us against some centralization vectors here. If the MEV geth was not available, what do you think would have happened with Ethereum over the last couple of years? Play that scenario out for us. So, you know, the place to look at for the counterfactual here is looking at other chains that don't yet have sort of an MEV solution. Is this basically all of them or do some have an MEV solution? Basically all of them, yeah, yeah.

All of the others. And a lot of them have experienced things like deep reorgs or spam or just like a lot of concentration in the validator or hash rate access. Now, we hear of anecdotal stories of many of these networks, you know, over 70, 80 percent of the hash rate or validator power being controlled by single entities, even though on chain it looks sort of distributed amongst a large set of validators. Because they can then sell all that block space in bulk to third parties and collect sort of revenues from. that in a sort of off-chain manner. So there's a lot of much shadier things, you know, going on in these other chains that don't have these permissionless, democratic, transparent marketplaces. So we already have the dystopias. We're not really waiting for them. We already have them. Like what you're trying to prevent is from Ethereum specifically and maybe for change in the

future from becoming dystopias. Yeah, that's true. We have it and we don't. You know, some of these other chains are just much more centralized by nature as well, right? Just the way that they've done sort of ecosystem development. A lot of, you know, the chains are controlled by the foundation and then the foundation can have a lot more say over the type of activity that ends up happening. But for the more decentralized ones, then we have seen a lot of this concentration through MEV. We have seen this sort of dysopia emerge. It still is the case today that the majority of economic activity sort of by orders of magnitude is on Ethereum. So our sense that FlashBots is if there's one place to protect decentralization, it's on Ethereum, and then

hopefully whatever abstractions and solutions that we're able to develop in this ecosystem can then be ported over to the other ecosystems. The Brave browser is the user-first browser for the Web3 internet, with over 60 million monthly active users. And inside the Brave browser, you'll find the Brave wallet, the secure, multi-train crypto wallet built right into the browser. Web3 is freedom from big tech and Wall Street, more control and better privacy, but there's a weak point in Web3, your crypto wallet.

Crypto wallets are browser extensions, which can easily be spoofed. But the Brave wallet is different. No extensions are required, which gives Brave browser an extra level of security versus other wallets. Brave wallet is your secure passport for the possibilities of Web3 and supports multiple chains, including Ethereum and Salam. You can even buy crypto directly inside the wallet with RAMP. And of course, you can store, send, and swap your crypto assets, manage your NFTs,

and connect to other wallets and defy apps. So whether you're new to crypto or you're a seasoned pro, it's time to ditch those risky extensions, and it's time to switch to the Brave wallet. Download Brave at brave.com slash banklists and click the wallet icon to get started. Arbitrum is an Ethereum layer 2 scaling solution that is going to completely change how we use DFI and NFTs. Some of the coolest new NFT collections have chosen Arbitrum as their home,

while DFI protocols continue to see increased liquidity and usage. You can now bridge straight into Arbitrum for more than 10 different exchanges, including finance, FTX, Whoobie, and Crypto.com. Once on Arbitrum, you'll enjoy fast transactions with cheat fees, allowing you to explore new frontiers of the crypto universe. New to Arbitrum, for a limited time, you can get Arbitrum NFTs designed by the famous artist Ratwell and Suoy for joining the Arbitrum Odyssey. The Odyssey is an eight-week-long event where you can play on-chain activities and receive a free NFT as a reward. Find out more by visiting the Discord at Discord.g.g.g.

You can also bridge your assets to Arbitrum at bridge.arbitrum.io and access all of Arbitrum's apps at portal.arbitrum. in order to experience defy and NFTs the way it was always meant to be fast, cheap, secure, and fiction-free. Rocket Pool is your decentralized Ethereum staking protocol. You can stake your eth in Rocket Pool and get our ETH in return, allowing you to stake your eth and use it in Defi at the same time. You can get 4% on your Eth by staking it with Rocket Pool, but you can get even more by running a node.

Rocket Pool is the only staking provider that allows anyone to permissionlessly join their network of validating Ethereum nodes. Setting up your Rocket Pool node is easier. running a node solo and you only need 16Eath to get started. You get an extra 15% staking commission on the pooled Eid that uses your node to stake. You also get RPL token rewards on top. So if you're bullish e-staking, you can boost your yield by adding your node to the decentralized rocket pool network, which currently has over 1,000 independent node operators.

It's yield farming, but with Ethereum nodes. You can get started at rocket pool.net, and you can also join the rocket pool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. I want to drill down on two parties really quick, really just to emphasize why this new equilibrium emerges with flashbots. We talked about earlier there's the largest Ethereum miner sparkpool. Is that the largest one? They used to be. No, it's ether mine. And then say let's have some like, you know, imaginary like prop desk, jump capital, for example, jump capital and ether mine, make a handshake and be like, all right, jump capital says the spark pool, give us all of your order flow,

like show us all of your transactions so we can do all of our MEV and sparkpool. It's like, okay, sure, great, like mutually beneficial relationship to the loss of every other non-Sparkpool, non-jump capital entity. The reason why, if you are a minor and you are a minor is like sending your hash power to SparkPool or just a minor in general, or you're the other party, you're an M-EV arbitragergergerger, like, you know, balancing uninswap pools, doing liquidations on MakerDAO, the reason why you would choose flashbots instead of choosing SparkPool or if you're jump capital, I guess if you're an MEV minor, you can't join Jump Capital, and that's kind of the problem. The reason why you would choose FlashBots is that if you are a minor, you get more money.

If you choose to go through FlashBots, then you would if you were to SparkPool, because SparkPool is giving 50% of that rewards over to Jump Capital, not to you. And so you have a raw financial interest to joining FlashB because you pull out a larger proportion of that MEV. If you're an MEV bot operator and you have a really good MEV like algorithm, highly refined, well, you can't join Jump Capital. So you have to go to somewhere else and you've got to go to FlashBots because it's an open permissionless marketplace. And so what FlashBoss has done is created a highly competitive environment that is extremely beneficial to proof of work minors because they extract the most MEV that way. And it's also the only place where MEV like bot arbitrageters can have. their like playground of, you know, sandbox of their to run their bots because it's the only

open permission list marketplace for bot operators. So flashbots is really just like a meeting place for hash power and Mavv bots. Am I explaining this correctly? I think that's exactly right. So here's one thing I want to add about this. We spend a lot of time thinking about incentive compatibility, right? And we think that the only systems that are robust long terms are ones where like every single actor, it doesn't have a benefit from deviating, right? So this is the equilibrium that we want any of these crypto economic systems to have. Everyone is incentivized to play the same game. And the game is sort of beneficial to all the other actors. It doesn't have some negative externality on like end users that they're stuck paying forever. So the system is designed in this way, right? It

maximizes the amount of value that miners get because this is inherit to MEV, maximum attractable value, right? Like, they own this value. And so the only way to create an incentive-compatible system is one where they end up extracting the majority of this value. You can also create system in which you minimize and, like, reduce the amount of MEV or like the amount that miners can operate on top of. And those, I think, are also extremely valuable design approaches, but they sort of start at the application layer, right? They start by building applications that just do not expose as much of this value in the first place. So incentive compatibility here is crucial to have these systems that everyone is as happy to adopt.

It's really interesting because like an example, David, that you were just saying, if you've got Sparkpool and you've got Jump Capital, right? It's like what we know is going to happen over time. If there was no flashbots in between, if there was no MEV geth, is that Sparkpool gets enough money and they just vertically integrate and they jump capital gets enough money rather than they vertically integrate and they buy Spark pool, right? and then it all becomes one. Like that is the nature of these markets where even somebody hearing that, they're like, well, it's actually like two parties. No, it's not going to be two parties.

They're just going to acquire, they're going to consolidate, they're going to merge, they're going to integrate. It's kind of the way like, you know, Disney owns freaking every brand. They've got Marvel, they've got Star Wars, they've got everything. It's a big conglomerate. That is the nature of these types of capital markets unless you enforce or create some sort of decentralized markets.

marketplace where everyone, no one's disadvantaged and everyone has the freedom to advantage. And you've, as Stefan was saying earlier, you've lowered the barrier to entry. I just wanted to make that point, too, as you were talking, David, I was thinking about that. You know, another way to see this is like, if we allow a single party to have sufficient market power, capital, to be able to purchase other parties and like integrate, they will. So the only solution is to try to maximize competition. It's the only way to protect the decentralization of the system. Well, the other solution is, of course, top-down regulation.

But, you know, maybe in the world of crypto and crypto people, that actually is not a solution. That's actually a failure scenario. Yeah, you're right. The only solution is bottom-up competition. And so this is why this solution for this is so elegant. And so honestly, like what makes people like me and Ryan really optimistic about the future that we can solve some of these centralization problems with natural, like, not antitrust regulation, but antitrust mechanisms.

which are just marketplaces at the end of the day, like making sure that competition can flourish because the more competition there is, the better it is for everyone involved. Stefana, I'd like to take this conversation into the next phase because we're talking about the current state of Ethereum, but Ethereum never stays the same. Ethereum is about to change.

So what we've been talking about so far has been M.E.V. Geith. But as we go into proof of stake post-merge, we get into a future state of flashbots, which you guys have been working on tirelessly. for many, many, many months now, which you guys have been calling MEV boost. Can you talk about MEV boost and how it's different from MEVGeth? Yes. So we started working on this over a year ago,

knowing that there was a lot of progress being made and commitment from Ethereum core developers to move towards the merge. You know, for us, obviously, we didn't have much of a choice, but to look at this, because all of a sudden, this 90% of, you know, miners who are running our software become zero. and then there's this entire new set of stakeholders, node operators, and so of the validators, who don't have software to run. So the immediate obvious answer would have been, okay, well, let's just port the software

that's already working and apply it over to the validators and happy days. We still have this timeline patch on top of the client. We can still run Gath. Everything is sort of running the same way. But we thought we could do better. So, you know, one of the principles that we have is to incrementally improve. the trust assumptions of the systems that we're building. And right now, there's sort of a few properties of how this auction works that relies on trust.

Miners see the full content of the bundles. And so they still have the ability to front run those bundles or, you know, deprioritize them or, you know, censor them completely if they so wanted. What this meant is that you couldn't send these bundles to just anyone, right? this would be like a market-breaking flaw in the system where no one would then trust the privacy and the integrity of this auction, and they would no longer participate in it. So there was a scalability limit in the number of entities that you could have participating in this marketplace on the minor side. So we wanted to solve this. We wanted to create a system that was more permissionless where you could have 100% of the validators on each two participating. And the way to do that is to shift from this idea of having bundles to the idea of having full block proposals,

introducing this role of a block builder. There's this blog post by Vitalik on ETH Research, introducing the concept of PBS, which is achieving exactly this. It's achieving separation between the block proposer and the block builder in such a way that the block proposer no longer needs to see the content of the block that they're proposing to the network. they only need to make sure that they're selecting the block that has the highest amount of value. And then they can outsource completely the job of block construction to these third parties, block builders, that can themselves be more centralized potentially, and they're having less of a risk for the integrity of the chain, because all of the validators can participate equivalently.

So this is sort of the key change that we aim to have with the merch. And it took a while to figure out what was a design that was compatible with the merch. PBS as a whole, the idea behind it is to have a consensus level change, right? A change that would require an upgrade to the Ethereum network as a whole, modify the for choice rule in a way that sort of embeds this directly into the protocol. And we knew that we didn't want to delay the merge anymore than it's already been delayed and didn't want to ship any of these large features at the protocol level before the merge. So we started working on a design that could sit at a layer above consensus.

right, this sort of marketplace approach that FlashBots has, but with some of the additional properties of the system. So this is called Mev Boost, and it's, you know, in the final stages of testing now with Node operators, we have this landing page called Boost.flashbots.net, where you can keep track of the progress on adoption of that software. And yeah, it's promising to bring a lot of need benefits to Ethereum. And so this is a really a product for validators. For people that plan on staking their eth and running a node, this is a solution for them. And we probably will go into the details about how MavV Boost preserves the decentralization of Ethereum, where we've already alluded to it a lot. But you kind of take it on faith when the function, when the mechanism is that

validators are presented with an array of blocks, like a little Mr. Menu comes up and says, here are your available blocks, sir, or ma'am, and then you can say, like, I pick the one that gives me the most money. And you'll pick that one, because you're rationally incentivized to, and you'll pick the one that has the biggest MEV, like, tip that's associated with it. And you can just take it on faith that that is going to be the thing that preserves the decentralization of Ethereum the most because you're capturing the most value. The value is being captured by the ether stakers and not who is ever bundling up all the transactions, doing all the MEP. And because of the by nature,

of like all the other ones are paying you less. You pick the one that's paying you the most. So you know that you are pulling the most money off of the table and leaving the lease amount on the table for jump capital. And so it goes to the individual staker, who we hope is a decentralized network of stakers, rather than a much more professionalized like block builder or expert block builder that is like an activity that I have no idea how to do

or how to engage in and neither will like 95% of eat stakers. And so that's how you kind of know that it's preserving decent. centralization. Yes, 100%. So let me make sure I understand this. So we've got right now, we're in the stage pre-merge of you have this software called MEV Geith, which is just like 100 lines of code that you add to the geth client. Cool, got that. 90% of miners have deployed that. All right. Now you're taking a similar model, I think, and you're saying in the proof of stake world, post-merge, we've created some additional code that can be added to an eth validator client and we're calling that Mev boost or MEV boost. That's where we get the MEV part. And I would assume

individual client teams, you know, we have like Prism and Nimbus, all of these teams, do they have to adopt it? Are they deciding to adopt it? Or are the individual validators or validating pools, you know, like all of the validators in the LIDO network, are they having to adopt MEV boost? What does the MEV boost adoption path depend on? All of this, all of the above. Okay. So this is one of the challenges with developing these pieces of software. There's so many different stakeholders that you want to work with and get their input into the development process. Sort of a fully open source approach, collaborating with everyone from EF research team, core developers of all these different clients, note operators,

everyone from, you know, the more distributed decentralized ones to, you know, the fully custodial centralized one, creating a piece of software that meets all of their diverse requirements and that they are all sort of on track for integrating. A lot of cat herding, right? So at the core, right, what this software aims to do that's somewhat different from MvGath is aligned with the objective that the Ethereum core developers had with shipping clients for the merge. So protecting client diversity was super important. You know, as we all know, the majority of nodes on Ethereum today are Geph nodes, go-etherium nodes. And that creates some risk because if there's a consensus issue within the go-etherm

client, this all of a sudden sort of becomes a canonical chain and requires some social coordination to recover from. So in effort to avoid this, the goal with proof-of-stake Ethereum is to have a wider diversity of clients. What this means for us is we shift away from just having the single patch on top of a client to now wanting to build a sidecar. an individual piece of software that can plug into any of the consensus client using a standard API. So there's this thing called the, we're getting into the weeds here, but the Ethereum Builder API, right, which is a standard specification that all the different client development teams have implemented.

The Mevboos software plugs into this protects the client diversity of everything. This is pretty cool. But like your pitch to all of these different stakeholders, I don't know, it seems like a good pitch. it's just like add this code and you get more money, right? Whether you're a validator, pool operator. I guess maybe the client teams have to do some extra work, but they probably want their client to be able to get their validators who use it more money. So the pitch seems like it would be as adopted as MEV Geh was.

Like, how long do you think it'll take to get to basically everyone is using Mev Boost? Does that happen from day one or will it take some time? Yeah, our goal is to talk. target everyone having that as soon as a merger wise. It's mostly a question of the node operators at this time, how comfortable they are in their deployments and when they have done. So the background work to be able to expose MEV rewards to their stakers. You know, all the interfaces within the Ethereum clients are implemented. MEV boost itself is feature complete. And now it's at the stage of testing in TestNet environments with node operators. So this is going to be cool.

And guys, I just want to remind bankless listeners, this kicks in right after Merge. So much is happening at the merge, right? Proof of Work gets turned off, new blocks and proof of stake start producing. And MEV boost will be in play too. And I'm curious to find what kind of difference might we see in the APY for staking, right? So like, let's say, I don't know, it's 4%. What is it right now? Staking APY?

4%. Something like that, 4.2%. That's without MEV boost. And that's without staking. Do you have any numbers on what it would look like with MEV boost turned on? Yeah, a couple things I want to touch on. So one of the things you brought up is, you know, it's cool that this is ready right at the merge. The real answer is like, we don't have a choice but for it to be ready at the merge

because MEV will keep happening, you know, whether it's on proof of work or proof of stake, MEV will stay there, right? And it'll keep happening. And what happens if you don't have like an efficient block space market for MEV after the merge is you go back to the way that Ethereum was during like summer 2020, which is like a lot of spam, a lot of gas wars, and everyone ends up paying more for inclusion and getting like a degraded experience. So in order to mitigate that,

you want to have these like efficient marketplaces in place as quickly as possible. And yes, in terms of, you know, how much reward this provides validators, well, as we all know, right, issuances of ETH after the merge goes down a lot. And so a lot of the value that, miners have been collecting up to date has been this two-eath block reward every block. This goes away. And now, you know, MEV becomes a much larger piece of the total reward that validators receive. We have some numbers that are an analysis from last summer, right?

Completely outdated. There's a lot of things that happened since then. First of all, the market, you know, went crazy and then died down a little bit. Also, EFP1559 came out and sort of modified a lot of these numbers. But anyways, the metric back then was around 60% of the rewards of validators is going to come from MEV. We're working on updated numbers. So please caveat this. It'll be potentially lower than this, but still some significant amount of value that can't really be ignored by validators.

Okay. Give us that number again, those numbers again? Sorry, I missed it. It was 60% was the initial analysis. 60% of the total reward would be MEV. So we're talking at least a few percent. points, a few hundred bips on top of like, you know, if staking is 4.2% and extra couple of percent.

If sticking is 4.2% reward right now, right? You'd look at 10% APY total. Wow. Wait, what? Right. 10% of like 60% of total, right? That's what he said. So that would be 6%.

Yes. Total is 10. Wow. And that could change, of course, given like market conditions and M.E.V potential. But it's like, that's a big reason to go get M.E.V. boost. I am not worried about your adoption, sir. I think it's going to be fine. I think everyone's going to want this. I guess there are so many different, you know, side quests we could do on this. Like, one part of me wants to ask on a side quest, by the way, are there going to be any big MEV issues when proof of work is turned off and we migrate to proof of stake? Like, what's going to happen there during that gap? But another question I have before we get there is maybe like, why are you guys doing this? Why is flashbots doing this? Like, do you guys have a token you trying to pitch or something? Like, are you kind of a commercial enterprise? you're here to make money? Are you like a nonprofit trying to make the world a better place?

Because this is definitely a public good. But how do you fund yourselves? What's in it for FlashBots? Okay. So FlashBots sort of emerged from a telegram group of researchers, really. And what we realized very early on, this is a very difficult problem. And if we want to attract the best talent to solve it, we can't really structure it as just a nonprofit entity. So we did raise some money from investors that are highly aligned with Ethereum. So, you know, one of our biggest backers is paradigm. And the reason why we wanted to partner with them to fund the organization was around their heavy focus on research and sort of their proven research output. So we are structured as a for-profit entity, but very deeply ingrained into the sort of culture of our organization is

commitment to the principles that we've laid out in our initial foundation. So we have sort of a public record of these commitments that we have towards a community. And really, that is our North Star. We don't have any sort of monetization method right now or plans to have monetization methods anywhere in the future. At some point in the future, yes, but not in the immediate future. And the reason why is we don't feel that MV has been solved as a problem yet. We sort of have confidence that if we are able to build solutions that actually help achieve the principles that we've laid out, there will be some way somewhere in here. for us to monetize. The main thing that we have to do is commit to those principles and

follow through with them. That's the way we've been operating so far. So in the future, with PBS, Proposer Builder Separation, this will go from more or less what MEV boost is now, but except in its current state, MEV boost is kind of like the side car to a bunch of Ethereum clients. In the future, we'll have an EIP, we'll have a hard fork to Ethereum that will actually enshrine the same role into the protocol, and it'll be called Proposer Builder Separation. but once the service of flashbots becomes a part of the actual core Ethereum protocol, what's the role of flashbots beyond that? Like, does flashbots sunset or how do you guys have a company

once your guys' service actually just becomes a part of the Ethereum protocol? So PBS is a small part of the MEV solution as sort of the answer there. I'll link us back to the MEV supply chain question. The MEP supply chain is actually multidimensional. So not only do you have a supply chain on a single blockchain, but you have a supply chain on every single other blockchain as well. And PBS really only targets the relationship between builders and validators. It doesn't say anything about the relationship between users, wallets, wallet, searchers, searchers, block builders.

Those are all sort of solved by other solutions. So while PBS is hugely beneficial to the decentralization of the system at the protocol level, right, and maintaining validator decentralization, the focus then becomes how do you, enable decentralization at other layers of the stack. How do you enable block builder decentralization as a whole? How do you solve problems like cross domain MEP, cross-chain MEP? How do you solve the problem of exclusive order flow? These are all other sort of MEPB problems that remain unsolved, even in a PBS world.

We've used this model on bankless a number of times before called Moloch, this god of coordination failure. And Moloch is something that you fight, but you can never really find. finally slay. Like, he never goes away. He just emerges in a different place. And so is your answer, Stefan, that, you know, FlashBots focused on MEV boost right now. And once it gets enshrined in the protocol, that part of, like, centralization, that centralization vector kind of actually does go away. But then there's, like, other pockets that MEV Boost will, like, hop around to try and, wherever there's a vertical integration, like a capture, wherever there's, like a centralization vector, flashbots will come in and figure out some mechanism to make that more into a competitive marketplace,

and then I'll solve that problem, and then I'll go on to the next one, the next highly vertically integrated centralization vector, and then flashbots will go there and try to make a marketplace out of that and then move on. Is that kind of the idea? Yeah, exactly. And I think a lot of these solutions will sort of converge, right? I don't think that it is an infinite problem space. I think it's a very vast problem space. When we think on the research side of the organization about a research roadmap, we think,

think on like the 20 year, you know, maybe even 50 year horizon, like there's just some fundamental computer science and cryptography problems that need to be solved if we're going to solve the MEV problem like at the fundamental level. And a lot of these solutions that we're looking at now are, you know, short-term patches that move us towards this ultimate solution. Well, super interesting as well about this model is effectively, you guys are like Ethereum core devs now, I guess, if that's what that means. And what's super interesting about this model is this is private sector developing an important enough feature and, yeah, features that, that eventually public sector, the Ethereum protocol itself says, oh, I want that. Please, we need this. Let's embed it deeper

in the protocol. And your work becomes embedded and enshrined in the Ethereum protocol. Therefore, making you, Stefan, an Ethereum core dev, I guess. I guess that's how it works. That's very fascinating to me. Can you tell us a little bit more about PBS itself as it's enshrined in the Ethereum protocol? Like, how far away is that? And like, how much do we actually need it? It seems like MEV boost can, like, do a pretty good job of it.

So maybe it's not that urgent? Or you tell us, when is it coming? How urgent is PBS getting that enshrined in the protocol layer? Yeah. So it's, you know, notoriously difficult to predict consensus level changes on Ethereum. I will say, you know, PBS is still at the research phase. There's a lot of ideas for how it can work, but it also is intermingled with a lot of other items inside of the Ethereum roadmap.

It has across dependencies on several other things. And as we learn more about how Mev Boost performs and how it gets used, it will also help inform how to design PBS. So a timeline is impossible to give, but it won't be in the next year or two, is my very conservative estimate. So we'll have some period where, you know, we expect the ecosystem to evolve on top of Mev Boost, sort of stress test it, figure out how it needs to be improved, how it needs to be changed, and then I expect iteratively we'll move more towards enthrined a system from that.

Mev Boost kind of gets us what we need, right? Like, we don't really need this PBS feature in order to protect us against decentralization at that level. We do still need it. So Mev Boost gets us part of the way there. The problem is that it sprinkles a little bit of trust special sauce onto the system to be able to work. While it achieves the decentralization on the validator side, it introduces these relayers, which are sort of delegates of validators, but these relators still have access to the information. So they are sort of receiving blocks from block builders.

They are holding onto them, and then they are submitting them to validators for inclusion. This relator role is the one that full PBS and Triumph PBS gets rid of. It's important for improving the trust guarantees of the system, but the system works even with those in place. Yeah, how worried should we be about that relayer role, I guess, from a practical perspective. Is that a large centralization vector? I'm really not sure how to think about the relayer role right now. I guess I haven't given that role too much thought.

So the main concern with regards to block builders or relays is really one of censorship. So if you have a single entity that's sort of accepting these transactions and holding onto them before submitting them on to validators, they have sort of the opportunity to perform censorship over those transactions. So if you look at the PBS roadmap, it gets rid of these roles and introduces some mechanisms to help protect against censorship. which is something called CR list, and those help mitigate this specific issue. One thing that's worth noting is while reliers have the ability to perform censorship, they don't have the incentive to do so.

And they still incur a cost to perform censorship. So it means that all the blocks that end up being produced, either from the block builder or the relayer, is going to be less valuable, which means some other relayer or some other builder can come in and produce more valuable competitive blocks. really the censorship piece is the piece that's most crucial to solve in the intrine PBS yeah it's interesting to think about it this way it's like mv boost as a whole is is kind of like you know plus 10 points

let's say to the character stats of ethereum for mv resistance which is a great thing but it's also maybe like a minus one point or minus two points from a censorship resistance perspective maybe that's the case and then pbs kind of plugs that hole you know we get back to the censorship resistance that we want to have from the Ethereum system. Okay, just a quick branch down the other rabbit hole. So I think we've described past, present, and future for MEV and FlashBots as it emerges from first MEV geth. That's what FlashBots is doing today in the proof of work, mining a world.

That world is fast fading. And hopefully maybe September, October, we will have the next stage, which is MEV boost. And so we've got this marketplace for proposers and builders kind of achieving a similar objective of creating a marketplace for MEV separating these concerns. And then eventually, years later potentially, we get this technology enshrined in the protocol as a protocol builder separation. So this is enshrined PBS. But there's this other thing that's happening, of course, with the merge. And I'm curious, it seems to be the case that there's going to be a lot of MEV type of opportunities may be stuck on the proof of work chain in this transition to proof of

at least I've heard big brain MEV folks talk about it in this way. What would you say about this? At merge time, at merge o'clock, are there going to be some like weird MEV things at play? And what do you expect to see? So I don't know exactly what will happen. I know there'll be a lot of chaos. I know that a lot of very smart bot operators have been thinking about this for a long time

and like building strategies because there will be a lot of one-off opportunities one-off arbitrage, one-off things that can be done between the two chain. Let's say that the proof of word chain continues to march on or whatever. There's going to be some MV chaos. That's pretty much for granted. I don't think it's anything that's going to compromise the stability of the system or compromise the merge from happening. But it will mean that the operators who are prepared to capture it will make a little bit of money at that time.

The alpha is knowing exactly what those strategies. are, I don't have that else. I've described the block one of the proof of work fork chain as that one in San Diego a few years ago where they were doing a fireworks show, but because of a computer malfunction, all 7,000 fireworks all got lit off at once, rather than orderly and normal, like, distribution of fireworks. That's a great gift. Anyways, there's a few, like, happy byproducts of MEV boost that I'd like to go into.

There's some things that it doesn't intend to enable, but it happens to just bring along with things like account abstraction, maybe there are others. Could you walk us through just some of the extra cool stuff that comes along with MEV boost? Yeah. You know, one of the things that's always been sort of a limitation of app developers on top of Ethereum is the abstraction of a transaction. You've always had to encode whatever you do into a transaction that you then send over to the network for inclusion.

And, you know, the reason why that's been a particularly difficult abstraction to break is because a transaction has these properties around DOS protection, right, that you need to have a fee payment embedded into the transaction and it reverts on chain and like you have all of these things that like require you to pay for it using Eath. This is all sort of becomes a thing of the past when we start to look at Mev Boost because block builders can start introducing any sort of abstraction that they want on top of their block building algorithms. It can start to say, you know, if you have a smart contract on chain that accepts sign messages,

you can actually issue a transaction by just signing an arbitrary piece of text and you can pay for it using dye or USDC or like any other stable coins. And then behind the scenes, it sort of converts that into ETH and then uses the ETH to pay the base fee and pay for the inclusion. By the way, we did an entire episode with Matt from Block Native called Ethereum's Hidden Pets. power structures, and we spent a little bit of time speculating who this new builder class would look like. Because, again, in Proposer Builder separation, right, the proposer, that is kind of the at-home validator individual running an eth-node, like very easy job, kind of you're just running your eth node. But the builder requires some additional skill, and it's probably going to be commercialized. It's probably going to be a set of organizations or companies or

entities doing this. Do you have any speculation on what this builder market might look like? is very difficult to predict. You can analyze any market using some first principles, right? Like building right now is like a blue ocean, like there's no one doing it. So probably what's going to happen is there'll be some players that are like newcomers and they'll have a first mover advantage. Then they'll be like an explosion of competition because ultimately block building

is meant to be like a competitive landscape. A lot of innovation is going to happen. A lot, a lot of innovation. So it'll start with a few builders, then a lot of builders, then most of the innovation is going to have taken place, and then we'll see some concentration again, back into fewer builders. Ultimately, it's likely that, you know, the marketplace is going to have some kind of power law distribution where the top builders aggregate the majority of the proposal power. But one of the things that we want to optimize for is to keep this

distribution as flat as possible, right? So what Flashbots is going to be looking at as this builder market evolves is what are the sources of advantage and what are the key innovations that some of the block builders are introducing to the marketplace? And how can those be commoditized so that they sort of remain accessible to all the other block builders? That will be sort of a fascinating journey that I think the Ethereum ecosystem is going to engage on over the next few years. Is there a risk of over-centralization in the builder space? Yeah. I mean, certainly there is. Certainly there is. I mean, implicit into the design of PBS is saying, okay, MEV is a centralizing force,

but we would rather the centralization happen at the builder level than at the validator level. The cost of that is risk of censorship. We as Flautras believe that like builder centralization is not necessarily an acceptable outcome. And we want to go one step further and actually achieve builder decentralization because we think that even if it's just an economic advantage, that you have a single builder, or maybe a handful of builder, five builders. You still have a better system if you have a larger number and if they're all commoditized. Beautiful. We were going through some of the happy byproducts of Mavie boost and we went down

the account abstraction rabbit hole. Are there any other happy byproducts as well? Yeah, I mentioned cancellations. I mentioned, you know, rescuing, White Hat sort of fund rescuing. I think mitigation of MEP is going to be one that we'll see and hear more, more about block builders that have various features that help protocol developers or application developers mitigate and sort of reduce the amount of MEV that they expose. Yeah, it's difficult to predict exactly which direction that things are going to take, but those are early explorations, I think we'll see. Well, Stefan, to kind of wrap it up here, you alluded to the theme of MEV Day at DevConnect in Amsterdam, and it was very much good versus evil, light versus dark,

dystopia versus utopia. And these are just framings that I really appreciate because they understand crypto and what we're really doing here as this multi-decade-long fight against the evils of centralization. Not all centralization is evil, but systemic centralization certainly tends towards that. Putting it into people's brains that there is a lot at stake here as a framing that I think we could lean into a little bit more here in the crypto space. From your perspective, you have one of the best advantage points in all of crypto is to like the centralization risk of our base layer protocols. If we were a needle, going between light and dark, like how optimistic are you that we are able to push this needle

into the light as we go forward through our protocols? I think the future is bright. You always have to maintain an optimistic view over the future. I think that we are going to see a lot more centralizing forces and we are going to see more scary things take place. Ultimately, though, the only thing that matters is like a commitment of the community of the builders and the ethos of caring about decentralization to survive for solutions to keep innovating and being brought forward. And I think that spirit is still holding out extremely strong as what we tried to perpetuate. And as long as that that spirit exists, there is a huge amount of hope.

So I'm feeling very optimistic about it. Well, Stefan, thank you so much for joining us. This has been a fantastic episode. I know it was our goal, even myself and for the Bankless Nation, to learn a little bit more about MEP boost and what is happening post-merge and also how that affects the Ethereum Protocol in PBS. I think we accomplished that today. Thank you for all the work you're doing. This is a public good for Ethereum, for crypto, and ultimately for the world, and we appreciate it.

Yeah, thank you so much for helping educate and get the word out about it. Stefan, is there anything listeners can do to find out a bit more about FlashBots and how to get involved? Yeah, so for MeG Boost specifically, keeping track of the progress there, boost.com slashbots.net, we are kind of difficult to keep track of because we don't necessarily have a lot of websites or Twitter activity, but we have a website, a writings website where we publish blog posts called writings.flashbots.net. And yeah, I recommend checking out those resources to one more. Bankless station, we'll include a link to those in the show notes, boost.flashbots.net and writing.flashbots.net. Also, second action item for you. Once you're done,

looking at what Flashbots is doing these days, listen to our sister episodes if you have it already. The first is a guide to the Ethereum roadmap, where David goes through the entire Ethereum roadmap and talks a little bit about MEV and PBS. And also the episode I mentioned earlier today, which is Ethereum's hidden power structure where we go into detail in this new role, this block builder role, how that's going to affect the economics and power structures in Ethereum. So we've got some homework for you there. Bankless Nation, as always, David and I will be doing a debrief after the episode. If you're a premium member, stick around, download that, you'll get our thoughts on this episode after the episode. And as always,

got to end with this. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.