Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Stephane Gosselin: Frontier Research - Solving Ethereum's MEV Problem

Episode Date: September 1, 2023

The maximal extractable value (MEV) problem, if left unchecked, could represent an existential threat to Ethereum’s core values. One might argue that it is a natural result of solving market inefficiencies, but it entices to centralisation and collusion in order to extract the highest amount of value. Additionally, through front-running and back-running, it creates unnecessary overhead, which caused up to 2.4% of the total network congestion back in DeFi summer of 2020 (according to Flashbots’ research). As current infrastructure cannot eliminate MEV altogether, Flashbots and other research groups have tried to come up with solutions to address its aftermath.We were joined by Stephane Gosselin, co-founder of Flashbots and Frontier Research, to discuss the MEV landscape, what research breakthroughs have been recorded and how they impact DevEx and UX.Topics covered in this episode:Reflecting on ‘Frontrunning the MEV crisis’Decentralising the MEV ‘supply chain’The vision behind Frontier ResearchRequest-for-Quotation (RFQ) explainedBlock buildingUniswap X and how it might impact LPs & block buildingDecentralising block buildingProposer-builder separation (PBS)MEV burnHow MEV influenced different applications’ UX IntentsEpisode links:Stephane Gosselin on TwitterFrontier ResearchFrontier Research on TwitterFlashbotsThis episode is hosted by Brian Fabian Crain & Felix Lutsch. Show notes and listening options: epicenter.tv/511

This is Epicenter Episode 511 with guests, Stefan Gosselin. Welcome to Epicenter, the show which talks about the technologies, projects, and people driving decentralization and the blockchain revolution. I'm Brian Frein and I'm here with Felix Luch. And today we're going to speak with Stefan Gosselin. He is the founder of Frontier Research. Frontier is a sort of new M.EV-focused company, but he was also previously one of the co-founders of FlashBods. and I think so if the lead architect, I think if that's correct, or product designer or something like that, at FlashPOT.

So thanks so much for joining us, Stefan. Yeah, thank you. It's always a pleasure to get the chance to come back on this podcast and chat with you guys. Yeah, absolutely. It's not the first time. Actually, maybe you can just get started in there. I think this is a great question.

So 2020, you wrote a blog post on EF Research titled FlashB Front Running the MEP Crisis. So this is now three years ago. And I'm curious just if you can reflect a little bit, sort of looking back. I mean, you called it back then like MEP crisis. I'm curious, you know, what was your understanding of like the MEP crisis? And like, what does it look like today? Are we in an MEP crisis?

I was supposed to like think back on this actually earlier today. Someone asked like, do we actually have a counter? factual to PBS, like what would have happened if we hadn't launched MF Boost? Would we actually have a significantly different distribution of concentration on the validator side? Or would it look like pretty similar? The MEV crisis was basically the thesis that said if there wasn't action taken by the community and early flashbots members who sort of felt responsible to take this this action, there would be an increasing concentration of hashing power because the level of activity on Ethereum was increasing to the point where

MEV became meaningful. I remember during summer 2020, DFI summer, we had all of the sort of the yield farming and like really you to swap getting traction for the first time with all the liquidity mining programs. It was at Yam, finance, and all this good stuff. And so it was clear that, you know, whether it's token sniping, arbitrage, whatever else, there was an advantage of operating this at the validator level. And validators weren't currently doing it.

The activity was happening through the transaction pool through sort of gaming the algorithm that the miners run for, for packing blocks. So the crisis was, well, it's very clear that miners have the advantage in doing these games. They are likely to start to invest into running things themselves or run custom clients, make partnerships with trading firms to be able to extract some of that value. And that has a potential to lead towards more concentration because there's sort of increasing returns to being the ones that play this rule.

maybe there is a better mechanism that we can develop and launch that enables to maintain transparency over what is sort of happening in the system and maintain open access to it. So make it so it doesn't require a special deal with validators, but you can freely connect and participate. And finally, have some way to redistribute the value to the actors in a way that's like welfare or maximizing or whatever definition that you can have. So that's the MEP crisis. You know,

you sort of mentioned like, hey, you wrote this post and he made it on E3 research. And I'm like thinking back to like the last three years of my life. And I feel like all I did was write two posts. And like everything else was like fluff, right? Like I wrote this front running the MEP crisis, which was like a spec for Mavgeth,

which was like the client that that we developed and then ended up getting adopted by minors. And the second one that, that I wrote was introducing Mev Boost as a spec. And then maybe like I should have just written those things and just like, went to the beach and did nothing else for the rest of the time. Because those specs alone, I feel like move the needle into like what the infrastructure looks like. And we're like the most impactful things that I really did. So yeah, I sort of, there's this like really fun progression from, you know,

there not being any infrastructure to now having gone through two major cycles of the MEPI infrastructure changing on Ethereum. And do you feel like both of these things had the impact that you hoped it would? In terms of mitigating the MEP crisis? Yes. Not really. Not really. I mean, it's like hard to say. It's like there is no kind of.

Is that what's happened or? Yeah, I mean, it's like, it achieved the like the outcome in terms of like, it's a system that got adopted and like everyone got excited about it and, you know, introduce a new industry and ecosystem with a lot of people that are having open discussions about these things and implementing alternative solutions to them. Then maybe crisis in itself. I mean, one can debate whether it's a crisis at all if it ever was actually there. or if it's just like a natural way that an industry evolves.

And whether, you know, whether it was MvGeth, MEP boost, or something else would have happened, the end results would have been the same and would have ended up in the same location. At the end of the day, I don't know that the amount of concentration that we have at the stake level today is like meaningfully different than what we would have if we didn't have PBS or like any sort of MEP infrastructure. Maybe we have more transparency in how the system works because, we have sort of this open pricing mechanism where the information is being routed through. We have like a dollar value for like the price of blocked and you have some nice dashboards that allow us to show it. Maybe there was some path dependency there that's different. But in terms of

how things are evolving, it seems like pretty inherent to the way that blockchains are designed that the end result will end up being very similar. Maybe just maybe just commenting here one thing. at least I do feel like reasonably confident that MEV did not increase validator centralization in a meaningful, like was not a meaningful driver for a validator centralization on Ethereum. I think that's pretty clear. Yep. So I think from that perspective, if you take, if you take like concentration on the validator level, then I think if that's the kind of criteria, then I would say, like, yeah, I think it worked out, right?

Like, that didn't happen. Or it happened to some extent for other reasons that were unrelated to MEP, I think. Right, right. It didn't fail. Yeah. We don't know if it was necessary, but we know that it didn't fail. I think the thing that I'm the most excited about in the end, and in particular with the introduction of Mav Boost, So MevGeth was like a really simple solution. It was like get FlashBoss to run a server and then like route all the MEPs through this server and then like multiplex it to like the miners.

Right. And it was just like introduce like flashboss as like a server that like runs the MEP market. Mev Boost is a much more sort of open system where you have a lot of different layers to it. and a lot of room for individual entities to compete and offering additional services. So just the introduction of the block builder role and the relay role has sort of meant that this thing of operating an MEV market that the flashbats was doing

now is being done by like, I don't know, six, seven, eight companies. And there's quite a bit of turnover, I think, in the like, in the dominance of these parties. they're like trying to figure out how to make it sustainable, how to have a revenue model and competing for features that they develop. I think that's all very positive because it brings a lot more diversity to the way that these systems are being iterated upon. And just the number of different perspectives they're being reflected into the architectures that they get adopted. So that to me has been quite successful. if nothing else, just having more different stakeholders are involved in developing

and competing against each other for developing this infrastructure, providing services on top of it. That seems like quite a decentralized way to approach infrastructure development. So it's almost like the third thing you did, right? Like I guess formalizing this MEV supply chain with the different actors and how you can break them apart and how you can like separate the roles. did anything change in that perspective from how you looked at the MEP supply chain during MEPB boost and like nowadays? Or has there anything you haven't foreseen or something? I don't think there's anything that I haven't foreseen.

I think what I've been trying to introduce as like a reframing of the MEP supply chain is to think of it less linearly and think of it more as sort of a chaotic set of games. I presented a little while ago and we wrote this blog post with Frontier about infinite games and introducing this idea of a transaction supply network. So instead of thinking of M.V. supply chain as being like users originate MEV

and then it sort of gets sort of funneled through this system of extraction all the way to the validator. Inside you think about a cluster of a bunch of different infrastructure components that yeah, it originates with users, but depending on, I can say they're intense, like whatever they're trying to achieve and interacting with the chain, they get routed through different sets of specialized infrastructure that leverage tools like auctions,

that leverage tools like privacy to provide those services and capture those systems, reflect that value back to the user and provide the utility that the user is looking for. It's kind of like this thing to say like, okay, MEV is like a lens through which you can see the world, right? And once you start to look at like bridges, you look at changes, you look at all these different things from the MEV lens. It's like a toolkit that allows you to analyze them

and understand how do the dynamics play out if you set this up in a decentralized setting. I think it's useful to have this lens, but still look at all of these conforms, individually, all these games individually, as opposed to say, like, there's only one game here and it's like the MEP supply chain and like that's the only thing that matters. I'd rather look at individual components. Can you talk a bit about your vision for Frontier Research? Like what do you hope to build as a like what kind of organization you hope to build and what kind of impact do you hope to have on, you know, the MEPV landscape or crypto more generally?

Yeah. Frontier research. So I left FlashBots at the end of 2020, like, beginning of the fall of 2022. And I so took some time off and decided, like, is this something I want to continue working on? Do I want to continue working on MUV? I felt like there was still some contributions I had to make to the space. And so started sort of a research organization around this that where it helps. working with various different teams that are participating across the entire entire ecosystem of MUV infrastructure, help them sort of up-level the level their understanding and mental models around MEV, help do some analysis over the system that they produce and advise on go to market and whatnot. So we've been doing that for quite a few months now since the beginning of this year.

Now we've started looking more active like, okay, where are the opportunities for developing products? We've started incubating a block builder called Faith Builder that participates in this game. I sort of see very abstractly the set of games as being

an abstract set of two roles. You either have a message, passing system with some rules over how these messages are handled and aggregated. And you have individual agents that can be called like solvers or searchers or block builders or whatever else that aggregate these messages and then solve them, optimize them according to some objective function. And so the block builder that we're running, we see as being sort of fundamental to enabling the development of all these different games across the ecosystem and participating in them and helping them bootstrap to provide the better user services.

So it's the generalized solver that aims to participate in all of these different blockchain games. So yeah, that's sort of a venture that we're incubating from the Frontier team. So this means like it's a builder in the FlashBos. MUV Boost, because somebody could also be a solver, maybe, you know, I don't know, for KOWSwap or, like, you know, other products like that? Is that correct?

There are very similar games at the end of the day. They, they achieve similar objectives, and they sort of are architected in ways that benefit from participation in multiple of these games. I mean, the move of activity and, like, the trend, this is like one trend that's interesting to discuss is how how much RFQs are going to gain in momentum and adoption over the course of the next 12 months. Can you explain RFQs?

Yeah, I can give like, maybe I can give like an MEV explanation to it. Sure, please, yeah. And then I'll give the like the, maybe I'll give the user explanation and then the MEV explanation as well. So the user explanation is you're used to doing trades on top of D5 by going to like Uniswop.com and like requesting a swap. What happens then is you're tapping onto AMM liquidity that's on chain, but you have a lot of inefficiency in the prices that you obtain. So the liquidity that's on chain is stale. It isn't by professional counterparties. And you're, are susceptible to

sandwiching attacks and like exploitation of your orders if you if you routed through there. So it doesn't give you very good pricing essentially to interact with uniswap relative to

the pricing that professional traders would be able to get by interacting with all the different liquidity venues. RFQ just allows you to outsource the work of routing through a bunch of different liquidity venues to some solving system. It says, hey, we're going to introduce a marketplace of service providers that are going to compete to give you the best price.

And they can do the complex work of figuring out how to access liquidity wherever it is. At the user side, it's great. You have the same experience of doing a swap and getting the tokens that you want. but you can also expect to get better pricing on the trades that you do. The MEV lens is RFQ's like recapture value that's being leaked sort of down the supply chain, right? So if you look at the distribution of validated revenues today, over 50% of it comes from basically arbitrage against UNSwap LPs, right? And so UOSOPLPs put a bunch of capital into their AMM pools, and they're relying on CFI-D-Fi arbitrages to update the prices that they offer relative to the prices on other liquidity venues like finance and whatnot.

And the arbitrages are capturing a significant amount of value. The AMM-LPs are losing that value, and this is called LVR, loss versus rebalancing. There's a service that these arbitrages are offering, which is to maintain prices on chain. It comes at a significant cost for the LPs, and a lot of that value ends up being captured by validators. What RFQ does is it says, okay, thank you very much for this system that was like generating a lot of value for validators. We as the originators of this order flow would rather recapture this value either for ourselves or for our users. And so we're going to create the system that enables us to internalize essentially the liquidity and provide that value back

to our users. So the sort of trend on this RFQ stuff is for more and more of the liquidity to move off-chain, to move away from PMM contracts and be sort of accessible by these professional market makers, these professional solvers that can get better price improvements to the users and better quotes to the users and expose less of that sort of down towards validers. And then in this RFQ example, so let's say I'm on Ethereum, I want to trade some E for USC, for example.

Then I'm making this request for quotation or something. And then it's like, hey, I want, I have E if I want USC. see, this also means that somebody could come and say, hey, I'm a trading company, and I can make that trade on Binance, and here's how many, you know, USC I will give you for this, if. And, you know, nothing ever settle. I mean, of course, they're going to send me the USC on Ethereum, but the trade actually gets executed on Binance. So this would be possible? That's like, yeah, that's mostly how RFQs work. Traders don't necessarily need to make the trade on Binance. At the end of the day, like, they hold a bunch of tokens on chain,

and they like heads their exposure on other venues. So basically it's like they have inventory on Ethereum that they are providing within their market making. and their goal is to keep this inventory within some range of parameters that's like in line with their hedging on the centralized exchange. And yeah, whenever this inventory goes like too far in one direction or another, that they lose money, but so long as it stays within a certain range that they make line. Maybe let's talk about block building. I feel like block building is something that's very poorly understood, I think, by most people,

even Ethereum users they have like no idea right that like valid is not actually building the blocks and it happens in some other way and how that's happening

so can you just explain what is the what's block building and what is the block building landscape in Ethereum at the moment yeah so block building is basically validators

outsourcing the job of putting transactions into a block to a marketplace. Anyone can be a block builder. Anyone can like spin one up. Not everyone can be a good block builder because block builder is very dependent on having access to order flow. So there's a trend here which is increasing amounts of private order flow that's being routed to block builders. Interestingly enough, right, like a lot of the discussion there was initially like, oh no, block builders are going to get exclusive order flow deals and become super dominant and it'll be centralizing towards a chain

because you'll have just like one party that produces all the blocks. Realistically, I think there's a lot of economic dynamics that mean that that's not going to be the case. What is happening is there's an increasing adoption of orderful aggregation systems. So more and more of the transaction flows being routed through systems that say,

we will directly send to block builders, we'll send to all the block builders, but we'll directly send to the block builders and never touch the public transaction pool. And so essentially, if you're a block builder, you have to connect all these different private sources of order flow to be able to build competitive blocks. You compete on this access of the order flow,

compete on the efficiency of the merging, and then submit blocks to validators for inclusion. There's sort of two types. of block builders. There's block builders that generate the order flow themselves, which you could call integrated sort of searcher builders. A lot of the dominant block builders to date have been of this kind. They, you know, don't really monetize from playing the role of the block builder. The block builder is sort of a way for them to execute trades that they would, that they would want to execute anyways and have some edge in providing this execution.

And then the second type of block builders are sort of neutral block builders, and they're the ones that don't generate order flow themselves. They don't do trading themselves. They just aggregate the trading as done by a bunch of other searchers, traders, and provide sort of fair execution across all that flow. And that's like one of the big questions right now on the block building side is, is it inevitable for block builders to be traders or can neutral block builders provide services and be competitive? So if you think about a business model of the builder searcher, I guess they make the money through their own searching.

And the neutral block builder has to sort of come up with some way to make money from the private order flow. Or how do you kind of attract the order flow just by being a neutral party? is that basically the strategy or, you know, I guess whatever you can share or how do they compete with this like integrated builder? I mean, either you're like doing the trading yourself or you're providing some service to someone that wants to sell transactions on chain, right? Let's say that you're a trader, right? You're considering like running a block builder. It's not easy to run a block builder. Like not everyone can do it.

Not everyone can get access to all the private order for that's required. So you have like some cost, right? Like you have some some potential revenue versus cost calculation that says like are we going to do trading or not or do block building or not. So they're willing to pay for someone else to provide that service if they don't have to sort of spin up themselves. I think this exists with several other systems as well where like they would be willing to submit flow to a block builder if they can get certain guarantees or like partnership on on how. it works. I genuinely don't think block building alone is a very good business to run. It's like very competitive marketplace and unless you're able to get some some very like special deals, basically the profits get competed away. So the model is not is not necessarily super attractive.

So what is going to be the kind of future of block building? So you, you think there's other products that are going to be built by block builders? And what do you think are the most promising ones? I think there's two trends that are worth keeping an eye on. One is a transition of order flow from public venues to private venues, in particular, like, just the transition of Eutyswap order flow from the MMP pool to U2Swap X. that will influence a lot of different things. I think that will mean that searcher builders

become less competitive and less important, and neutral builders will become more prominent. Can you explain why? And maybe just also explain what is Uniswap X? Because I think many people will not be... Uniswap X is like the RFQ platform basically that uniswap launched.

It works similarly to one-inch fusion, similarly to CalSwap in some ways as well. It aims to use all sources of liquidity to be able to provide price improvements through running an auction with a bunch of professional private market makers for the right to settle a swap. So what this does is, It transitions a lot of activity away from the public transaction pool.

So we can say sort of goodbye to all the Sanochang, which is great, great for users, but also reduces sort of the opportunity space for those trades to take place. It makes providing liquidity as a passive LP and AMMs a lot more difficult because you have active market makers that have first look on all the, retail orders and the chance to settle those. And so as a liquidity provider in an EMM, you sort of just get all of the leftovers that for whatever reason the professional market makers aren't settling. So you have to ask yourself, like, why aren't the professional market makers settling

this? And why do I, why am I as a retail, you know, do I believe that I'm making money off of this trade? The answer is like probably you're not. And so I expect there to be just like a decrease in the amount of liquidity that's available on layer one amms. And more and more of that trading to sort of settle on on this either private liquidity or layer two. This in turn sort of reduces the arbitrage opportunity between the layer one and like other trading venues. And like if you have less liquidity that's available to be targeted,

you will expose less value. Separately, there's like Uniswop v4 and like hooks and like other like mitigations are being developed to be able to reduce the amount of LVR that are exposed by passive LPs. Essentially all these microstructure changes that Unswap is introducing, reduce the amount of MEP that gets exposed in the system and reduce the opportunity for integrated searcher builders to sort of, you know, have a significant portion of the value of the blocks. So more and more of, I think the value of the blocks is going to be distributed

towards other use cases relative to just arbitrage and uniswap. That will cause this shift away from searchy builders towards one neutral building. And then how do neutral builders differentiate? I guess maybe we went into a bit, but is it mostly on this like, so offers they can make for private order flow or what other dimensions are there to differentiate for neutral building? I don't really think that there is.

I think it's like a knife fight. Just do it better. And what are your thoughts on decentralizing the block builder? Do you think this is

it possible to build a decentralized block builder that would be competitive and is there a reason to do it? I'd say it's, I mean, I don't know that much, I will say about what decentralized block building actually looks like. And the designs that I've seen or the attempts at it have been unconvincing. There's like this bigger question mark, which is like what does decentralization actually mean that like needs to be answered

when you're even like trying to tackle these questions? and the answers I've seen haven't necessarily made much sense to me. This is like a very deep rabbit hole to like dive into. I see all of these things as like games that you're developing. And the main metric to me about how decentralized it is is what are the barriers to entry and the advantages to like to scale or to. network effects that the system involves. And I think the definitions and proposals for decentralized block buildings to me are trading

off what is like a competitive market with individual agents for like a network that has network effects. And to me that doesn't necessarily feel more decentralized. Maybe there's there's something I'm missing. But it is susceptible to same centralized. pressures at different nodes of the network as any participant in a latency system have. And so while it may have properties and look like a network, it doesn't necessarily seem very decentralized to me.

So I don't know. I don't know where decentralized block building is headed. I think there'll be a lot of experiments in attempts at developing it. I would tend to believe that there's something promising, I think, to be said for adding more constraints to the way that block building works and essentially giving validators the more control over the policies of what they accept as blocks. And maybe you could say that that sort of decentralizes the role of block building a little bit. by constraining them to some set of rules that are enforced at the validator level. And so you are leveraging sort of more distributed validator set and the requests that those validators may have while still having the block builder role to actually enact those requests.

That might be like a direction for more trustless block building. But yeah, is there like a specific approach to decentralized block building that you've looked at? I mean, it's, I guess there's a few reasons why this. I have not looked at this in any depth. But there's some things that sort of like triggered this a little bit. I mean, one thing is that, you know, there was like so much effort and thinking that kind of went into, oh, let's try to make Ethereum, you know, as decentralized as we can, that there's like lots of different validators. Now, did that work or not versus like other proof of stake chains? You can

debate, right? There's some aspects in which Ethereum is maybe more decentralized. Some aspects, maybe it's like similar to other networks. But, you know, it's still, it's pretty decentralized, right? When you look at the, I would say, the validation level. And then, but now we've had the segregation of taking the rules apart and then you have this block building. And all of a sudden, if you look at this block building, well, it's sort of, right, you have a few, you have a few block builders that produce most of the blocks and and as you said, right? I guess at the moment, the ones that are kind of dominant there is the search of builders, which means they're, you know, they're also looking for what is the optimal transaction ordering and finding their own

things. And the ones best able to do that are kind of trading companies, right? They're also trade on centralized exchanges. So from it just to sort of, okay, what do we want to do? he seemed to look like having a few companies like that that in the end has this critical role maybe doesn't seem like the most desirable outcome. So this is like one thing. And then the other thing has to do with, you know, some people talking about. And I think this is also true for a faith builder, if my understanding is correct, of being like a neutral builder, right? where basically, okay, let's say there's like some builders and they kind of maybe use the

information against you when you send it to them, but then there are others and they say, we promise we don't do that, right? So trust us. But of course, that also seems like a bizarre thing, right? Because all of a sudden, the whole thing is about building like trustless systems, right, with crypto and cryptography and, you know, T-Sentras Network and stuff. So if then you have at the core of this whole thing, you have these block builders who, you know, claim that they do things with a certain, you know, following a certain process. And that's why people use them. But actually, it's based on trust. And you can't, like, verify that. You don't have, like, the kind of guarantees that we generally have in crypto networks. That also seems a little bit weird. And it seems like the kind of thing that often you be like, oh, let us replace this trusted thing of the neutral block builder with something that's actually

trustless. And then of course, decentralizing it is often, is I guess generally the way that this is approached. I do think that there's a difference there between providing better trust guarantees and decentralizing. So you could do block building in a centralized way while still providing strong privacy guarantees, right? And so you can have this, what is like filled through trust with like, hey, I won't front run you, I promise be enforced cryptographically while still being operated in a centralized manner. I think that's a natural evolution that things will go towards. I think the like decentralized component of it is the part that I'm not seeing how it'll take place. The other,

question is like, let's say that we decide that we don't like that there's five whatever block builders. And we don't like that there's sort of a, you know, a parallel distribution and dominance between them. We want block building to be uniform distribution. The way to do that is by creating centralization somewhere else. You say, okay, then you put all of the order flow within a single system and you sort of selectively distribute it to various different block builders and enforce the fact that this uniform distribution happens on the block building side. But you've just introduced the problem at a different layer, which is the order flow aggregation layer. And then are you happy to have as like, you know, two, three different order flow systems that process all of the order flow and

Ethereum? Is that better? Is that like a meaningful improvement? Yeah. I think those those like end up being the directions of inquiry that I get, that I get concerned about. We also wanted to talk, I guess, about the PBS system in general. Is this the right direction and your thoughts? I guess we already covered it a bit, but given, you know, Brian and me, both, like, say, there's, like, different chains and there's, like, different approaches to how MEV is treated. I think, obviously, if you're almost sort of the first and still, like, the main venue where

the liquidity is and everything, And, yeah, we wanted to capture your thoughts on like, would you do it again like this? Or is PBS the right way? Or should it be done differently on other chains? So, for example, you know, in cosmos there is like different ways to try and handle MEP. I don't know how familiar you are with them. But like, yeah, I guess just wanted to hear your thoughts on is PBS the right direction for proofstake that works? Or are there other ways to handle this?

I don't know I don't know I think it was right for Ethereum I think it was right for Ethereum at the merge like they needed MF boost and like that was that was probably good like they needed an MEPV solution

at that time and it worked out is it right for Ethereum in the future is it right for other chains is the right for layer twos it's not clear to me I mean you guys have looked at this a lot right? What do you guys think?

So if you look at like Cosmos chains, then it seems like there are way easier ways to address this issue. I mean, I think in the cosmos chain, right, you already have the situation that, you know, you have validators and the validators depend on the token holders to stake with them. And the token holders, of course, want this chain to, like, work properly. they want their token to do well. So if now you have some validator that says, oh, I'm going to sandwich, you know,

let's say you have some sort of dex chain and then some validator says, I'm going to sandwich everyone. Then the token holders are like, what the hell? This is like undermining my project. I'm not going to stake with you, right? So this is like one thing.

So I think that makes it like way harder for someone to say, oh, I'm going to run this kind of strategy that you have on Ethereum, right? Because in Ethereum, I think you just have a very different landscape. So I think that's one thing. And yeah, I guess you've had a few different experiments on cosmos, right? Like for example, Moses, where they have basically some in-protocol MEP capture, where they're basically running some MEP bots. And then it kind of goes back to the Stakers and mostly.

And then I guess I think in DYDX, right, where we've done this report, where there's a committee that, where it's like, okay, you cannot, validators are not allowed to do basically MEP. And then there would be some kind of taking, looking at data and trying to detect things and then the ability to have, you know, slashing of validators who do it anyway. So these feel like pretty straightforward and easy solution that actually solved the problem pretty well for the foreseeable future. Maybe at some point it will break down in some ways, but there it seems like proposed a builder separation. It adds a huge amount of complexity. It doesn't really seem to, does it solve the core problems any better than that? I don't think so. So it doesn't feel like the right way for at least for let's say cosmos chains.

Now, okay, you have other things again. Solana, I don't know, difficult. It's again very different. So, yeah. I think the one thing that PBS is is sort of validators rejecting their power, right? In many ways, like they're saying like all of these systems of that are, that do like leader selection, they essentially say, Valder, you have power. You have all the power and like you have the power and like you have the,

figure out what to do with it. And PBS is kind of like rejection of this power. It's like, oh, like, no, we don't want to use this power, but we want to get paid for it. And we're just going to like give this power to the highest bidder. That's sort of what it says. But is that actually what's like max utility for the end user? Or is there some other approach to dealing with the power that these validers receive and the leader selection process that provides, uh, provides, guarantees are more useful for end users. And that's how I would frame what you're discussing. If validators opt for constraining the types of activity or types of blocks that they produce

based off of some slashing mechanism or whatever else, you may be able to generate more utility for the end users, whether it's first and first out system or or other sort of rules. I mean, even censorship rules at the end of the day policies are enforced by the validators. And so you can come up with sort of a framework for thinking of policies that the validators subscribe to and offer to the consumers of the block space that they offer.

So that was also what you mentioned earlier, that this way, if you would have this sort of system, like different broad builders could see. serve different constraints for the validators and that way decentralized more. Is that correct? Yeah, exactly. Yeah, very interesting.

I do think that there was, there is this like, tendency, right? Like, Brian, what you said with the Dex chain and people saying, if you sandwich everyone, you're destroying the project. But I guess at the same time, if you delegate to that validator who does it, you might get a higher yield, right? So I guess there's like a sort of issue there where if you just do it, and delegate to this validator

it probably you just benefit and the chain doesn't like go to zero but yeah I was wondering if that maybe it's what drives it I mean you could have you could of course have like yeah say hey I'm going to launch a validator and I'm going to be like math maximization validator and you know

maybe you can generate higher returns and maybe people stake with you it's just the challenge is if you have if you have like governance I mean it is very easy then for someone to say hey we're going to make

a governance proposal and we're going to say like hey this this guy here he's like messing up our project so I don't know we just slash them or we say this is not allowed or we take

some action that goes against that I mean I think this is maybe a little bit I guess that's also where the whole app chain world can be a bit

different from the Ethereum world, right? The Ethereum world doesn't really allow for that. And you know, pros and cons on that, right? Of course, it tells us its advantages. Have you looked at Mev Burn? And do you have thoughts on it?

We were going to ask you for your thoughts on it. I don't really have, I mean, I am like aware at the highest level of sort of like what its intention is. But I don't have, yeah, it would be great if you could explain, first of all, what Mbiburn is and then what your faults are. So one of the benefits of PBS is that you have a public price for the value of blocks that are being produced, right? which is not something that I existed in a pre-Mefboos, pre-PBS world. Prior to that, you could see the amount of transfers to Coinbase that were taking place,

and you could, like, summit, I guess, and, like, see out of bounds, like, what it looks like. But that wasn't the venue for the price discovery to take place. And, like, if a miner wanted to have a different approach to collecting fees, like, they could do so, and it wouldn't reflect the value of the blocks that they produce. Similarly, we sort of saw a lot of miners say, like, we're only distributing like block rewards to the miners in our mining pool. And we're keeping all of the MEV rewards to ourselves as like our monetization. And in some ways, like that was possible because the miners didn't see sort of this one number that said like, okay, here's like the value of the block that I mined. You know, you just know that the block reward that was included in that block.

So now we have this public value for the blocks. And the question is, like, how does this value get distributed? Right now, it's sort of left to the mining pool operators or node infrastructure providers to decide how they want to distribute that to their constituents. Most of the time, they keep a percentage of those rewards and, like, distribute the rest. there's still some incentive to like optimize this in some way and whatever else. And there's more and more discussion about like, oh, maybe this like value should be redistributed to the network and not necessarily to, um, to validators. So MevBurn is essentially saying, hey, we see this public value. Is there a way to enforce that this gets burned similar to the IP 1559 rather than distributed to.

to validators. There's like interest from token holders, like ETH holders to do this. And I think there's some arguments for like network stability as to why this should be done. From my view, it seems to be net negative for anyone who runs a validator in terms of the yield that they're going to be able to generate. Yeah, it's interesting. It seems it's beneficial for eath holders that don't stake, right, and maybe discourages staking since the yield will be much lower. And I guess I personally also probably saw me as one of the revenue sources for moving away from, you know, inflationary token increase. So tough one. I think it is similar to what, you know, I guess in osmosis or these models where essentially the map is captured by the chain and like redistributed

to the token itself. So I think it's important that like, you know, people do stake and the infrastructure providers do run nodes. So like somewhere this revenue has to come from. And probably MEP is like a pretty good place for that. Yeah, I guess the question is also. And I think you'll have a much better understanding of this. But, you know, if something like MEPBurn was created,

you know, are there ways to kind of route around that? you know, to through some sort of, you know, off chain, like basically trying to pretend to the chain that this block doesn't have a lot of values, that little is burned, but actually it has more value that then is distributed in some way between, I know, block builders, validators in some way. Yeah.

What do you, what do you false on that? Yes. I mean, both DAP 5059 and like Mev Burn, to me is increasing the potential value of collusion is like a way to think about it. These mechanisms all have some sort of assumption that there's some price to collusion that's higher than the benefit of it and, you know, therefore the collusion isn't going to take place.

It definitely seems to me that with Mevburn, there's a pretty strong incentive to attempt to bypass it. again, Mevburn is like, there's like a few ideas for how it's implemented and it depends on the specifics of it and the model that is deployed. But the incentive is there. Is it significant enough to cause a change in behavior given both economic incentive and social political incentive? I don't know. It's to me, so like what does it solve? What does Meph Byrne actually solve is not clear. I mean, I guess one thing I've heard was more that, well, if M.E.B, that it smooths, you know,

that you don't have like huge returns being made on some blocks and that then this sort of incentivizes more concentration and staking pools or something because like if you just run a few validators, then, you know, it's going to be very rare that you earn like a lot of of money for MEP and so I don't know that I'm not sure that's how convincing that are you giving this to me this smooth is it by removing it right so it's like an entice-taking cool thing I heard that as one I think maybe Justin Drake gave that as as one as one explanation for it but yeah I think if you sort of look at it on a high level.

Or maybe we should talk more about that, actually. If this is an area we haven't really talked about. We'd love to dive into a bit. So right now, you know, we talked about block builders and how they are basically capturing a bunch of value. But of course, we have maybe other places where this is going to happen too, right? So one would be the wallet or another one might be, you know, let's say some Ethereum app that a little bit like what Unisop or Kaurop are doing, you know, to building some kind of thing

that also circumvents the MEP. I'm curious, how do you, what do you feel like it's going to be the role of maybe wallets or some of these other players in the MEP supply network? My claim has always been that MUV is best mitigated at the application layer. I actually build better applications that deal. deal with MEV, you're able to provide better user guarantees and superior user experience because of that. And to me, a wallet and an application are one of the same.

The venue of the user is interfacing with to get their preferences expressed. The role, there's this interesting role that the wallets have played historically, which is to be both the assigner and an RPC provider, right, with like a nice UI around it, but not really try to provide the experience of what the user actually wants to do, right? Let's say, you know, that's the metamast thing. Like we are a browser extension, we work on all the different apps. we're sort of agnostic to the type of activity that you do. All we do is we provide the signing,

and we provide the RPC service. A lot of M.V now is about, oh, maybe the RPC service has become more complicated. There's all these different private venues to which he can route, not just to the public transaction pool. The type of RPC service that you use and the guarantees that you get from them is more closely tied to the type of activity that the user is doing. And so as an application developer who really cares about the user experience and really understand what the user is trying to achieve, I would be in a better position to understand which RPC to use. So how do I negotiate this with the fact that right now that service is being handled by some external product?

I want to bring that level of control over the user experience within my application. There's a bit of a tension between applications and wallets in this way. And so I think the natural result is we'll see more sort of separation between these things. Like more applications launched their wallets, more wallets have an application feel and sort of integrate the full sort of user lifecycle within their own system. The role that they play in MEV is the same, right? Like they want to provide the best guarantees to their users to retain them and increase the little activity that they have.

That could mean protecting them from MV. It could mean giving them better prices. It could mean selling their order flow for monetization reasons. There's a bunch of different things that applications can do. Cool. I want to ask another top, like maybe one last topic here. So this is another area that gets a lot of attention in the moment, which is intense. and I mean, what are intents?

We before spoke about this RFQ thing, which I think is a great example of an intent, right? Where it's basically someone saying, instead of saying, you know, a transaction that's like, you know, okay, do exactly this on chain. I guess mostly with trades, right? Swap X for Y. You say like, hey, I want this kind of outcome.

You define some sort of criteria for outcomes. and then there will be a job for somebody else to figure out what is the best way of satisfying that outcome. And there's some blockchains that are very much focusing on this. I guess like Anoma is one example, but some others. And then of course there's intense applications doing things like that on Ethereum. Do you think intents are going to have a major impact on this MEP supply network? Yes and no.

I think intents are confusing because the way that it's being framed is as opening up a very broad new set of possibilities in a way that I'm not sure how broad it is. There's a quip about intents, which is an intent is no longer an intent once it has product market fit. So an intent is called like an RFQ if it's like a swapping use case, right? or an intent is called like a bridge transaction if it's about going to a different chain. So I think intents where there is a need is a more advanced transaction types that allow for performing types of activities that you aren't able to perform otherwise that constrain the execution space based off of things are either inefficient or have, difficult trust boundaries to enforce directly on a layer one. And those seem mostly like

standards to me. An intent that's able to have conditional execution on multiple different chains and able to bring constraints on external state is fairly interesting as sort of a model. whether or it will be developed in a generalized case or a specific case to me is sort of a key question. So in this sort of infinite games, transaction supply network framing of things, all these different transaction types, all these different message types are being passed around are intense, right? They are ways of communicating some preferences over what solvers on the other side. are doing and how they're re-aggregating those messages together. The exact format and use cases, are all these different messages going to use the same

standards for being expressed or are they going to be very use case specific? I would tend to believe that it's more likely to be use case specific. While intents can be like a very useful generalized framework for thinking about the expressivity of these messages and sort of pushing for more. expressive systems. I think the development will be use case driven and it'll be about what is this more expressive message type enabling to build as an application rather than the message type being the core focus. Cool. Well, thank you so much, Stefan, for coming on. I think the MV feels like one of these rabbit holes. That's just like complex.

and changing at a really rapid rate and also really fundamental for, you know, how all these systems are going to work in the future. So it's really great to, you know, have you back on and talk about these things and I'm excited about the work you're doing at Frontier and all the things are going to come out of that. So thanks so much. Yeah, always a pleasure to come back on. Hope I had a few insights that were interesting. Absolutely. Cool. Thanks so much. And thanks to listen. We look forward to being back next week. Thank you for joining us on this week's episode. We release new episodes every week.

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