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Who will win on the MEV track?



What is MEV MEV is Miner Extractable Value, which refers to the value that miners can extract. MEV was first proposed by Philp Daian and others in April 2019, and with the development of DeFi, it has gradually been valued by people. (Flash boys2.0 proposed the MEV concept, arxiv) Specifically, what is MEV? We know that miners can package transactions and generate blocks in Ethereum, and in the blocks they generate, miners can include transactions, exclude them, sort transactions, etc. In addition to transaction fees and block rewards, miners can also extract more value through the above operations. And this value is MEV. In the DeFi field, MEV mainly occurs in arbitrage transactions and liquidation. Arbitrage transactions, such as arbitrage opportunities between different DEXs, such as Uniswap and Sushiswap. As shown in the picture below, it is a real arbitrage transaction: (A real case of MEV, Etherscan) MEV infrastructure provider Skip Protocol officially launched Evmos: On November 22, Cosmos ecological MEV infrastructure provider Skip Protocol tweeted that Skip Protocol Evmos, the Cosmos ecological EVM compatible chain, was officially launched. On Evmos, Skip Protocol will allow node verifiers to complete the execution of bidding at the top of the block and the capture and distribution of maximum extractable value (MEV) revenue within a shorter block time (the team said it is less than 2 seconds). It is dedicated to MEV The democratization of , protecting users from erroneous MEV policies. [2022/11/22 7:56:42] The arbitrageur first bought 33160.66 LDOs on Uniswap with 17.01 ETH, and then sold them on Sushiswap at 23.05 ETH, making a profit of 6.04 ETH. (This is an example of MEV with relatively high income. There are higher income than this, but most MEVs cannot reach this income level.) The above-mentioned extractable value is MEV. Generally speaking, after a large transaction occurs on Uniswap, there will be a certain price slippage. And arbitrage robots tend not to miss such opportunities. It submits arbitrage transactions to miners. It is also possible for miners to participate in this game. Miners only need to conduct transactions by themselves and package them into blocks first. If the income is higher than the pure transaction fee income, then miners have an incentive to participate. Of course, when an arbitrage opportunity arises, not only one robot will notice, but other robots will also participate and pay higher gas fees. This creates a fee competition for arbitrage. Also known as PGA (Priorty Gas Auction). MEV operator Flashbots announces open-source Flashbots Builder: On November 20, MEV operator Flashbots announced the open-source Flashbots Builder, which aims to help the Ethereum ecosystem further develop. The source code has been released on GitHub. Flashbots says that with SUAVE, its latest build of a fully decentralized block builder, every builder can be part of a block contribution, rather than having a single entity build the entire block. [2022/11/21 7:50:35] It can be said that due to the continued existence of transactions on Ethereum, MEV has always existed. Therefore, it is difficult to calculate exactly how many MEVs there are. However, through historical records, the realized MEV can be calculated. As of the writing of Blue Fox Notes, the MEV that has been realized so far exceeds 380 million US dollars, which is not a small scale. MEV and front-running MEV is not necessarily all front-running. It could be benign or it could be malicious. If MEV is just an ordinary arbitrage transaction, it is benign for the market. For example, there is a large transaction in Sushiswap, which leads to a large arbitrage space. It is normal for the arbitrage robot to carry out arbitrage and let its price return to the real price level of the market. However, we can often see "front-running transactions" in DEX transactions such as Uniswap. After the user initiates the transaction, the robot pre-empts the transaction, thereby manipulating the price, and finally sells for a profit. This is equivalent to an invisible increase in transaction costs for users. Data: After the merger of Ethereum, Lido’s total MEV reward was 275.4ETH: September 16, according to Dune Analytics data, after the merger of Ethereum, the total MEV reward of Ethereum pledgers on the Lido protocol has reached 275.4ETH. In addition, the current Ethereum pledge rate on Lido has been updated to 5.5%. [2022/9/16 7:02:05] In addition, if the income from arbitrage is very high, much higher than the income brought by block rewards, it is very likely that miners will reorganize the order of transactions or reorganize blocks to obtain This is not conducive to the normal operation of Ethereum. Market Size of MEV First of all, it is difficult to accurately measure the market size of MEV. This market is currently viewed primarily through the MEVs that have already been implemented. As of the time of writing Blue Fox Notes, from January 1, 2020 to the present, the cumulative MEV realized has exceeded 380 million US dollars, the MEV realized in the past 30 days has reached 52 million US dollars, and the realized MEV in the past 24 hours has reached 2.6 million Dollar. Assuming a daily average of 2.6 million US dollars, the annualized MEV can exceed 9 billion US dollars, which is enough to become a very important source of income for miners. Of course, the actual data is greatly affected by the volume of DeFi transactions, and it may not necessarily reach the scale of 2.6 million US dollars every day. However, as the overall scale of DeFi increases, the scale of MEV will also increase accordingly. South Korean listed game development company Gamevil acquires blockchain technology company Zenaad: According to news on November 25, South Korean listed game development company Gamevil has acquired blockchain technology company Zenaad, planning to develop a blockchain-based game platform. Gamevil revealed yesterday that after acquiring Zenaad, its blockchain ecosystem construction has entered the final stage. Zenaad's technical prowess has been internalized into Gamevil's development team. The company will use blockchain technology to build an e-wallet for its NFT exchange and develop a blockchain-based advertising solution for its global game service platform HIVE. It is understood that Gamevil's HIVE platform is transforming into an open game platform based on blockchain to enhance the company's environment for developing blockchain games and facilitate convenient transactions of NFT. Gamevil's NFT exchange will be launched in the first half of 2022. (Forkast) [2021/11/25 7:11:05] (MEV from 2020, Flashbot) At present, MEV in the market mainly comes from trading arbitrage, accounting for more than 90%, while the rest is mainly liquidation, which is probably less than About 5%. (MEV is mainly based on arbitrage and liquidation, Flashbot) Alpha Homora users lost 40ETH due to MEV robots, and the project party will fully compensate and repair the problem: News on October 23, Alpha Finance Labs, a cross-chain DeFi protocol, stated that there have been 20 addresses in history When using the leveraged mining protocol Alpha Homora V2, a total of 40.93 ETH was lost because the transaction was discovered by the MEV robot. Alpha Finance stated that it will fully compensate these losses in the form of ALPHA tokens. Regarding this problem, Alpha Finance believes that the smart contract of Uniswap V2 has implicit assumptions (implicit assumptions), and these assumptions are not clearly stated at the contract level, so they believe that this will cause slippage to be unchecked. Alpha Finance stated that it will fix the problem and check it at the time of transaction, so these situations will no longer happen, and security auditors OpenZeppelin and Peckshield have also confirmed the fix. [2021/10/23 6:09:30] (Arbitrage and liquidation occupy the vast majority of MEV, Flashbot) From the perspective of the protocol, as of the writing of Blue Fox Notes, the most frequently interacted protocols in MEV are mainly Uniswap ( 47%), Sushiswap (20%), Balancer (13%), dydx (8.5%), Curve (3.7%). It can be seen that at present, arbitrage trading is mainly used, supplemented by liquidation. (MEV's favorite protocol for interaction, Flashbot) ARCH and MEV In the MEV track, there are mainly ARCH and ROOK. ARCH is the governance token of ArcherDAO. The Archer protocol hopes to unite miners and strategy providers to obtain more benefits through arbitrage transactions, liquidation, etc. To put it simply, there are two important roles in the Archer protocol, one is a miner and the other is a strategy provider. Only the cooperation of the two can complete the landing of the MEV. The strategy provider is responsible for submitting the transaction, and the miners are responsible for packing the transaction into the block. The protocol connects the two and routes the transaction submitted by the strategy provider to the miners. In this collaboration, strategy providers are like arbitrage and liquidation opportunity diggers, and they are responsible for discovering various possible profit opportunities everywhere. Once a possible opportunity is found, it will be sent to the Archer protocol, and Archer will route it to the miners. When the final arbitrage is successful, the agreement will distribute the income in a certain proportion between the strategy provider and the miners. At present, in this income distribution, the current agreement does not capture fees from it. In the future, according to the governance of DAO, the agreement can also participate in the final income distribution, thus giving ARCH value. Possibility of ARCH *Market size Assuming that the average daily MEV can be maintained at 2.6 million US dollars, and Archer can obtain a 20% market share, then, in this case, Archer can obtain up to 520,000 US dollars of MEV per day, and the annualized MEV can reach up to $189 million. It is up to the DAO community to decide what proportion of the fees ARCH can capture. Assuming that 5% of this can be captured, then the annualized capture fee can exceed $9 million. You can see how many protocols can reach this level at present, and if they can reach this level, how much can their valuation reach? According to the statistics of Cryptofee, according to the current data, there are ETH, BTC, Uniswap, Sushiswap, Compound, Bancor, Aave, Binance Chain, Balancer, etc., and Terra, Ren, 0x, Synthetix, Curve, Tornado, etc. are all below this level. (Ranking of encryption protocol capture fees, Cryptofee) That is to say, assuming that the annualized fee captured by ARCH reaches 10 million US dollars, then it can rank among the current major DeFi protocols in the encryption field. Of course, the above is purely hypothetical, and whether it can be realized depends mainly on the execution ability of the team. The execution itself needs to be proved by facts and implementation. For now, the team has yet to prove, which is one of the main risk points. * Miners' attention to EIP-1559 may cause miners to constantly seek new sources of income. If miners find that the value of MEV is large enough, it is also possible to join the ArcherDAO protocol to achieve more sources of income. With more miners joining and more strategy providers, the MEV scale that ArherDAO can achieve will be larger. *ARCH and ROOK The main players in the current MEV market are non-miner traders. However, there are some MEVs that can only be captured by miners, because miners have the opportunity to order transactions or exclude certain transactions. In other words, PGA's gas bidding can only complete part of MEV. ROOK currently mainly completes MEV through PGA, while ARCH cooperates with miners, which makes the potential MEV that ARCH can achieve higher. In Dan Robinson's famous article "Ethereum is a Dark Forest", Dan once mentioned that arbitrage robots are everywhere, and they are always ready to pull the trigger. For example, after Dan, the author of the article, discovered a loophole in a smart contract, he planned to recover the funds before being discovered to prevent theft. However, arbitrage bots quickly discovered their transaction, copied the transaction, replaced the address, executed the transaction with a higher gas fee, and finally stole the funds. As Ethereum miners understand the value of MEV, MEV has become an important source of benefits for miners. With the addition of miners, the opportunities for pure traders may not be as good as the combination of miners and strategy providers as a whole. *Latecomers on the MEV track, who is the final winner? Who are the main players? It's too early to draw conclusions. Although ROOK may not have as much market potential as ARCH, it can also gradually change its strategy. In addition, other latecomers may also enter the MEV track. If there is better implementation, they can better unite miners and strategy providers, have better DAO governance, and have better tokens Value capture mechanism, then, is not out of the question. This is an open market, as long as there is enough profit space, there will be a steady stream of competitors entering. ------- Risk warning: All articles in Blue Fox Notes cannot be used as investment advice or recommendation. Investment is risky. Investment should consider personal risk tolerance. It is recommended to conduct in-depth investigation of the project and carefully make your own investment decisions.


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