'From MEV Auction (MEVA) to Sequencer MEV Extraction' - Karl Floersch

perfect timing for carl to uh switch on and talk about neva or rap about viva i am very excited to see carl make through his presentation in time i will make a beeping sound if you cannot go through 169 pages in 15 minutes feel free to share a screen you don't think i can do it wow wow okay let's go you're right it's i i'm not gonna lie i will have a timer as well so that we can see anyway why hello everybody i am carl and today we are going to talk about miva mev auctions um also sequencer auctions also just like generally what is this you know what is mev like what you know what can we do with it and uh uh why is this extremely exciting in my opinion for just like literally the entire internet and the way that we work and communicate together because more things are complete communication problems than than you might imagine so anyway first why is this such an exciting topic i think that the reason why this is such an exciting topic is because i love open source and blockchains we'll talk about how this works but blockchains give a business model to open source this is my claim and i think that this is actually pretty accurate and pretty it's pretty pretty revolutionary and in fact blockchains give a business model to public goods in general right the ability for us to build things that don't necessarily aren't necessarily extractive but instead get used and when they are used maybe you are rewarded in some way that doesn't incentivize you to like you know horde and whatnot you know like it's this beautiful future that we can potentially have and i really do believe that it is possible so you know i've been working in this crypto space for a while and guess what i'm you know working on all these various projects they're all open source and they're all public goods and so there is this fundamental thing where it's like okay it's amazing to be able to work on this technology give it out for free etc etc but how like how how is this actually being funded like i'm not gonna lie like you know i got paid for all of all of my work i'm not just like doing it out of the goodness of my heart alone right and i would say that a large portion of where this came from is just the fact that eth itself got bigger and bigger and the network effect grew and grew and the price grew and grew and then people started reinvesting and it got bigger and bigger and just showered eath on everybody right and that's like like legitimately how all of these open source projects have been funded in you know to to some extent and so yay you know blockchains gave a business model to to public goods these public goods that are that i was working on um and that many of us have been working on so it's it you know but it's like is that really the business model like we patronage uh essentially from you know or reinvestment into in into it's not it's not terrible i'm not gonna say that it's like a bad thing but it kind of it doesn't feel as sustainable long-term and so here's why it doesn't feel super sustainable because users right they they have they have a bunch of you know ethan and you know crypto and they use dapps and then those dapps essentially pay minors because you end up spending a transaction fee you end up getting you know arbitrage profit taken from you whatever it is and so and then developers make these steps and they're just kind of like oh okay well you know i'm just going to deploy my smart contract now it exists and now guess who's guess who's getting paid for it it's it's not the developer it's the miners right and so this is like a kind of like wacky scenario um and it doesn't seem doesn't seem particularly sustainable and i'm not saying that developers need to you know make all of this all of this cash but this is you know this is an issue anyway so the miners are making minor extractable value um and just imagine just imagine for one moment imagine all the um imagine that the miners had to actually pay the developers right that i mean that that would be pretty that would be pretty sweet and maybe what if miners literally paid everyone what if we could all like use the blockchain and guess what the blockchain pays us back that just seems like such a nice like a kind of weird like circular mindset and circular you know strategy that just seems like a great basis for an economy you know like every good economy is circular um anyway so you know this is an amazing future we'll and then we can all join in universal consciousness um as we're paying ourselves and being good okay okay i'll take i'll take a step back but anyway let's let's let's get into some mean potatoes um and you know talk about minor extractable values so what exactly is mev i just i mean i i think that when i think that this concept is probably a lot more you know normalized now thankfully um but uh i will still define it i think it's useful basically it's the revenue from being a miner so it includes block rewards it includes transaction fees includes front running includes slow market arbitrage or there's probably a better word for that as well but we often think of it as just like just front running because that's the thing that gets like a lot of attention but really it's it's all of the above it's literally what can be extracted from running a minor right um and you know shout out to phil dime for uh you know introducing um and so there is another form of mev and that is just the minor extractable value that you can make from 51 attacking network being bad all that kind of stuff you don't want to don't don't be bad okay and so we make this assumption in blockchains that the mev for being honest the basically the uh you know economic reward for being honest exceeds the economic reward for being malicious right so the miner is making money what is keeping the miner from doing anything bad well it's because it's making more money being good then it makes being bad and that's great but what happens what happens if the mev honest is actually way bigger than the mev malicious right like you know i mean and honest is a spectrum right like if you're front-running everybody is that really honest it's kind of like honest it's not necessarily you know great it's not pro social pro us pro community it's more just like pro you so like what what this big big mev honest is not necessarily a good status quo why like we should just taper that down a little bit and give back to us give back to the community and so when mev malicious is low especially especially especially you know proportionally to the mev honest and and casper and you know consensus protocols that are a little bit more you know have better security properties can actually achieve this then we can extract that excess mev extract that minor extractable value so that seems pretty fun so now i'm going to talk about miba so miva notably there are there's kind of like it's a little bit of an ambiguous term at this point so i i'll try to make the distinction pretty clear um and we can uh we can yeah i'll go into it but anyway so these are the sources of mev and we're not going to talk about extracting the block rewards we'll just talk about extracting the transaction fees front running slow market arbitrage and by the way i i'm a big fan of the you know the previous talk where we can actually eliminate much of front running just by using some you know commit reveal slash timelock crypto which i'm very excited for but anyway um here we are these things we can extract and that's a solid that's a that's a solid chunk of change you know okay so first gas auctions you know we currently have you know priority gas auctions flash bodies work flashbots is working on much more sophisticated kinds of auctions here and they those are by the way called miva miva as well so i'm sorry it's a little bit of a confusing uh term because there's a lot of auctions all over the place and they're auctions for mvv all the time so anyway um you know users or arbitr arbitrage bots or whomever are submitting transactions to the miner the miner is about to create a new block sorry i got to get a little bit more context here the miner is creating new block figuring out which transactions go in it and so how are they going to do this well they're going to hold an auction and that auction you'll have the participants be either the users arbitrage bots flashbots you know etc and they will send these transactions which express some you know desired you know uh inputs to be included in this block and it'll you know propose this modification and it can be conditional it can be arbitrarily complicated it's very you know it can be very interesting and at a sit at a very simple level the miner is going to choose the the transactions that provide the most value to the miner right pay the highest gas price pay the highest fee and so that is the transaction that is going to be mined and that is the ordering of the transactions that will be mined et cetera and the miner will make that gas times the gas price and so the mev plus equals transaction fee right we we just got we just got some some money from including transactions so that's an mev auction and that is that is uh one sense of the term and so i think i'm going to start disintegrating these terms a little bit and just call the next one a sequencer auction and that's what i'm going to be that's what i'm talking about when i say like you know extract the mev you know let's talk about a sequencer auction so the sources of mev right we just got transaction fees but now notably this is you know we this also works for arbitrage right you know if there's a free arbitrage opportunity everyone's going to be wanting to take uh take advantage of it they'll all be bidding and they'll bid up to essentially how much money there is to be made and so this is just to tell to like give and give a feeling for how the miner actually makes the arbitrage opportunities in some kind of like perfect uh perfectly competitive markets uh market situation now mev plus equals the arbitrage opportunity on the chain that's pretty crazy and you know there i i included this a little flashbots 2.0 diagram of of these gas gas price auctions because you know they bit each other up up until you know pretty close to the value that they're gonna make anyway so those cover all all of the other you know sort of forms of mev and now let's talk about sequencer auction so minor another word for minor where i'm i want the part of what a minor does is it sequences the transactions in a block and so that sequencing is the thing that we're going to like focus on and so i'll instead talk right they you know they order these transactions and so i'm going to actually just call it a sequencer call the miners a sequencer you know sometimes i forget i have animations that describe what i'm saying so then i have to play them back anyway okay so this is that that auction that we just had right users paying transaction fees you know extracting mev for the uh or i'm sending me feed essentially transferring mev to the the uh sequencer so what if we had an auction for being the sequencer itself so let's call hold an auction and let's say okay if you want to be a sequencer and you want to make this juicy juicy profit why don't you bid for that right that privilege well we can expect that the bids will be the expected mev you know gained minus the operational costs of being a sequencer and guess where that money can go you know first who's going to the sequencer where's his money going to it's going to facebook we're going to send all the money to facebook and google and amazon now i'm just kidding imagine a future imagine a future where we send it to ethereum send it to us send it to the community send it to not just you know the ethereum community everybody right right like you know if everyone's gonna be using this blockchain it better be good for all of us build public goods so you know one thing that i'll just like point out although i don't have that much time so i'll just you know mention it one thing that we need to do for this to work is we need to have really good open source software that commoditizes being a sequencer right we want to make it so easy to extract the you know mev in the way that we want it to be extracted so essentially right we may not want any front running to be possible we may want to you know require that all transactions are uh you know encrypted and with uh uh commit reveal schemes and whatnot like that is something that we definitely want to do but we need to commoditize being a sequencer for this mev extraction to actually work and to be you know uh uh something that doesn't get itself captured and then you know okay i don't remember what that that greater than okay what's with this optimism so that's what i'm i'm working on right we're building optimistic roll-up the ovm optimistic ethereum we are scaling ethereum i forgot to give that context in the beginning it's very important it's a very important project so um anyway miva's whoops sorry about that it can't be implemented on top of optimistic roll-up and we got a a charter to enshrine public access to public goods so that's that's pretty great and amiibos can fund public goods in fact they should fund public goods and maybe they must fund public goods because like we're not gonna like who is going to accept a future where blockchains aren't giving back to ourselves so anyway currently we're sad let's make ourselves happy you know this might be sequencer auction we can call it sequencer auction anyway and then we'll fund tons of awesome public goods give a business model to public goods we're going to fund public goods blockchains will fund them in fact we will fund public goods in fact we will give back to ourselves all right this is what this is fundamentally about you know value is subjective all this stuff is subjective we're all just kind of like slurping around in a soup we need a good you know non-uh extractive system we want a little circle we want that circular circular logic that's what i'm all about just kidding um great look at these look at these rich people although i guess it's right here pretty centralized you know we gotta gotta spread the money around a little bit more in my next image anyway that's public goods funding i don't know how to distribute the gift for the funds you know we've got bitcoin grants and whatnot but you know i believe we can do it love no love no snowboarders and you know thank y'all that's optimism check out optimism check out optimistic ethereum check out uh you know mive and shout out to all these folks that's me am i i think i hit it i think i hit the 15 minutes i'm 11 seconds over let's go yay congratulations good job do we have any questions for carl no questions from eve tv chat but awesome presentation um i guess i have one maybe questions if there's no question so i guess one option for redistribution is is burn right and that's like the simple equal redistribution to everyone like what is your intuition in terms of um how inefficient the burn is like if we were to you know focus the money on specific projects could what is how much more can we get how much more bang for the buck could we get um great question so i think intuitively that there is value in having some sort of redistribution mechanism that is a little bit more complicated my the reason why i think this is the case is because we do currently redistribute you know a lot a lot of value based on you know i work on some project i'm like you know convince some venture capitalists to like pay me some money and then i go out and i build my thing and then it makes everyone a bunch of money that's like a very sophisticated like money redistribution system and i think that it gets you know it gets even more complicated you introduce taxes you introduce government subsidies you you know all of these things i think that it is uh just kind of the nature of the problem of like collective value and collective you know value distribution it's essentially like a preference function on like what what we as a you know human civilization like want and so i just think that that preference function is going to be quite complicated and i'm not sure if there's like one distribution system to like rule them all or if we can just do like okay this is a really simple one let's just like focus on that only and it's one of many so here's my kind of uh counter argument um for the burn basically just a simple burn um and like the first one is you kind of mentioned it is like if you don't burn then you have all sorts of questions around credible neutrality right so burn can gives you incredible neutrality i guess the other thing is that the burn you know is part of the ultrasound money features you know i keep shutting the ultrasound on your pieces but you know there is a possibility that uh ifa will become you know in the same way that ethereum could become the the internet of money if could become the money of the internet um you know with tons of of monetary premium and if we if we focus on this one thing the burn um then i think we have a higher chance of eve becoming kind of this this ultrasound money um and and the fact that eve becomes ultrasound money gives us all sorts of of you know rippling effects you know it means you know more security for for ethereum it means more economic bandwidth it means all of these other good things so i think the trade-offs need to be carefully weighted as to whether we want to be you know very ad hoc or just be credibly neutral and reinforce the um the the burn yeah don't get me wrong i'm feeling the burn too i'm feeling the burn but it's really just an argument that you know there are probably multiple ways to uh skin a horse i'm not sure if that's a that's not uh but uh there are multiple ways to go about it and i think that you know we should have we should do we should we definitely need to burn and we probably are going to want to be doing other things and in fact my thought is the most the most uh exciting mechanisms are the mechanisms that have sub-mechanisms and sub-mechanisms like composable things that incentivize really good behavior so if you said like okay the if you say like this mechanism let's say it's the burn let's say it's something else has this consequence of you know funding innovation giving back to uh you know people who need it just like generally like rising all bringing everyone up then that is like that and and those sub mechanisms are all dependent on like you do this burn and then you like kind of like have this ripple effect of all these other things happening that's what i'm interested in so like if you know for me to feel the most burn that's what i would that's that's where i really just would love to see it's like okay yeah you know that's how you do the burn and then the whole world's burning i don't know in a good way in a good way excellent thank you carl um we don't have any more questions um so i guess we could move on to the next talk