#ShareTheMEV: Recirculating value to all the right places with Matt Cutler

check check hey we're on okay cool uh good morning everyone thanks for joining us my name is Matt Cutler I'm founder and CEO at block native we're going to spend about the next 20 minutes or so is talking about block building and Mev um state of the market what's going on and why uh I like to start this off by asking everybody hey did you eat anything today most of us have probably had some breakfast and while you're eating did you think a little bit about like where your food comes from and and often we do and the reason why is we kind of know that we kind of are what we eat right now the parallel here is have you done a transaction on chain this year and if so have you thought about how it got there because it turns out how your transactions go from your wallet to being on chain have changed a whole bunch at the merge and entities like us block native are responsible for ensuring that your transactions get Unchained in an orderly fashion and so what we're going to do is talk about how all this stuff works it's kind of surprising and there's a whole bunch of new interesting possibilities surrounding it that are really pretty fun and interesting so we're going to talk about block building pre and post merge we're going to talk about the fundamentals of this mysterious Force called Mev we're going to talk about PBS proposer Builder separation in the wild and a new initiative that we've been working on called share the Meb so at the end of the day we're all here for blockchain Stuff uh block you know transactions go into blocks they get ordered they get hashed they get put into the next block and who's ever in position to build this block is core infrastructure and I always ask people have ever thought about how that happens like who is responsible for actually constructing the block and the answer is pretty surprising because under proof of work pre-emerge the people who built blocks there were literally like four or five entities on the entire planet that built virtually all the blocks they were the mining pool operators so the the ethereum network under proof of work uh was secured by computers doing uh solving math problems but they were largely organized into mining pools and when you're organized into a mining pool the block template I.E which transactions are in an order get handed to you by the mining pool operators so this was vastly more centralized than most people anticipated uh virtually all the mining pools were located offshore and subject to different jurisdiction and there was evidence of manipulation occurring at the Block Builder level because it turns out sophisticated actors with lots of resources if you you can create off-chain agreements you can get preferential treatment and that's not so much in line with the values of web 3 as an equitable system for us to work with and so there's a whole bunch of work that happened around this to basically try to better understand uh what was happening and try to open this up and the good news is at the merge one of the fundamental changes to the network was known as proposer Builder separation and what happens in proposer Builder separation is a validator someone who is mocking up Ethan has the opportunity to help secure the network they assume the role of proposer meaning they have the opportunity to propose a block to the network now they could build their own block or using the sidecar known as Mev boost they could Outsource block production to a third-party set of actors known as block Builders like us specialist providers whose job it is is to build great blocks for the network okay and the interesting question is why is this a thing why is this happening and what's going on here and this is optional so the validator has the option to run this thing called Mev boost and you'll notice Mev boost has these magical three letters Mev is maximal extractable value and that is value derived from explicit manipulation of transaction ordering all transaction systems have to be ordered and it turns out if you can control that ordering you can set all sorts of value and and that's how this whole system works so naive transaction ordering is as you take the transactions of the mempool you can see each one of these transactions has various gas prices and you just sort of set up the block to say the most valuable transaction in terms of gas price goes at the top and the lease goes at the bottom awesome but imagine there's a transaction here transaction D which moves the price on an exchange and now there's a price differential between exchanges which sets up an Arbitrage opportunity meaning someone can insert a transaction and basically normalize prices and extract a little bit of a profit which is great for the the health of the network but see this Arbitrage transaction has the same gas as transaction I and so who's ever doing this Arbitrage transaction isn't exactly sure they're going to get it right behind that and so what happens here is things like gas Wars where people spam the network with all sorts of transactions and effort to get right there and the whole network suffers because gas prices go up so instead what you do is you you have what's called a bundle where you bundle these two transactions together and you say if you include my Arbitrage transaction right behind transaction D maybe there's a hundred dollars a profit I'll pay you 50 to do this so there's sharing of Revenue in this ecosystem because there's value which can be extracted as a result of this ordering and there's all sorts of ways that this ordering can occur there's front running where you're trying to get a transaction in front of another transaction they're sandwiching where you put a transaction in front and behind of a certain transaction if anyone's ever done a unit swap transaction on public mempool this is what's happened to you and as a result of uh sandwiching you suffer less favorable settlement not great um and there's even transaction suppression or censorship where you say I don't want transaction I to get into this block so I'm going to flood a bunch of other transactions in and push it off the bottom of the block this is the sort of thing that happens with nft drops right people try to get in front your transaction doesn't get in so what's well Mev feels a little funny it's actually everywhere in them by definition so we're all used to search engines and we all know the idea that being search result one is more valuable than being search result 12 right why because there's more clicks and we're all pretty comfortable with the idea that there's this art called search engine optimization where you manipulate search engine indexing so you get higher ranking right no problem we're all used to the idea that when you like call in to try to get concert tickets the faster you get in the better tickets you have access to and we all know that look when weather gets bad at an airport the airlines that have more gates get their planes landed and the smaller Airlines get delayed these are all examples of Mev okay however in web 3 it's open and transparent we can see it which you can't see in any of these other systems and that's what makes this really interesting and really powerful so does it work so we made this big change at the merge it was about five and a half months ago and the simple answer is hell yes okay today this was I took the screenshot earlier this week 97 of all ethereum main net blocks are outsourced to block producers like us 97 and why does this happen well because the rewards for a validator are 4.18 X so over 400 percent more value per block when outsourced and interestingly if you look down here average transactions included 100 for a vanilla block 154 for an outsourced block so professional block producers or third-party block producers are much more efficient about including value in blocks much more efficient about sharing that value with validators and much more efficient about using block space effectively so there's all sorts of incentives for the network to Outsource block production to specialist providers like us now by the way I'm going through this there's all these public dashboards on this which is what's awesome about PBS is everyone can see what's happening the last one was called mevboost.org this one is known as rated Network there's another great one called relay scan and there's tons of other ones out there as well now one of the interesting things about the merge is uh prior to the merge when you wrote a block you got a fairly significant rate of new eth issuance because the network had to pay for the special computers and all the power you needed to run it well we all know under proof of stake you don't need any specialized compute at all so the rate of issuance went way down this is where the ultrasound money beam comes from is this massive reduction the triple happening rate of issuance but because the value in a block as a result of these three things when issuance goes down the relative influence of these other two things goes up so here is a graph the blue is the value in the trail in a block for gas fees the Orange is value from Mev from transaction ordering is the orange big or little on this like it's pretty big so while Mev itself hasn't really changed much as a result of the merge it now exerts a much greater influence on the network particularly in relative proportion to the rate of issuance so Med is a bigger Force than it was before not because Mev has changed but as a result of this drop in issuance and what we're seeing here is the number of private transactions Mev bundles appears to be gradually Rising so here's the merge 915 about one percent of all transaction to block on average in a day were Mev bundles and now you can see today it's between three and four percent of on average in a given day between three and four percent of all made net transactions our Meb bundles are otherwise private and you can see we started at about twenty percent share of the network and now all these relays consist of more than 90 percent of the network and by the way the red here is block data that's us we operate a relay um as part of all of this so PBS is going pretty well but there's plenty of room for improvement it's new and while it solved a lot of interesting issues it also raised some issues like well you know when you produce a block and you propose it to the network you're basically competing with other block Builders so every 12 seconds there's a new slot we as a builder try to build the most profitable block and we bid for the right to propose it out now let's say we build a block for one eth we could bid one eath like exactly what we have we take no margin as a result we pass all the value onto the validator and that's this Gray Line right here this is percent of blocks with no margin okay or we can say well there's one eighth of value we're going to bid 0.90 and if we win we capture point one e that we can basically collect as Revenue that's the green line this is number of blocks with positive margin but what's happening today on the network I don't think anyone really anticipated when they introduced PBS is you can bid one eth I mean you have a block of one eighth but you bid 1.

1 you actually subsidize the network and and what's interesting is the number of blocks with subsidies on average is going up at the moment it's about 35 percent of all blocks are subsidized like who's subsidizing and what are they doing and the vast majority of these subsidization is things like uh sex decks Arbitrage where you're arbing between decentralized exchange and centralized exchanges but the ARB that you're making on the centralized exchange doesn't appear on chain so from the perspective of block building it looks like negative subsidies or you know subsidies and so it's again it's sort of interesting you can look into this and see which Builders are subsidizing and wonder why and also question like is this sustainable for the network now as a participant in this ecosystem we think this green line should be healthier because ultimately it's in everybody's best interest that this is this ecosystem is functioning properly okay and and I think the economics are getting there it's just early and emerging now this is a graph of all the builders there's about 140 Builder addresses there's 540 000 give or take validators often in in mining pools and there's just 11 relays that stand in between 97 percent of ethereum blocks occur through Mev boost and all of them go through one of these 11 relays we're one of the relay operators right but it would seem to us that we want more relay participation and greater levels of relay diversity and each major staking pool can connect to various relays here's coinbase they're one of the largest they talk to only two relays so any block validated by coinbase comes from one of two sources and again our attitude about all of this is if you're operating a staking pool you should probably be connecting to as many relays as possible to encourage diversity at the core of the network so here you have that we view this as not great we think that there should be more economic to the Meb boost level at the Meb boost relay level and and to encourage more participation because today there's no economics there um but what all of this does is unlock programmable fluid expressive value flows and and what's interesting here is we can start to think a bit differently about Mev in particular where does Meb come from without a transaction there's no Mev and who does those transactions you do without an end user doing transactions there's no Mev now when you do a transaction on chain are you aware that there might be Mev no do consent to being sandwiched or bundled no and the reason why is you have no opportunity to express your preference to the network that all those preference expressive uh uh uh setting it happens down the line and so what happens is while the value originates at the user and the wallet and the DAP and protocol that they use it actually flows downhill largely to the validator in the Searcher and and we think that there might be better approaches here where this value can be recirculated because you have third party Builders like us who can programmably specify how the block works we can recirculate Mev value back up the value chain and so uh we're actually working on a draft proposal right now that we're announcing here at eth Denver that we're calling wallet boost it's a sidecar car for wallet providers to give them access and exposure to this magical world of Mev without having to have a ton of complexity and their infrastructure without having to pollute the UI of the the wallet experience so this is something that we're discussing with the variety of providers and if it's relevant for you we'd encourage you to check it out we'd encourage you to provide comments and feedback on it there are multiple proposals out there right now surrounding share the MAV which is a meme that we really started at the beginning of all of this so we're quite excited about the level of sort of Industry activity around creating greater degrees of equity in this system so that value can in fact recirculate back and if you're interested to talk about this or anything I've talked about today we have a booth that's right Corner over here sort of by the sporkwell lounge and we'd love to talk with you about that now in in closing there's this whole new game on the network called block building okay it involves Outsourcing compute Network and storage to a specialized set of actors who can construct valuable blocks on behalf of validators and basically keep the network operating and healthy but this model doesn't end with block building that in fact when you have this this source of of compute this sort of source of networking the source of power you can use it in all sorts of other ways so coming soon is EIP or ERC 4337 account abstraction and these same capabilities for Block building can be applied there similarly right behind that we have 4844 proto-dink sharding with data availability sampling the same set of infrastructure can facilitate here and as you start to get more and more capabilities in the network with more and more specialized actors who can apply heavy compute to it you can start to do all sorts of really interesting things like gas sponsorship gas Futures block Futures pre-confirmation and much more and so fundamentally these capabilities are basically going to be the the underpinnings of all sorts of new capabilities at the core of the network that you as Builders and developers can tap into not because your Geniuses about Mev but because you have Mev aware infrastructure from block Builder providers like block native who can help you build more powerful more usable more valuable applications and so that's what we're really excited about is providing this real-time infrastructure that Taps into all this stuff to make life easier for every level of the network and so that's that's what we do there's a great piece on this from Frontier here Tech that's where this comes from it's basically saying that Mev is the tip of the iceberg and that there's all sorts of more value coming and it's actually a really exciting time for this sort of stuff so with that I want to thank you oh please share the Meb uh thank you for coming my name is Matt Cutler you can find me on Twitter at M Cutler we're block data we're right around the corner and it's great to be here at East Denver thanks for being here this morning and have a great rest of your show okay cheers everybody