Ethereum Foundation DevCon 6 - Cryptoeconomics Track, 13 Oct 2022

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From YouTube: This is not MEV. by Alejo Salles | Devcon Bogotá

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https://archive.devcon.org/archive/watch/6/this-is-not-mev/

As a nascent field, cryptoeconomics is still lacking in terms of formal definitions upon which a cohesive theoretical edifice can be built. Maximal Extractable Value (MEV) is a particular example of a technical concept where there is no widely agreed upon formalization. Here, we discuss the difficulties in arriving to such a formulation, and survey some proposals. Critically, we emphasize what MEV is *not*, highlighting the critical aspects that need to be encompassed in its definition.

Speaker(s): Alejo Salles
Skill level: Intermediate
Track: Cryptoeconomics
Keywords: MEV,formalization,security

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Devcon is the Ethereum conference for developers, researchers, thinkers, and makers.
Devcon 6 was held in Bogotá, Colombia on Oct 11 - 14, 2022.
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Thank you all for coming. um A friend of mine recently shared this picture with me with the label Mev.

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And sure enough right it looks it's very reminiscent of the member Wars between Searchers trying to snatch an opportunity right from each other and try to get early. Try to over beat the other one right. But but is this a good metaphor for Mev? Is this actually Mev.

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People in the community now are very, maybe aware- and proof of that is that there's 18 talks in this Defcon around the topic of Mev. There were zero in the last. So that's quite a testament for this.

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um Despite this, I would argue that we're not 100 sure of what mov even means- and this is a poll from last year and so which of the following is not Mev right. There seems to be rough consensus around front running, but much less so around transaction fees, liquidation rewards and, like all of these rmev, it's barely very evenly split.

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This one is more recent right, like the the last year from last year to this year, there has been many developments. As you all know, this is a recent one. From last month our block rewards a form of Mev. This is pretty impressive, it's almost half and half right, so it's really a contentious concept right.

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um This is a perhaps a more trolley one uh conference. Swag is a form of Mev. I won't go through this chart. It's a lot of fun. I, encourage you all to check it out and essentially there's two Dimensions that are taking into account here. One is a value and one is extraction so, depending on where you sit on, each of these variables is uh yeah what you should consider Mev or not, and but are these the only Dimensions that are relevant right? So again, it doesn't seem like there's a lot of consensus.

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This is the ultimate one. I hope nobody got robbed, I really hope so, uh but yeah so I think this meme illustrates is also my favorite meme format.

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It's not mine by the way, but I think it's a it illustrates what I'm trying to to get through to you and today right next, so we've been calling MV a lot of things, and um so in this talk, so in my work in trying to formalize Mev I've been argued that there's no consensus on a formal definition of Mev and there's many around there and we're using different things and and it's hard to come up with a formula but in in doing work for this talk, I realized that there's not even consensus on on the concept right on the intuition of what we want to call Mev.

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So in this talk, I want to go through different ideas and say why many of these are not a movie and and crucially, the stock is tightly coupled together with my friend Shin stock. Next, who will tell you what actually is I mean so I encourage you to stay he's going to roast me and tell you why the things I tell you now are actually wrong. So you should definitely stay I'm gonna be a bit of a shorter talk and he's gonna.

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Give a longer talk, and perhaps if DMC allows us, we can do questions at the end, so yeah. So since you all said that you were gonna stay to his for his talk right, let's get going so yeah, oh I forgot I have like a cool animation, transparency, okay, just a decision stock. Okay, let's get going so um we're gonna start with like a trivial example right is Mev is the the are all the things that are maybe also and all the things that are value right. This value the same as Mev right.

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This is a trivial example. We can easily argue that this is not the case or the small to Mev than to any value. You can think of picking up a one dollar bill out of on the street right. We wouldn't want to call that Mev. Hopefully you all agree, but this is still value right. So again, this is a trivial example, but just to set the stage of the type of argument I'm going to be doing and critically. This is all intuitions.

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There's no proofs here, I'm, not just trying to hone in a concept and it's up to all of us what we decide to call me right. It's a matter of uh choice and there's no like again proofs here, um okay, so first non-trivial example is Mev equal to a set of value on the blockchain right. um So uh if you think of the um definition, the original definition in the flashroads 2.0 Paper- and there was like value that can be extracted by miners by censoring reordering transactions.

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So there's a lot of blockchain Concepts there right transactions, miners Etc. So so it might well be that okay, what we're calling Mev is nothing else than value on the blockchain and sure enough and there's things that are value in the blockchain that are also Mev. uh Arbs are one of them and I'm going to be using Arps like a canonical example of family Arts, like talking about Arbitrage on a blockchain, for instance right, um but uh are there things that are value in a blockchain that are not MAV?

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Well, here one could argue that, okay, if I, do a simple if transfer right and then the miner has no way to extract that. So we can call that value on the blockchain that it's not Mev.

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Although put a pin on this idea, because we're going to come back to it, because it's not as simple as it look even assembly transfer can get trickier, but in principle we can say: okay, there's some value in the blockchain. That's actually not Mev.

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um How are the other side right? uh And let me also say that mostly for the question of this is not Mev we're going to be thinking of the right side of this slide. It's like the inclusion of the pink set on the in the in the white set, but we're going to find interesting things along the way on the left hand, side too right. So we're gonna also comment a bit on those. So in this case, is there Mev? That's not value on the blockchains.

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This is again a matter of choice right, but I would argue that we are striving for a more abstract General concept than value and that's strictly on the blockchain I, don't see any anything special about blockchains in terms of value. Blockchains are certainly special in terms of uh coordinating devices, but I don't see them as like again providing value a characteristic, that's so special right. So in general we would like to think of maybe as something more General and- and here the canonical example you can think of- is a centralized Exchange in a centralized exchange.

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You have all the orders coming and the operator can decide to extract value from users like Robin Hood. Does that's the Robinhood business model right? So we might want to call that nvn matter of definition. You might not agree, feel free to come and chat. If, if you don't, but in principle, I will perhaps we want that one subtle Point here is that we might need this if we start quantifying, uh centralized exchange versus the centralized exchange r right.

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So if we have value flowing in and out of the blockchain, then maybe when we start quantifying this, this kind of Arbitrage and so on, we might need to call that Mev if we want and like the the whole calculation to be sound right. So, um okay, so value in the blockchain doesn't seem like it's the best uh candidate for our concept of Mev. So, let's move on to the next one is Mev the same as front running right.

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Okay, we start with the intersection of these sets trivially arbs again, as we saw I'm gonna use, always arbs here and the first leg of a sandwich. For instance, you can think of it as an ARB. This is clearly a movie. This is clearly from running okay. How we'll start with the left side here? Also obvious Point, there's clearly nav, that's not from running you can think of back running trivially or reorgs other things.

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Okay, so here the tricky parties on the right side are all things that are from running Mev, okay and thinking from running here is you learn some information uh from other parties and then you like are faster than the other in Catching or capturing. That value is that anyway, again the rugby example in the first and slide right. So um here you can. You can take two paths. You can say: okay, let's look at the rugby example.

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Okay, maybe I don't want to call that Meb, even if it has a characteristic of like you know, being faster than than the other person and and so there has to be something else for us to call uh being early I mean because being early again doesn't have that much to do with the structure of of the value itself, and so here, okay, what's the missing part here, perhaps we can think of a coordinator, a coordinator that is doing the allocations of value right and and in the rugby there's no really meaningful coordinator.

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You can think of I, don't know gravity as a coordinator, but it's a coordinator that cannot extract it's like a dumb coordinator. So here, if you have a smarter coordinator, what happens is that the game theory gets more interesting right, so the Mev concept becomes much richer. So so here, okay, this is one path you can go down and you can say: okay, not all front running is Mev because for it to be Meb we need some extra player. So this is perfectly fine.

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Until you start thinking and okay, you can think of the the example of the arbitrum chain right in arbitrum, you have a first come first serve centralized server and that cannot extract and then people are doing Arbitrage.

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So if you go down this path, considering that the coordinator there cannot extract, you would be, you would not be calling arbitrum arbs as Mev right, and this is something many people would frown upon right and in fact the Avalanche devs at some point were saying: okay, Arps are not Mev and the Searchers were laughing because they were saying: okay, we're calling what you will we're making millions of dollars out of this, so I think there's some consensus that okay, these type of things are Mev, so again, tricky contentious point: it's a matter of choice where we want to call that Mev or not.

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um Okay. So this again question is the set of things are from running included in the set of things that are mov and we'll get back to this at the very end.

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Okay, next Set uh is Mev and the set of things that are maybe equal to a set of things that are permissionless value to your example in Center Arps right. This is permissionless. Anybody can make an ARP, and it's also Mev canonical example of Mev. So that's fine.

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How the left side are all things. Rmev permission is so when I work with definitions and formalization of Mev I argued for the importance of permissionlessness in the in the definition, because there were many definitions out there that included the notion of a player that can extract a value. But this is very tricky and It's tricky, because you can think of an example where you have an airdrop right.

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You have an airdrop, that's only entitled to you and when you are going to clean the airdrop The Miner cannot do anything right, so there's no way that Miner can steal that value from you, so I would say. Okay permissionless looks like it's important in the in the concept of Mev, although if you think of an artist to our example, say you have an inner drop, which you can only claim at a specific block height and say that the proposal of that block knows about this.

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So then they can credibly extort you and tell you, look if you don't give me a share of the airdrop. I won't include your transaction right. So then, okay, after all, there might be some mov character toys. This extortion capability of of the coordinator right- and this might look like a very contorted example.

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Okay, after all, is there any airdrop that is only valid for one Vlog, but if you think like a little bit deeper on this, and if you some numbers uh you can think of the earlier ether transfer and from the the the earlier slide and there, if you have a collusion of, say 10 of the validators, they could, in principle extort you for uh 0.4 for uh four percent of the value and shin has run these calculations right.

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So 0.4 percent of the value is a lot right, it's uh more or less the same as the fees that you have. You pay like swapping on uni, swap or whatever. So actually this example- and that looks contorted is not, and could very well happen right. So extortion is a real thing.

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um Okay, that's again for the left side on the right side. This is not too interesting. We have the example. I gave you earlier of the dollar wheel, you pick up a dollar bill, that's permissionless value and that's arguably not Mev, but okay. That's an example. That's outside of the blockchain, so perhaps we want to consider permissionless value on the blockchain how this set of things. Okay, the two examples I gave you for the intersection and for the Mev side are on the blockchain. So we know this exists in principle.

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So how about the other side? Are there things that are permissionless value on the blockchain that are not Mev? This is a question for you. Actually, I haven't found an example. So if you can come up with an example again of things that are permissionless value on the blockchain that you wouldn't call Mev, please let me know, and we can sort out that set inclusion and there. So this is a one candidate set to consider for characterizing or half characterizing it.

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Maybe if you will okay thanks for bearing with me, we've been through a lot of like Venn diagrams. This is the last one: okay, how about value extract all by a monopolistic coordinator again, I've argued sorry. I have argued for the importance of a coordinator and because it changes the game theory, it makes it more fun. So, here again critically, the coordinator needs to be able to extract for that game theory to be richer. It has to be monopolistic because also for the extortion I showed you before.

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If, if it's monopolistic, then this doesn't work so uh in the intersection we have the same example as before. Arbitrage is an example of this monopolistic coordinator, scam, like naturally in blockchains, like the proposers. Are that right?

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um Okay, so how the left side are things that are Mev and that are not uh value extracted by monopolistic coordinator, and here it depends on your earlier choice on the arbit room example right the front running example: um okay, if you uh decided to call arbitrum arbs that type of front running Mev, then this is an example of an element here right because it's not value extracted by a ballistic coordinator, but you're still choosing to call it Mev again a choice. um Finally, let's look at the RSI.

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Is there value extractable by a monopolistic coordinator that is not MAV? Can you find examples of this I haven't so again a challenge to you all. Please come talk to me if you find an example in this set there and again we can sort out this this question here.

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Okay, so we've dealt with the concept of Mev, we came up with three sets that look like might always be Mev. This is, of course, not a full characterization, just to sum up value extractor by a monopolistic coordinator, front, running permissionless value on the blockchain. uh This is quite an unfortunate picture. I would argue right because there's these three disjoint sets and how are they related to each other? This doesn't look like a unified theory of energy right.

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One would ideally like to have a more concise idea of what Mev is right, and these are only if at all, partial characterizations. So uh what come in the talk that comes next uh Shin is gonna share a little bit of that and try to come up with this was more like an outside in exploration of the idea of emulation is going to share uh inside out a more constructive way to think cohesively about nav and so again. Thank you. So much for coming I appreciate you all been here.

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