WTF Is MEV, and Why Should We Care? (Breakpoint 2024)

0:00Hey, everyone. As you know, Solana is one of the ecosystems I'm the most interested in. I've been incredibly bullish. I love to see the vibrancy of what is happening in the space. Unfortunately, I couldn't make Breakpoint this year, but the stories have been amazing. I heard the talks are incredible, and we're really proud of Real Vision to give you talks from Solana Breakpoint 2024 in Singapore. I really hope you enjoy them.

0:37What's up, guys? I'm Zano from Gito. So I've been in this space as an engineer for a couple years now. Really got into it because DeFi is just amazing. I think financial sovereignty is just an amazing concept. I've been working on Gino for the last three years. We build MEV software, along with a couple other things, on Solana. And, yeah, I mean, it's been a wild ride. Yeah, how's it going, everyone? I'll introduce myself, I'm Ben, so my background's all in like very in the weeds, computer science, mathematics, high performance computing style stuff. I studied math and CS in school for a few years, interned at two high frequency trading firms, Acuna Capital and Citadel Securities.

1:26Became really fascinated by trading and market structure and stuff like that. But at the same time, I was doing a lot of research on blockchain systems and just high performance distributed systems in general. became very interested in the intersection between the two, and as we'll get into, MEV considerations are very, very relevant to that. And, yeah, excited to chat a little bit more about WTF's MEV. Yeah, what is it? Like, what is MEV? Seriously, everybody's throwing this around, this, like, obscure, mysterious acronym. What is MEV to you, Ben? Yeah, I mean, it's a good question. MEV is sort of this intrinsic property of blockchains that is essentially the concept that, you know, in blockchains where you rotate proposers, such as Solana or Ethereum, you've got time windows where proposers have a lot of power.

2:22They have the sole power to actually build and produce a block. And in the process of actually building a block, there's a lot of value that you can actually capture in doing so, right? So, you know, one of the most infamous examples is say you've got an NFT mint, for example, and it just so happens that it's Alana, for example. My leader slot is the leader slot where that NFT mint actually starts. I am in the ultimate position to actually capture every single NFT. When that mint goes live, I can just snap them all up just like that. Right. There's many other types of mems related to markets and stuff like that.

3:03But yeah, we can get into that a little more. I just wanted to ask you, what are your overall thoughts on MEV? A lot of people see it in a negative light. Is it necessarily a bad thing? Can we get rid of it, or should we? Yeah, I mean, that's a great question. I see this get thrown around a lot. Let's remove MEV. I think that comes from a good place. I don't think MEV is necessarily a malicious phenomenon. on. I think it's a naturally occurring property of blockchains and any system that requires consensus on the sequencing of events as they happen. I think it comes from a great place, right? That's sort of like, let's get rid of MEV.

3:45I think the way you need to think about it is, how do you give users the best pricing? And how do we optimize for the best user experience? And And what I think is good user experience is an example is just I push a trade out to the network, and I don't get filled at the worst price possible. And the worst price possible is, let's say you put 5 % slippage, and you get filled at 5 % slippage when you could have gotten filled at 0.1 % slippage. I think in order to be competitive or harmoniously competitive with centralized exchanges, we need to do just as good and just as well as centralized exchanges.

4:24You know, today we're seeing about half a billion dollars in MEV generated for the network on Solana. It's a big number, but I think it's actually quite a small number in the grand scheme of things. Over the next decade, I expect this to be a multi-billion dollar sector in DeFi. What do you think, Ben? We're at half a billion today. What's the state of MEV on Solana? How would you address that? Yeah, I mean, I do get the feeling we're going to go higher. $500 billion is still a lot. And if I'm not mistaken, that value has been captured by Gito alone, right? And, you know, this is a lower bound on how much Mev is actually in Solana to begin with, right?

5:04And, you know, I get the feeling that, especially with all the exciting announcements and all the users that will continue to try Solana, that this number is probably going to go a lot higher, right? So what we're seeing right now is that you've got, like in Solana for example, the users will send transactions directly to the validators to their TPU, right? And one thing that we're seeing right now is the validators have realized that the information that the users actually sent them is pretty valuable. It's like a transaction that hits the TPU but actually hasn't landed on the chain yet. But validators will sometimes pass this information down to, we'll say, searchers.

5:44They're essentially people that bid on these MEV opportunities and compete to return the most value to validators and stakeholders as possible. So what you're describing here, how do you see that? Is this malicious? How do you describe that? Yeah, so like, there's some types of MEV that I can definitely describe as more negative MEV, such as front running, for example, right? And, you know, sandwiching is the really infamous one that people talk about a lot, right? This is when I'll have a user send me a transaction, right? And, you know, I'm going to pass this transaction. I'm going to pass this transaction on the searchers, right?

6:23Or maybe I'll just myself, I will insert my own front run transaction before that retail transaction, right? Insert the retail transaction, right? Then dump on them. But essentially this is, I am ensuring that the user gets the worst price possible, right? And I would call this a negative type of MEV because the validator is behaving in a way that ultimately results in the user getting the absolute worst price possible in the market, right? So I think the one thing that I wanted to touch on next is, as a staker, this is probably something that you want to be aware of. You'll have some validators that will just consistently engage in behavior of leaking retail flow to sandwichers.

7:09And then you'll have some validators that might be actually trying to keep that flow private and actually give users better prices. Right. So, you know, I'm not I'm not sure who coined this this exact phrase, but something I've heard thrown thrown around quite a bit is that staking is explicitly political. Right. You know, in a way that, say, like Bitcoin or like a proof of network or a proof of work network is not. Yep. And what do I mean by this? Right. And like how how am I as a staker? How would I actually help mitigate this problem? Yeah, I mean, I think Samani coined the term. I'll give him credit because he's good at corning new phrases.

7:46But yeah, POS networks are explicitly political. I think the way I interpret that, well, scooting back, I think proof of work networks, any sort of system where you can influence large groups of people through incentives to act in certain ways are going to naturally be political. POS networks have manifested out to be even more political. The way I interpret it is you have some capital as an individual, and you direct that capital to validators. By doing so, you give that validator power over the network to propose blocks. You were talking about proposing blocks earlier. We were talking about sequencing of events at every slot.

8:27On sauna slots are just units of time. every unit of time there is a single arbiter of transaction ordering and that is proportional explicitly to your amount of stake or delegations that you have so as a staker if you if you believe that certain activities are malicious then you should not stake to validators or stake pools that allow that specific type of activity that's where it gets political right and then you might be a staker that doesn't care you just want to optimize for yield that's fine everybody you know that's the beauty about these networks is whether or not we think things are malicious they are open networks and uh if you cannot if you cannot mitigate something through cryptography or incentives then you then so be it you need that's the problems that we're trying to figure out here those are the problems that teams like mine and yours are trying to solve here i think stake pools help with this problem a bit um as a staker you probably don't have the know-how as an individual you know retail user you probably don't want to be monitoring your validator that you stake to uh did this validator rug me on the yield uh did this validator you know right at the end of the epoch crank the commission up to 100 or did this validator sandwich users where i'm against that sort of activity, what you do is you offload the task of monitoring validators to stake pools.

9:58And stake pools are aligned with, they, stake pools only spread stake around validators that are explicitly aligned with them. Some stake pools optimize for yields, some stake pools optimize for other things, right? So as a staker, you should be staking to stake pools. Stake pools will then take on the burden of monitoring the validators. why do you think it's important that stakers think about what they're staking to who they're staking to and whether or not they're aligned why is that important have you ever wanted to trade bitcoin but haven't dared try with plus 500 futures you can trade crypto without the hassle of opening a wallet with just a few clicks you can register and start practicing with their free and unlimited demo see a trading opportunity you'll be able to trade it in just two clicks Feel ready?

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11:21Not all applicants will qualify. Plus 500, it's trading with a plus. Right, yeah, I can, I'll make an argument to every staker in this room, and, you know, I can make this argument to every staker on Solana, that, you know, if you're trying to actually ensure long-term prosperity on the network, you actually want to engage in behavior that benefits your users. Because users are the customers of the network, right? Users bring value to the network. They pay fees to the network to execute their transactions. Those fees ultimately accrue to stakers, right? So as a staker, you want the maximal number of users on the network long term.

12:07And as a staker, if you're staking to validators that are just leaking transactions and sandwiching users left and right, you're probably going to drive those users away from the network. If I'm a retail trader, for example, I'm sending orders on Solana, and I am always getting filled at literally the worst price I can get filled at, that is the very definition of an inefficient market, right? And especially in the short to medium term, what we really want to see is stakers and validators in the greater Solana community to actually work together, figure out why so many users, you know, are getting sandwiched, and figure out how we can put a stop to it, right?

12:47And that starts by, you know, again, like, stakers need to know their validators. They need to have a relationship with them, right? They need to actually be vigilant. And as a Solana developer community, right, I have a feeling that people are going to put out a lot of tooling relatively soon that's hopefully going to give us a lot more insight into which validators are behaving maliciously. leaking user transactions, which eventually leads to those users being front-run, right? Now, this is kind of short to medium term. I think there's some more things that we can do in the long term. What have you heard, for example?

13:21I mean, there's many proposals out there. There's multi-concurrent proposal stuff. I think that's super interesting. The one that interests me the most is async execution. I think Solana was... The reason why I got Solana built, and I think a lot of people got Solana built, whether you know it or not is because uh solana's block propagation through turbine is uh the blocks get streamed out as opposed to you know about it or building an entire block and then posting it out once the block's built i think that was a step function improvement over previous networks and i think the next improvement is going to be async execution where uh consensus essentially gets faster i think that in combination with multiple concurrent proposals helps with a lot of things we're talking about here um i just want to know you know we've been talking a lot about sort of like the malicious things and things like that but like on a more positive note i think salon has got some of the best validator operators in the ecosystem or across crypto period um i've been i've been in the room uh i've been in the war room with some of these guys like and i'm sure you have too where you know we've had outages and that sucks but when you can coordinate people across seas and oceans to coordinate restarts.

14:34You got people in Europe where it's 5 a.m. their time, people in the U.S., everybody just coordinates together, and we're pushing out patches. You don't see that. I don't see that in any other ecosystem. So, I mean, kudos to those guys, and honestly, I just wanted to highlight that. I'm pretty optimistic. What do you think? What's going to happen in the future? How do you see the next decade or two playing out? Yeah. So I think, and also to kind of continue what you said, I think that these are, like the fact that some validators are behaving maliciously and maybe even some stakers, this is a conscious tradeoff of decentralization, right?

15:18In TradFi and in the centralized world, we solve a lot of these problems with things like law and regulation. say, if you are front-running people on your own exchange, that is definitely illegal in almost every jurisdiction. Part of the value proposition of decentralized networks is can we actually solve these problems without having to trust anyone. I'm pretty involved in the core community and in a lot of the core stuff that's happening. We're working on a lot of solutions that will hopefully solve these problems longer term. right because even if stakers I think it's really important for stakers to be extremely vigilant about what they stake and to know their validators and you know again to keep in touch make sure their validators aren't behaving maliciously right but beyond that we're working on a lot at the core L1 level to actually solve these problems longer term right there's a few proposals that are floating around and discussions as to which proposal is the best is ongoing right so the first thing you need can actually be solved at the application layer, you actually just need better DEXs, like better DEX mechanism design, right?

16:22Like I think XY equals K kind of creates this fundamentally flawed market structure, right? Where it's really, really easy to atomically front run and then back run someone. What you actually want are DEXs more like order books or, you know, auction mechanisms or RFQs or something like that, where you can actually have multiple people that are competing to give users the best price possible, right? Now where this breaks down is if the L1 is not censorship resistant, and that's where multiple concurrent proposers, for example, helps a lot. Another thing that I've heard thrown around a lot, and I know the Fire Dancer team is a really big proponent of this.

16:57They think that we can get slot times down to 20 milliseconds or even lower than that. We actually get slot times that fast. We get a really, really high degree of censorship resistance as well. and I think some combination of lowering slot times and hopefully in the future figuring out a mechanism that at least in my opinion, I like multiple concurrent proposals a lot. In my opinion, I think there's a way that we can get this on Solana long-term as well and this will enable a market structure that I think is a lot friendlier toward users and that can, I think, be maximally competitive with centralized exchanges long-term.

17:34Ben, you're an absolute gigabrain. I hope everyone in the ecosystem continues doing what they're doing and then we continue working together to solve these hard problems. Yeah, my final thoughts are just higher. I think we just go extremely hard. That's it. Thank you. I appreciate the compliment. Thank you. I'm not the only one.

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