The Quadratic Funding of Ethereum: A New Decade of MEV Scaling Growth.

Original Title: "IOSG Weekly Brief | The Four Impossibilities of Ethereum: The New Decade of MEV Scaling Growth #160"

Original Author: Jiawei, IOSG Ventures

SUAVE: Standing on the new decade of MEV

Summary:

SUAVE is a blockchain compatible with EVM proposed by Flashbots. As a unified sorting layer for multi-chains, it aims to solve the centralization problem for builders.

The infrastructure is gradually evolving from a centralized general layer to a refined professional layer. The improvement of functional modularization and specialization makes "the whole greater than the sum of its parts" possible.

The trend from PBS to SUAVE in the encryption industry is to continuously introduce competitive diversity and ensure balanced competitive conditions.

We envision the new decade of MEV as one of competition rather than monopoly, sharing rather than exclusive ownership, and co-governance rather than dictatorship.

We already have what?

Source: Hasu

Returning to the DeFi wave at the end of 2020, with the rapid growth of on-chain financial activities, the first signs of MEV emerged. At that time, there was almost no direct communication channel between miners and MEV searchers, and searchers could only pay higher gas fees in the hope of getting their transactions included. This caused network congestion and fluctuations in gas fees, resulting in negative externalities for the Ethereum network.

Flashbots Auction is based on an auction mechanism, creating a communication channel between miners and searchers. The former sells block space while the latter captures arbitrage opportunities, effectively realizing the marketization of block space.

Another issue is the significant gap in the ability to capture MEV between large validator pools and individual validators, with the former having a higher probability of being selected as proposers, which will gradually lead to centralization of the Ethereum validator set. Therefore, PBS is proposed, which outsources block construction to professional block builders for both large validator pools and individual validators, creating a relatively fair competitive environment.

As an implementation prior to the protocol layer, MEV-Boost continues the auction mechanism of Flashbots Auction, alleviating the centralization problem of validators at the MEV level.

And what else is needed?

Source: mevboost.pics

We still need the decentralization of block builders.

It is easy to overlook that the role of current builders is still highly centralized. In the past 14 days, 79.1% of MEV-Boost blocks were constructed by only 4 builders. Centralization can bring about some undesirable consequences (especially when block construction is a core infrastructure), such as censorship and extortion, regulatory pressure, and system vulnerability, among others.

The main reasons for the centralization of builders are mainly due to the following two points.

Exclusive Orderflow (EOF)

We know that there are three main sources of orders for builders: Mempool, private transaction channels, and bundles submitted by searchers. The ultimate goal of builders is to construct the most valuable block. In block construction, order flow is the most basic production material, and the more order flow obtained, the more opportunities there are to demonstrate MEV. If builders cannot grasp enough order flow, even with the best strategies, it is like a clever woman without rice to cook with, and it is almost impossible to win in the fierce competition of block construction.

In this regard, the network effect of the advantage party in OF is very obvious. On the one hand, they have more opportunities to demonstrate MEV, which means they are more likely to build the most valuable block; on the other hand, if the disadvantage party of OF cannot win the block for a long time, the transactions submitted to their Orderflow Owner will also be delayed in confirmation. After a period of time, these Owners will turn to builders who can confirm transactions faster. The gap between the two parties will quickly widen and the disadvantage party will eventually have to withdraw from the competition.

Source: 0x shittrader.eth

In order to obtain as many order flows as possible, builders can flexibly use various methods: similar to PFOF (Pay for Orderflow) that appears in traditional brokers, builders can pay rebates to wallets, RPC service providers, and dApps to obtain their order flows - wallets can easily do this by modifying the default RPC port, and most users will not notice whether their transactions are sent to the public Mempool or private relays.

Builders can also provide additional services to users, such as sandwich protection, pre-transaction confirmation, and subsidizing users' Gas fees, to attract users to submit transactions to them.

Source: Jon Charbonneau

The above figure shows the vicious cycle that EOF may bring - the exclusive order flow gives builders more freedom and space to perform MEV, thus building blocks with higher value; over time, these builders will occupy more market share of block construction, validating the rationality of EOF, which becomes a further incentive for builders to optimize and promote EOF.

According to Rated statistics, in the blocks built by builder 0x69 within 14 days, there are 529,633 addresses that are not in the blocks of other builders. This means that 32.7% of the address order flow comes exclusively from EOF. It can be seen that EOF has already occupied a large proportion among top builders.

Cross-domain MEV

           Source: apriori, odos.xyz, A Formalization for Cross-domain MEV

Cross-domain MEV is another issue that leads to centralization of builders.

The background of cross-domain MEV is directly related to Vitalik's proposed Ethereum Rollup-centric Roadmap. In the next few years, most of the activities on Ethereum L1 will be carried out by various Rollups, while the Ethereum main chain itself will only serve as a DA and security base layer. Under this vision, a large number of financial activities will occur frequently between Rollups and across Rollups, resulting in more complex arbitrage opportunities and combinations.

It is easy to imagine that builders of multiple domains have more opportunities to capture cross-domain MEV compared to builders of a single domain, gradually dominating the block production of each domain.

SUAVE

(This section is referenced from https://writings.flashbots.net/the-future-of-mev-is-suave/ )

Source: Flashbots

Regarding the above issues, Flashbots has proposed SUAVE as a solution. In high-level terms, SUAVE is a blockchain compatible with EVM, serving as a universal Mempool and block builder network for all blockchains, as well as a decentralized sorting layer.

SUAVE's goal is to solve the centralization problem for builders, specifically addressing the aforementioned EOF and cross-domain MEV issues.

 Source: Flashbots

SUAVE can be broken down into the following 3 components:

Preference Environment

Preference environment corresponds to cross-domain MEV.

The definition of preference is relatively broad: for example, for users, limiting the parameters of a certain Swap is a preference; for MEV searchers, specifying the position of a transaction or the Bundle it constructs is also a preference. The scope of preferences can range from simple transactions in a single domain to complex event sequences across domains. Users will pay for their preferences, and if their preferences are satisfied, the fees will be unlocked.

From a technical perspective, user preferences are ultimately reflected in the form of transactions in the Mempool, and the preference environment is a public multi-chain Mempool that aggregates as many preferences as possible at the same level.

Why does a preference for the environment solve the cross-domain MEV problem? As mentioned above, multi-chain builders have an advantage over single-chain builders in cross-domain MEV because they can see and capture more MEV opportunities.

而 SUAVE 本身就是多链的通用排序层，偏好环境相当于把多链的用户偏好放置在同一层，因此无论对多链或单链构建者而言，用户的偏好都是公开透明的。这样使得信息差导致的优势不复存在。

And SUAVE itself is a universal sorting layer for multi-chains, and the preference environment is equivalent to placing the user preferences of multi-chains in the same layer. Therefore, for both multi-chain or single-chain builders, user preferences are publicly transparent. This eliminates the advantage caused by information asymmetry.

Execution Market

The execution market corresponds to EOF.

Since user preferences have already been reflected in the SUAVE Mempool, SUAVE has further introduced the role of Executors in the execution market, who compete with each other to provide the best execution for user preferences. Anyone, including builders, RPC service providers, and wallets, can be an Executor based on the different preferences raised by users.

Firstly, the user's transaction generates MEV; secondly, the executors compete with each other to meet the user's preferences, and competition will be reflected in the price when providing the best execution, ultimately returning as much MEV as possible to the user. This process can be understood as bidding and selective admission. This is why in the above figure, the execution market achieves "Minimizes MEV for users".

Preference environment makes the preferences of all users open and transparent. The execution market puts these preferences in a public market, allowing all executors to bid to implement user preferences, rather than being satisfied by individual builders, thus solving the problem of EOF.

Decentralized Building

Finally, after integrating the output of the preference environment and the execution market, the network of builders collaborates to construct the complete block instead of a single builder. This step requires sharing this information among builders without revealing the Orderflow and Bundle content. In the later stages of the SUAVE roadmap, secure solutions such as SGX will be introduced to meet this requirement.

Thoughts

Part #1 

 Source: IOSG Ventures

If we temporarily set aside MEV and simply think about SUAVE from the perspective of blockchain, then we can outline a development trend and narrative logic of blockchain.

First of all, Bitcoin realizes value transfer without the need for a trusted third party based on blockchain technology. Blockchain provides the most fundamental trust as financial infrastructure.

After the

tag, public chains represented by Ethereum serve as the execution environment for dApps, which can be further divided into general-purpose execution environments represented by General Purpose Alt-L1/Rollup and specialized execution environments represented by Appchain/Approllup. We abstract the components such as network and consensus into a whole and ignore the technical details, which are essentially the soil for the growth of dApps.

Although the above Rollup can be regarded as the execution layer, carrying part of the workload of Ethereum L1, the execution environment is still mainly monolithic. Celestia breaks down the various components of the execution environment. The DA layer also functions as a blockchain, but it is no longer the "execution environment" itself, and consensus among nodes is only reached for Data Blob. At this point, the blockchain is introduced as a trust component to enhance the trust level of DA.

SUAVE further abstracts Mempool and Sequencing from multiple execution layers as a unified coordination layer. The transaction types and fee structures of SUAVE can be customized and adapted to "express" MEV without the need to be completely consistent with previous blockchain designs. In scenarios involving multiple chains and collaborations, blockchains exist more in the form of coordination layers.

We can see that infrastructure is gradually evolving from a centralized general layer to a refined professional layer. The increase in modularity and specialization allows for "the whole is greater than the sum of its parts", for example, we can achieve better composability on the general settlement layer; and capture more MEV on the general sorting layer.

Part #2 

In the middle part of this article, we discussed the rough design of SUAVE. Currently, SUAVE is still in the early research stage and there is no publicly available information on its specific implementation. Here, the author presents two challenges that SUAVE may face.

Sequencing

 Source: IOSG Ventures

The centralization problem of the current Sequencer has not been solved yet. The Sequencers of Optimism and Arbitrum are operated by teams and are completely centralized. However, achieving decentralized Sequencing is always an unavoidable topic, and various Rollups have mentioned this plan in their roadmaps. For example, Optimism proposes to rotate the Sequencer from both economic and governance mechanisms, while Arbitrum proposes their Fair Ordering scheme.

Earlier, Vitalik listed several methods in his article "An Incomplete Guide to Rollups", including Sequencer auctions, PoS-based random selection, and DPoS voting. Other solutions include Cosmos' first-come, first-served (FCFS), Chainlink's fair sequencing service (FSS), and Espresso Systems' Decentralized Sequencer middleware.

SUAVE wants to become the unified sorting layer for all blockchains, and this vision is clearly ambitious. Of course, convincing various Rollups to adopt its solution will be a huge challenge.

Ecosystem

Quintus wrote in the article that Uniswap, Metamask, and Infura respectively serve as representatives of dApps, wallets, and RPC service providers, controlling the majority (and often valuable) of the total order flow in the Ethereum network. It is estimated that Infura holds a share of over 70% in the total order flow. These traffic endpoints act as checkpoints for transactions and control the flow of orders, playing an important but often overlooked role in the MEV supply chain.

The core of SUAVE is Open Orderflow, which requires participation from multiple parties. Therefore, the roles of the above entities are highlighted in the design of SUAVE, aiming to help these Orderflow Owners monetize and create profits.

Every entity in the MEV supply chain is Economically Rational. While dApps, wallets, and RPC service providers may have some concerns, searchers and builders are driven by incentives. If SUAVE provides high-quality order flow, they have strong motivation to proactively integrate with SUAVE and gradually establish network effects.

At the interface level, the wallet can simply change the RPC port and send transactions to SUAVE. However, if the wallet needs to adapt to preference environments and execution markets, some additional modifications are inevitable. Therefore, in order for SUAVE to achieve its vision, it also needs to establish partnerships with core traffic in the ecosystem.

Part #3 

In addition to the above discussion, we also raise some open-ended questions.

Originally, users had limitations when expressing their transaction intentions, and the state of the transaction on the chain mostly depended on the real-time network status, making it impossible to customize the transaction. However, according to the concept of "preferences" proposed by SUAVE, users can set conditions for the transaction on the chain, such as "I want to place this transaction in a certain block in a certain area of a certain domain." The freedom and richness of expressing user intentions have been improved.

On the other hand, increasing the granularity of expression preferences will significantly increase the complexity of the network and make large-scale DoS attacks possible. This further requires a reasonable design of the cost structure.

In addition, we have seen narratives such as Rollup-as-a-Service, DA-as-a-Service, and Restaking-as-a-Service. In the near future, various zkEVM projects will be launched on the mainnet, and the decentralized ordering layer is also included in the planning of various Rollup roadmaps.

Therefore, Sequencing-as-a-Service is a potential direction that we can explore. Will these Rollups simply adopt the FCFS approach, outsource Sequencing to professional service providers, or even use a rotation of multiple approaches? This will determine the market share and competitive landscape of Sequencing projects.

Summary:

In the past few years, MEV has been controversial, but it has not hindered its rapid expansion.

Existing MEV solutions cover various aspects, with basic topics revolving around "minimizing/preventing MEV" and "democratizing MEV/MEV profit redistribution"; the former uses some encryption schemes, while the latter provides profit returns to upstream players and users.

MEV, as an inherent property of blockchain, occupies a balancing point in the current "impossible triangle", and in the implementation of SUAVE, it may extend to the "fourth corner". Based on the determinism of the MEV supply chain structure, SUAVE will create a market of over tens of billions in the next decade.

From PBS to SUAVE, we can see a trend of continuously introducing competitive diversity and ensuring balanced competition conditions. The community is constantly moving towards the goal of decentralization, and we respect the community's unwavering efforts to illuminate the dark forest.

Our vision for the new decade of MEV: competition instead of monopoly; sharing instead of exclusive ownership; co-governance instead of dictatorship.

Original article link

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