MEV and Privacy Development Trends: Current State of MEV Technology and Novel Privacy Designs.

23-05-12 20:01
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Original author: Lao Bai, ABCDE Investment Research Partner, Amber Group Research Consultant


This article will introduce the trends in MEV and privacy.


MEV is a technical topic that is becoming increasingly complex, especially after Ethereum's transition to POS. Even non-user roles involved in MEV include Searcher, Builder, relayer, Validator, and Proposer. It can be overwhelming for those who are not familiar with the technology. There are various articles online that explain the principles of MEV in great detail, so I won't go into that here. Instead, I will simply discuss the current state and trends of the technology.


MEV Status


MEV clamping robots (also known as sandwich attacks or malicious MEV) often earn more than reasonable MEV (arbitrage and liquidation) and are also the main source of income for many MEVs. However, the recent incident where a malicious validator used a relay vulnerability to replace the clamping robot's transaction resulted in a black-on-black event that caused the robot to lose $25 million, which caused a great stir in the industry and caused many clamping robots to become more cautious.


In short, most of the profits from MEV go to Searcher and Builder. Those who work on MEV protocols or technologies don't earn much money. Flashbot, which is said to have MEV-Boost, has not yet made a profit (but Flashbot is a non-profit organization). I have seen at least 4 or 5 specialized MEV projects in the past few months, each with different technical features, but we haven't invested in any of them because we don't really think they can achieve stable profits (such as the earliest Eden).


Current MEV technology trends


1. Smart Slippage Management: This is mainly aimed at cross-chain MEV. I have seen projects working on this, which saves users from manually setting slippage and anti-sandwiching.


2. Threshold Encryption: This is an area where the Cosmos ecosystem excels. Currently, Penumbra and Osmosis are both working on it. Transactions that enter the memory pool are encrypted, rendering MEV almost useless.


3. Delayed Encryption: The threshold is similar to the multi-signature style, where 2/3 of validators are required to decrypt. If it is still considered unsafe (due to the security assumption of the validator committee), delayed encryption can be used to automatically decrypt the encrypted information after a certain period of time. This mainly involves the application of VDF technology, which is still in its early stages and reportedly has poor performance.


4. SGX Encryption: Similar to the previous two, but using trusted hardware. This is mainly done by Flashbot's SUAVE.


5. Fair Sequencing Service (FSS): Outsourcing the sorting process to a trusted third party to prevent MEV, while Chainlink is doing it.


6.MEV Auction: MEV auction, proposed by the OP team, which Vitalik Buterin reportedly likes and may be used as a solution for the decentralized sequencer of Optimism in the future.


7.MEV-Share: Share MEV profits with users. This is something Flashbot recently came up with. If it had been available earlier, the claw machine robot that lost 25 million could have recovered about 18 million.


8.Mev-Blocker: This is done by Cowswap, which allows Searcher to bid and Backrun your transaction (finally giving you 90% of the profit). Backrun (mainly for arbitrage and liquidation) is relatively mild in Mev, so users can avoid the more harmful FrontRun and Sandwich Attack.


9. ETH Protocol-level PBS: The proposers and builders of the Ethereum protocol are separated, following the usual style of the Ethereum Foundation, which is likely to be after 2025...


Privacy has always been a track that I, as a practitioner in the encryption industry, am not optimistic about from an investment perspective, from the earliest Zcash to later Tornado Cash to now Aleo, Iron Fish and the like. There is no other reason except that although it is politically correct, it is not a basic need for 99% of users. Who cares about topping up a dog coin on Uniswap, borrowing on AAVE, or staking on Lido, except for hackers and a few institutions and whales who are afraid of being seen?


Even if true privacy is needed, it should be in the form of a plugin like Aztec-connect, serving mainstream Defi protocols, rather than building a "privacy public chain" from scratch. With the closure of Aztec Connect (possibly due to fear of SEC investigation or simply not making money), my bearish sentiment towards the privacy track has only increased.


Currently, I have seen the following two new designs for privacy in the primary market:


The first type is based on Tornado Cash. The front-end of Tornado has been banned due to controversy over its design, which can help hackers launder money and is also considered "politically correct". However, in fact, 80% of the funds in Tornado Cash are clean, and only about 10-20% are caused by hackers laundering money. This is because there are indeed whales and institutions that need similar services to ensure privacy, and even Vitalik Buterin himself has used it.


So I have seen more than one project that wants to combine Tornado Cash with KYC. If they are afraid of hackers laundering money, why not use KYC+whitelist to ensure that the money coming in is clean?


However, this actually shifts the regulatory risk to the KYC provider. Additionally, KYC is theoretically very easy to forge or purchase. If hackers use this "Tornado Cash with KYC", once they pass KYC, it may actually make illegal activities more convenient.


The second type is similar to Namada in Cosmos, called Multi-Asset Shielded Pool (MASP), where multiple privacy-protected assets share an anonymous set, and with the powerful interoperability of IBC, at least within the Cosmos ecosystem, it can theoretically provide shielding protection for all mainstream assets on the Cosmos chain. For example, if you want to privately exchange Osmo and Atom, you can implement it in a way similar to the following image.



There have been attempts to use homomorphic encryption for privacy, but this technology is too early and its performance and operability have not yet reached the stage of being "truly usable", similar to ZK around 2017. It will probably take another 5-10 years to develop to a usable stage.


Today, let's stop here. In the next issue, we will talk about the new trends in the three major components of DeFi: Dex, lending, and stablecoins.


This article is from a submission and does not represent the views of BlockBeats.
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