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    Why would f2pool participate in the democratization of MEV with Flashbots?

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    12 May 2021. Written by Daniel Hwang

    f2pool is officially supporting the Flashbots organization and the goals of minimizing the negative impacts of MEV.


    What is Flashbots?

    Here is the official description of Flashbots from their documentation¹:

    Flashbots is a research and development organization working on mitigating the negative externalities of current miner extractable value or “MEV” extraction techniques and avoiding the existential risks MEV could cause to state-rich blockchains like Ethereum. Our primary focus is to enable a permissionless, transparent, and fair ecosystem for MEV extraction. It falls under three goals: democratizing access to MEV revenue, bringing transparency to MEV activity and redistributing MEV revenue.

    In short, we can describe Flashbots as a group working to prevent the negative effects of Miner Extractable Value (MEV). So, what is MEV?

    What is Miner Extractable Value?

    Miner Extractable Value (MEV) is essentially the profit block producers (like miners) can obtain from the cryptoeconomic games that are played involving unconfirmed blockchain transaction inclusion, exclusion, and re-ordering.

    To better understand why block producers and miners can profit from these cryptoeconomic games, it is important to understand that transactions on the blockchain do not automatically get accepted and confirmed on chain. Transactions first enter the mempool from which block producers pick and choose from to form their blocks. Usually, batches of transactions are chosen from the mempool by order of highest fees - following the first/second price auction² model/priority gas auctions (people sending transactions pay up higher transaction fees to have their transactions chosen first and get confirmed faster). However, in the case of transactions that can represent profitable opportunities like arbitrage plays (or other cryptoeconomic games like sandwich attacks³), miners and block producers may have a self-interest in changing the order and excluding transactions to replace them with their own to take advantage of these opportunities.

    MEV puts block producers and miners in a privileged position relative to all other participants in the network. This often results in power plays that affect transaction fees and users competing in these games that they would rather not participate in.

    As context, I wrote a bit on the mining of empty blocks and the reasons why that also includes some more detail on block formation in this post: Into the mempool empty blocks.

    Further, here is an excellent post from Paradigm Research on potential MEV opportunities within the ecosystem and some recommended solutions (one of which is Flashbots): MEV and me.

    Now with that background on MEV, we can describe Flashbots more accurately as an organization providing research, development, and solutions fighting back against the negative impact MEV can have on the ecosystem as a whole.

    Why do we support Flashbots?

    There are two main reasons f2pool supports Flashbots. Ideologically, the importance of supporting the ecosystem is important towards enabling an efficient and fairer blockchain system for all stakeholders. Practically, the democratization of MEV access with additional mining revenue from flashbots is valuable for our operations. These two reasons provide incentivized positive behavior while addressing the threat of negative MEV in our blockchain ecosystems.

    Here, our contributions to the ecosystem are additive towards the goals of Flashbots and minimization of negative MEV externalities by using Flashbots Alpha’s sealed-bid MEV auctions⁴. The Flashbots organization has offered Flashbots Alpha as a tool to allow miners and MEV searchers to communicate for more democratic MEV.

    Sealed-bid MEV auctions provide MEV searchers the ability to safeguard their profit maximization strategies, save on gas fee upbids, and give miners the opportunity to participate in democratic access for MEV for all parties involved. As a reference, the specific Flashbots Alpha sealed auction steps are as follows:

    • Searchers send Flashbots “bundles” to MEV-Relay⁴. A bundle contains:

    • one or several transactions that can be the searcher’s and/or other users’ pending transactions from the mempool

    • a sealed tip that is paid by the searcher to the miner via a smart contract call to block.coinbase.transfer()

    • Moreover, bundles have these properties: There can only be a single bundle per block (we are working on bundle merging to enable multiple). Flashbots bundles will always be at the top slot of the block

    • MEV-Relay receives bundles and sends them to all whitelisted MEV-Geth miners

    • Miners receive Flashbots bundles from MEV-Relay and process them in MEV-Geth

    • MEV-Geth picks the most profitable bundle out of all bundles it is sent.

    • MEV-Geth then compares the block that includes this bundle with a vanilla block that does not include any bundles. If it is more profitable to include a bundle MEV-Geth will do so, but otherwise it will default back to a vanilla Geth block.

    • Only when the searcher’s bundle is included in a block is the tip associated with their bundle paid. If a bundle is not included it does not cost the searcher anything (i.e. no gas fees are paid for failed transactions)

    The important concept here is that instead of the negative impact free-market MEV searching entities have on the rest of the ecosystem, Flashbots can reward both the parties involved (MEV searchers and miners/block producers) with a scenario they both can benefit from while also leaving the ecosystem intact away from the negative side effects. MEV searchers have their strategies protected and miners can gain MEV revenue that is an additional profit scenario for them relative to vanilla block rewards.

    There is an excellent FAQ on the specifics of how Flashbots incentivizes this beneficial behavior for miners here on the Flashbots miner on-boarding section here: Flashbots Alpha - Miner Onboarding

    An important statistic offered here is the overall network effect that provides higher upsides for more participants in this strategy. Details on these statistics from the most recent Flashbots transparency report can be found in the flashbots transparency report from March 2021⁵.

    In particular, the report details that miner profitability quadrupled with over 1,400 ETH being paid out to miners in March alone for the positive MEV mechanisms to protect from independent MEV searcher impacts on the overall ecosystem.

    You can find an update post on how miners and users alike have been benefiting from the Flashbots Alpha work here: Flashbots transparency report

    The results of the Flashbots initiative have produced promising results in many independent MEV bots and systems ceasing operations and transitioning to Flashbots use.

    In conclusion, the support we have for Flashbots aligns with the stance we have with ensuring our infrastructure services optimize for value with the support of the ecosystem we secure. Flashbots represent the right type of cryptoeconomic mechanisms to provide positive value extraction with incentivized good behavior benefitting the overall ecosystem.

    Sources

    [1] https://github.com/flashbots/pm

    [2] https://ethresear.ch/t/first-and-second-price-auctions-and-improved-transaction-fee-markets/2410

    [3] https://medium.com/coinmonks/demystify-the-dark-forest-on-ethereum-sandwich-attacks-5a3aec9fa33e

    [4] https://github.com/flashbots/pm#flashbots-alpha

    [5] https://medium.com/flashbots/flashbots-transparency-report-march-2021-d3930b4b98a9

    [6] official ethresear.ch post https://ethresear.ch/t/flashbots-frontrunning-the-mev-crisis/8251

    Written by Daniel Hwang

    Daniel Hwang

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