DeFi by Design EP#87: A New Method of On-Chain Profitability: Blockbuilding and MEV on ETH 2.0

Transcript

welcome to D5 by Design where we talk all things blockchain and cryptocurrency while striving to educate Empower and enrich it's your boy Andy and welcome back to the D5 site YouTube Channel smash the like button on this video that really helps us out and sit back and enjoy the content thank you very much D9 podcast episode in the midst of an interesting time in the world in the market of of D5 and coming off one of the most heralded events in in the entire space which is the ethereum merge now it feels like it's so far in the past when it was literally all about what a month or so ago

um crazy how that works there's been so much that's happened since that really feels like yeah it was like a year ago so um today I have the pleasure of speaking with Matt from block native uh we which are doing a lot of interesting stuff in the block building space so um pass it over to Rob good morning Rob it's another sunny day in Florida that it's nice and warm down there how you doing doing well then um yeah yeah good morning and um you know like you said it's been about a month since the merge um it seems like proof of stake has saved the ethereum blockchain like 400 000 beef um which is really cool um you know like we're just not seeing the issuance and it's just uh it's just

getting the uh you know getting getting more bang for our ethereum buck which is uh really cool to see and um yeah I I'm generally stoked to talk to Matt here at um you know there there's been uh several projects that you've been a part of your Journeys it speaks for itself um you know I won't even kind of like talk on the uh the journey that you've been through I'll let you kind of go through it and um yeah all the really cool stuff that's happening on Mev and um the the new world of ethereum I'm I'm excited to chat man so I'll kick it over to you and we can jump right into it sure of course uh hey Rob hey Andy thanks for having me on uh I'm Matt

Cutler I'm founder and CEO of block native uh we build core web3 infrastructure that that's sort of focused on what we call the pre-chain layer so everything involving transactions between the time that they're an ID and they go on chain um it's all real time it's Global it's high speed low latency very high availability and we've been building now for more than four years and uh it just so happens that the capabilities of our infrastructure are very applicable to this new market of block building and so with the merge uh we are one of the block Builders we operate a relay we've open source code and we're right in the middle of all of that which is a pretty fun and interesting place to be um you know my background is I'm a

glutton for punishment I I started building uh web 100 infrastructure way back in 1994 while I was still an undergrad at MIT uh that company was called net Genesis and it was the first ever web analytics business uh that one I like to say was a nine-year overnight success a zero to IPO and at the time we went public was one of the top 35 IPOs of History which is kind of crazy my most recent startup I've done seven or eight depending on how you count but uh my most recent startup was a mobile collaboration platform called collaborate.com that was founded on the crazy idea that people do real work on their phones which back when we started it was sort of a heretical thing to say and that one was actually acquired by Cisco under very favorable terms and uh part of that where me and my whole team

had to move from the Boston area to the Bay area so I live out here in the Bay Area now and um I was an exec in Cisco's collab business for about four years before I left to start black native with some other folks so it's been an interesting ride to say the least and uh I think the most interesting pieces of the story are still in front of us awesome yeah yeah optimistic for sure about you know just kind of all the experience that you've had and how it's uh set you up for Success here on on um on the on this like next stage this next phase of of uh internet infrastructure um how it's getting decentralized and how it's starting from you know uh this this kind of like flat web 1.0 very

basic framework uh where we can interact online um to like the the transferability of of value that is available on web3 um you know I want to get into like all the Mev stuff and like all the proposer Builder you know separation and kind of like how we've gotten here maybe you could start from the beginning and just like explain how we how we've arrived at this point um so you know it's it's interesting so so just to a little bit further back I went to MIT in the 90s and when I got there there were computer clusters all over campus they're called the theater clusters and it was uh their Unix workstations graphical user interface high-speed interconnect so they all talk

to each other and all your school work was on it you talk to other universities and play games on them and they were programmable and open and it was sort of school you didn't know anybody just showed up and that's the way that it was and we later learned like that's the internet and and probably we as students at MIT had among the best internet access in the entire world like there was others that were comparable but like it was the state of the art and once we started to figure out like oh not everybody else has this it seemed really obvious that this is the future right that if you're inside the internet in the early 90s it was really obvious what the future was going to be and if you were outside the internet it wasn't so obvious what the future was going to

look like I had the exact same reaction once I started to pay attention to web3 once I started to really tune into web3 in 2017 or so it took me a little while to start to wrap my mind around it but once I did I was like oh oh this is clear the future right this is the way that everything's going to work and it's really obvious if you're inside the category it's sort of all the advantages that you have through you know uh open programmable composable value systems that are you know enabled via decentralized Technologies and if you're outside this system it's not at all obvious what's going to happen and so I say that um because that's what actually why I wound up leaving a big cushy corporate job to to work in you know zero stage startup again

um but it's also why the merge and and where we are right now is so important because fundamentally what we're building in web 3 is sort of the foundations of the next economy and an economy which is uh built in such a way to be vastly more open and vastly more transparent and vastly less biased uh that's the more Equitable than the series of systems that it needs to sort of replace and for folks in my perspective my sort of point of view is we're not going to solve the big macro societal problems that we face like climate change and income inequality and some of the real serious challenges facing us at a global level without a a vastly more efficient Financial infrastructure that frees up the economic flows that are going to be

necessary to apply to some of these really big problems so I connect what we do every single day on web 3 and what we do at block native to sort of creating a better tomorrow for my children and their children you know I have three kids and I think a lot about sort of what sort of world they're going to be inheriting and so uh what does that mean what that means is we need to build systems which are are really capable of many orders of magnitude um lower transaction volume transaction velocity lower transaction fees the systems we have today that simultaneously preserves the properties of decentralization and open participation and historically this has been very challenging to trade off that the the trade-off is always you can have something decentralized but it's very

slow because you know decentralization means people using basically consumer grade or less Hardware which does have a lot of throughput and so the good news is anyone can participate but the bad news is you can hardly put anything through it that's something like Bitcoin which by the way the Bitcoin ecosystem created a whole made a whole bunch of decisions very much in favor of preserving maximum decentralization which explains a lot of what's going on in that World um ethereum was born out of that world and and is trying to sort of extend the technology and sort of be a bet on Innovative and on progressivism or a technological progressivism um but also wanted to preserve decentralization now there are folks other l1s that said oh we could make ethereum like things faster you just use

bigger computers and what you wind up with is you know blockchains that are secured by a handful of entities operating 20 or fewer big expensive cloud-based computers and then ultimately you're sort of participation in that network is ultimately at the mercy of a small number of centralized actors so you trade off performance for decentralization okay so enter the merch right the merge is this attempt to uh preserve and even enhance decentralization while sending the the foundation and landscape for um Next Generation scalability and so the merge in many ways is a a foundational shift you move from work consensus algorithm to proof consensus

algorithm and you enable all sorts of uh the next level of innovation to happen however the merge was about more than just the consensus algorithm it was about increasing the modularity of various levels of the network and this pursuit of decentralization all the way down um most folks don't really understand that before you had a lot of computers that were doing mining to support proof of work but the actual Act of building a block meaning which transactions were included and not included and in which order were controlled by fewer than a dozen entities all of which which were completely opaque and people are sort of amazed and someone horrified by that we

thought we had this decentralized ethereum but it turns out there's a small cabal of actors who decide what actually goes on shame and and that wasn't ideal and so one of the upgrades that was made to the network as part of the merge was this introduction of what's known as proposure Builder separation where we break out the act of validating the block or you know deciding what's truth and the act of building a block and now we create an Open Marketplace of what are known as block Builders block native is one of those and now anyone can propose here are the the transactions and here's the sequence of those transactions that should be the next block and bid against each other and this is all in service of uh deeper decentralization of the network and of encouraging maximum

participation at the validator level there's all sorts of consequences to this and then Mev comes to the fore but that's sort of this uh the Spectrum right of you know we're building the future we're building the foundation for the next economy to do so there has to be certain values that are built in at the infrastructure and protocol level and this is an ongoing project and you know uh the merge is not the the end point of that it's just a milestone along the way and there's more Innovation to come so anyways covered a lot of ground there but hopefully that helps sets the stage yeah a lot of the bitcoiners the OG bitcoiners for sure still use the uh still use and we'll continue now after the merge to use kind of the lack of decentralization argument against

ethereum so anything like this that is included in the merge and also kind of you know planned um will overall Just Help The Help the ecosystem but like you said there's that trade-off between kind of performance um and the amount of decentralization and I mean looking back I don't think that we could want uh the Bitcoin ecosystem and their kind of Hardcore what's called on like libertarian you know Die Hard Believers to have changed the way that they wanted to create the system because I mean without that without a fundamental kind of uh uh let's let's say a foundation of just pure just decentralized hard money it's kind of hard to build an ecosystem atop that so I'm coming on to ethereum now

um you know we've we are moving as you say like this techno uh this technological kind of progressive way in which we are kind of optimizing now for performance now we've got into blood building which is as you say a a improved way of basically decentralizing the creation of blocks in the entire chain itself um and you mentioned kind of how there's a split now between the proposers um and uh the builders um or sorry the proposal and the sequencer or something sorry I I missed that but um I would love to kind of hear what the what the key uh Improvement is in in the separation of the sequence um or of that process and um you know

how how you guys at block native are are taking advantage of this and uh you know and being active so okay uh big topic so so we'll get into it which is what a a validator so the network is instead of being secured by miners solving um uh difficult compute problems and by the way consuming a lot of energy along the way uh proof of stake is you have validators who stake the the core asset eth and uh every now and again they get elected to be the tip of the chain um they get to decide what's in the next block and if they basically play by the rules tell the truth they get a small reward for doing so and if they play games or they try to you know manipulate

things they get what's called slash and they reduce their stake so you move from a cryptographic security model to a crypto Economic Security model and there's interesting pros and cons trade-offs of it but what's fascinating is that proof of stake has you know on the order of 20 billion dollars of economic value securing the ethereum network um whereas a Bitcoin proof of work I think the number is like two or three billion of economic value in the form of specialized mining Hardware so you can argue that there's a larger security budget on the ethereum proof of stake Network than any other major Network right now the concern here is because you're doing less work to validate the chain meaning you're not running specialized Hardware that you have to buy you don't have a ton of electricity

that you have to power that with that the network issues a much lower rate of reward for you doing your job because it's actually pretty simple to do and so this is one of the things we talked about at the outset that the rate of new issuance of heat has gone way down it's often called the triple happening um because quite frankly if you're a validator you don't have very many fixed operational costs right this is great for the the supply of each because you actually massively reduce issuance but if you're a validator it's not that great because now you're getting smaller rewards right and it turns out that there are other ways that you can get value out of a block one of the ways you can get value out of a block is through preferential sequencing so it turns out

with ordered Financial systems which by the way all Financial systems are ordered because doesn't make any sense if you don't have an ordered Financial system that turns out that the order of transactions and which transactions get in and which don't get in there's a lot of value associated with that and when you have this privileged position to be the tip of the chain What's called the proposer um you can extract value from that block by manipulating the order okay this is what's known as Mev Mev is a maximal extractable value it was originally called minor extractable value but now it's been expanded to say maximal extractable value which is basically the value that can be extracted through a manipulating transaction ordering and in certain circumstances it can be pretty

significant and and before it was kind of a small percentage of the overall rewards but now that the rewards per block have come way down the Mev benefit actually is a much larger percentage and now this becomes sort of critical for validators because upwards of North of 60 percent of all of the rewards that a validator can get can be contained inside Mev and so let's say you have one staking operation that supports Mev and another sticking operation that does not the one that does will generate higher yields and so as someone who has eth and you're deciding where you should put it you're just going to naturally going to put it where you can get higher yield and so

what's going to happen is stake will will move to those organizations which are the best at extracting Mev and this becomes a centralizing force at the validator level so the whole thing is is as you get better and better at extracting mbv which by the way is computationally complicated it's not easy to figure out the right ordering and to to all the nuances and that it sort of is to the benefit of large well-resourced organizations into the detriment of small solo stakers which by the way if we're trying to maximize decentralization we want to encourage solar stakers this is a problem this is a fundamental centralizing Force at the core of the network and was so much so that the ethereum foundation researchers decided to do something about it at the

merge in collaboration with a group called flashbots is sort of an interesting entity in all of this and they developed what's known as Mev boost which is a sidecar it's not in protocol um it is a there are certain trust assumptions that go along with it but it's an optional piece of software that validators can run and effectively Outsource block construction and therefore Outsource me the extraction to specialize third parties like block native that that not only have the expertise and the computational resources to do this well but then share the majority or all of the rewards with the validator so guess what a small soul of sneaker at home can get exactly the

same value per block as the largest taking operations in the world because they have this Mev Boost network to tap into so what has emerged is this new market called block building there's a a number of providers who build blocks in a competitive Marketplace so basically all the block Builders compete with each other to get the privilege of of specifying what's in the next block there's all sorts of techniques and strategies that go into that and then ultimately the validators benefit from this because they don't have to do this work right it just is like not my problem I'll let you guys worry about it and we'll reap the rewards of that and and so so far in many ways shockingly that that market is working and and as orderly and is is quite effective

there's still lots of things to figure out and it's by no means perfect which shouldn't be a surprise to anybody we're just a month in um and the good news about this is it's all quite transparent so this notion of block construction that used to be very opaque and controlled by entities no one was even familiar with is now known entities there's public dashboards there's things you can go see and look and and um the groups are talking to each other so in many ways I think it's um much more healthy for the ecosystem and really quite interesting as a participant in the middle of all this and we can get into how it works and what's interesting about each speech if you want to yeah yeah I I do want to get into like the uh the next evolutions of Mev uh in terms of Mev uh redistribution Mev

decentralization first to clarify like kind of kind of the the picture you you've you've painted here um uh and just correct me if I'm wrong here uh What I Hear What I like my understanding of of Mev in the proposer Builder validator network uh the uh block Builders compete against one another uh to sequence the block and claim the Mev that's available in in that block they're um what whichever block Builder kind of wins this auction or this competition um that they build the block uh and then there's a validator that comes in and

validates that block for uh for correctness or or some sort of confirmation on on the chain to make sure that it's it settles correctly um and that the proposer at the tip of the chain had the benefit of uh building the block as well as proposing it and claimed all of the Mev now with Mev boost and proposer Builder separation it allows a Marketplace of blocks to compete for uh the uh the the tip of the chain uh for proposers to propose to

validators yes and I'll just CL just to clarify a little bit so you run a validator you're staking your 32 youth to do so every so often you get selected to be part of what's known as a committee which is like hey your job is to um this committee's job is to uh propose blocks to the network and then basically attest to them or sort of verify them within that Committee of sort of validators you might get selected to be the proposer you enter it's sometimes called God mode you're the tip of the

chain and you get to decide what the next block will contain and then other members of the community basically validate that and what they do What's called the test um and they attest to the veracity of that and then it gets included and there's a sequence of things that happen where it becomes an enshrined in what's known as an epic right um so every 12 seconds this happens so it's one of the changes with proof of stake whereas before more block times or variable under proof of stake block times are fixed so every 12 seconds this happens it's five times a minute that's uh um uh 60 300 times an hour 7 200 times a day 2.6 million times per year this process sort of repeats itself now when 12 seconds a a node broadcasts the tip

of the chain to the the rest of the nodes in the network and they all reflect and attest the uh the tip of the chain to one another every 12 seconds a new block gets added to the chip okay and so we're talking about this action of at the end of the 12 seconds a new block is going to get added by the way this is called what's known as a slot this is the new language for this and and I know that slot is going to be empty I.E Nobody Does It Or there's a bunch of transactions which gets included okay so this validator which is a distinct entity a unique address um at that moment in time they have the responsibility to the network to construct and to suggest a block and they can do that themselves they can

operate their own software and get their own thing and do it or via Mev boost they can Outsource that and they can say you know what we're going to just ask some expert to give us the best block right now and how we're going to decide on what that best block is is all these various experts are going to make bids okay and so uh Rob proposes a block and it's 0.1 ether value that they're that they're bidding and Andy makes a bid which is 0.2 Ethan Matt proposes a block which is 0.3 right and the validator just says they don't really care they just pick the most valuable block and they say 0.3 eighth is greater than 0.2 or 0.1 so I'm going to take Matt's block so basically like a an agreement gets

formed where Matt agrees to pay the the proposer the validator the tip of the chain 0.3 eth and in return Matt hands over the block body and the proposer is the one who then submits that to the tune as the contents of the next block okay that's the that's how it works now why would Matt do this in this example uh Andy myself and and Matt you you we're all block builders correct we're competing against each other we're trying to build valuable blocks right now the value of the block might be 0.35 e okay Matt has bid 0.3 eth so there's a Delta of 0.05 eth that map captures okay so this is the the

Delta between the bid that Matt makes and the value in the block associated with all the ordering and what gets in and what doesn't and by the way there's many factors that contribute that that represents the Economic Opportunity which is available to the building okay and so the idea here the extractable value well so there's there's many forms of value maybe is one of the forms of value but what you look at when you look at the contents of the block often Mev is the most valuable piece right so that's where the the most games get played if you will and so the idea here is you create a new economic market for Block Builders block building requires specialized expertise and non-trivial amounts of infrastructure so we have significant bills we pay in order to do it and if we're good at our job

um we can make margin every 12 seconds now interestingly so far that's not really how it's working that's so far 100 of the value the most most of the time all the value goes to the validator so the block builders for the most part are not really extracting any value yet um though it's sort of in the formative stages in this market so it's certainly possible that that will not be the case moving forward and there are different ways you can create value in a block so one form of value is which transactions are included in their priority fees so when someone submits a transaction to ethereum it has to include gas us there are two components of gas there's the base fee that gets burned this is part of VIP 1559 and then a priority fee which is known as the minor tip

of course there's no miners now it's the validator tip or is it the Builder tip I think there's an interesting conversation to be had around that and and what you're trying to do is collect as many of those high value transactions as possible and squeeze them into a block up to the block the the gas limit the maximum you know possible amount of gas in a block and that's one form of value okay there's another form of value which is Mev which is Mev involves you know putting in transactions in a certain order for a certain outcome so let's say Andy is conducting a transaction it's a trade on a it's on a certain liquidity pool and what happens as a result of that is there's an imbalance in the pool or that the price is going to shift on one exchange

relevant to it relative to another exchange okay and and this creates what's known as Arbitrage because you know you have price differentials at the exchange between asset a and sap over here your own balance or is different than over here on unit 1. and someone who's known as a Searcher and the Searcher is sort of an interesting name because it sounds like a person but it's really a bot so Searchers are people who build automated systems that detect these sorts of opportunities and then try to capture them and so the secret here is if you're trying to capture Andy's Arbitrage opportunity the only way to be sure you're going to capture it is if your transaction is sequenced immediately behind Andes so a Searcher might say well Andy's trade is going to create a price imbalance of 200 of value

okay and if I can slide my transaction in there there's 200 dollars to be to be captured I'll bid a hundred dollars for that placement to capture two hundred dollars to me and keep the difference which is 100 of the Searcher so in this example 200 ARB there's the Searcher bid the the cost of that preferential placement is a hundred dollars and in return the Searcher keeps a hundred dollars right then we have other Searchers who bid on that same opportunity they might be more they might bid less right and there's this game this competition between the Searchers and so what the builders are doing is they're aggregating what are

called Searcher bundles like all of these bids trying to figure out which ones they can include without creating conflict right meaning they can accept bit a but not bit B because they're both going for the same opportunity one of them are going to succeed um and then you're using that as another form of adding value to the block and building more competitive blocks they're called the med bundles um and then the third form of adding value would be unique transaction that you have access to that nobody else does through things like uh private transaction networks or proprietary order flow which is somewhat controversial but the game is is as a block Builder you're using all these various techniques in order to build the most valuable block to then bid the the price to win the block and ideally you know down the line

to capture some margin to fund your operations and to build a sustainable block building business so that you can continue to do so in the future got it does that make sense it does it does I wanna I wanna clarify again and then we can get into like the the redistribution of that Delta um and and how the Searcher value TR like kind of like flows through to the other elements in the network um so in this in this case the the I the Builder is also the uh the sequencer who can sequence the transactions and uh fit one transaction in in the slot in front to capture an Arbitrage is that right

yeah so the active building is the active sequencing right so as a block Builder um you decide or you know you're you're you decide which transactions get included in the block and then what sequence right that those two things are intrinsically interlinked um and that is what makes a builder a builder right and so the whole idea is being a good Builder is being good that each one of these areas requires competencies to to do effectively and to do quickly and to do reliably because remember every 12 seconds there's a new auction that's basically the the clock get through so which is one of the super interesting and fun parts to this like we just lost this auction oh well next option is coming up let's keep going right so yeah that requires a very high scale very reliable infrastructure to be

effective at and it's not easy to operate in these ecosystems so it does require you know specialized skills um so yeah to your point sequencing and block building are are arguably the same thing God and and there's there's multiple parts to the maximum extractable value to to to to generate from from these blocks there's the Arbitrage that uh exists from front running back running or sandwiching which is are essentially the the Arbitrage opportunities of sequencing the block and there's the Delta that is available to block Builders by bidding profitably on on these blocks are more I I probably should say the

right to sequence these blocks and is there is there other aspects I think you mentioned three I I see clearly the two one one uh value uh value in sequencing the block uh value in bidding on the Block is there is there a third element of value to that that block Builders um extract sure so so sources of value in a block so transaction inclusion you want to put the most high value transactions in okay which generally the source of that is a public mempool and that sounds like an easy problem but it is not um there's a lot of nuance that goes into being effective at doing that well um the second source of value is me B so Meb is sequencing right and generally

there's talked about three primary forms of Mev but there's actually many more than that so one would be liquidations so for instance in Oracle updates as a result of an oracle update there are collateralized loan positions which become available for liquidation you're trying to get your transaction in right after the Oracle update in order to perform those liquidations this is what's generally known as beneficial Mev because it it ensures the orderly operation of collateralized lending protocols and basically if those systems are going to work you need um liquidations to happen you know promptly and this does that right uh the next form of Meb is what's known as generally Arbitrage or back running which is sort of um benign Med meaning nobody's harmed by it Andy makes trade

there's some Arbitrage that happens someone takes advantage of that but Andy doesn't suffer any less favorable settlement okay and the third form of Mev is what's known as toxic or malicious forms of Med which are like sandwich attacks or front running where you know Andy does something and and um a Searcher will sandwich meaning put a transaction just before or just after or will front run will basically put a transaction in front and as a result of that Andy receives less favorable settlements or and he gets no settlement at all so you imagine you might have front running in a big nft drop right where you're trying to get in and be part of immense and people basically look at what's going on and they shove their transactions in on top and you miss out you're like dang you know it's

like trying to get tickets on on Ticketmaster for a big concert and you're like wow I tried to win the lottery and I didn't it's like the lottery was a rig there's there's folks out there who have preferential access and they buy everything up and you're just gonna have to buy in the secondary market for three times the price and and that doesn't feel very good right um in many ways this is why this is known as toxic or malicious Mev and there's sort of various um uh opinions about that there are other more exotic forms of Mev um like multi-blocking maybe so Mev that occurs across blocks there's cross chain Mev uh executed via Bridges and so the domain of Mev is quite large and quite complicated and this is why you have specialized actors who who do that right so there's this whole category of

entities called Searchers who have various Meb strategies and they compete with each other to do so so that's category two category three is what's known as you know sort of uh unique transactions so Rob Matt and Andy are all block Builders we're all trying to build the best block we all have access to the same transactions the public mempool so we go tone-to-toe on that maybe we all have access to the same search or bundles we go toe-to-toe on that but but Andy has some side relationships where let's say Andy will offer private members services so Andy gets transactions that neither Rob or Matt get and that therefore Andy can build blocks at neither Rob or Matt can because Andy

has transactions that we don't okay these are quite common today in the form of what are known as private mempools but they're also it gets a little bit nefarious with what's known as proprietary order flow so Andy has relationships with certain Traders and he has agreements with them where he will put their transactions on chain if he gives them if they give them to him uniquely and so what this creates is sort of a balkanization where now Andy has an advantage at Rob and Matt don't have the network gets less transparent and so in general these sorts of uh proprietary order flow-based systems are perceived as not particularly healthy for the network and generally discouraged but there's nothing to

prevent them and there are certainly groups out there that are actively experimenting with them I mean there's good economic reason to do so so I think one of the big open questions around the block building ecosystem is how much of an issue will proprietary order flow be and what are some mechanisms to to detect that and to mitigate that moving forward but you know as with everything this is a an unfolding uh uh process and debate but so so again to back up there's three sources of value which transactions get in public mempool which Searcher bundles you have the value associated with them and what sort of unique transaction sets or proprietary order flow might you have that others don't have and these the three things all combine to create a block of a

certain value and then you compete toe-to-toe and and often all of these things are happening simultaneously so it's not like you know up there's one trump card that one player has it's like all this stuff is happening simultaneously and again every 12 seconds there's a new auction to participate in and and then you know the thing about this is all transparent you can go to mebmoose.org you can see how many validators support Med boost you can see which relays are relaying these blocks where number three or number four depending on when you look which Builders are building much blocks how valuable the blocks are um so the good news is there's vastly more transparency in this ecosystem than there has been before yeah this is crazy it's like yeah take a whole economy happening of blockchains

that like I mean obviously the common folk wouldn't even have any idea but Rob and I are like deep in D5 and you know this is about as in-depth that I've heard about kind of uh the implications of ethereum merge sense and so it's just like that I mean it's nuts to to have a business spec like specializing this right now Matt is just I mean talk about just being in the right spot at the right time but um being from a profitable kind of uh um speculating perspective like I do a lot of you know trading on metamask on on different applications so I've got a few kind of practical questions if you can you know share some Alpha here so I guess the first one is um if I needed to get a transaction through quicker and this is like one of the easier ones to get into the better

ones is the priority fee more important necessarily than the base fee uh if I jack that priority up to like four five six you know and keep keep the base fee pretty much what the suggestion is is that going to basically get me ahead or you know is is it I guess yeah that's the question is that more important so we block native operates it's widely regarded as the most accurate gas estimator in the ecosystem you can find that at gas.blocknative.com and we have um browser plugins for Chrome Brave and Firefox as well and and how we actually build that how that works is pretty interesting so we have this sort of comprehensive view of the public mempool we have Global infrastructure that captures transactions all over the world brings them back and runs them through

real-time ml models like we use AI to look at the contents of the mempool and say which transactions are likely to be in the next block and then to say if you want to get a transaction the next block with a certain degree of confidence how do you need to structure your transaction to ensure inclusion and this is a Goldilocks problem because if you under price your transaction you you're less likely to be included and you won't get the performance that you want and if you over price your transaction you just waste money in a road profits because it's not going to go any faster right so there's this really interesting sort of um Zone you're trying to be in and structure the transactions to answer your question is of course it depends okay so uh you without the appropriate base fee you can you're not a candidate

for inclusion so if you set the base fee too low you're out of the game until the base fee comes down so getting the base fee too low is really detrimental there is no way to overpay the base fee though the network charges the base fee so you can set your base fee at 50 000 and if the base fee right now is 20 you'll get charged 20. okay so there's no advantage to being or disadvantage to being over you only get charged with the base fee is and again then that goes and gets burdened by the network and is one of the things that reduces each Supply the priority fee that sits on top is what's known as the minor tip and under different circumstances the minor tip can matter more or less and so in particular during periods of high Network congestion when a lot of people

are trying to get in okay the base fee has algorithms that basically it can only rise so fast that the maximum it can rise to 12.5 percent per block and so what will happen when things get hectic on the network is the base fee can't keep up and so the priority fee jumps and you can see this on our gas estimator we have historic Trends there there are times where the base fee or the priority fee is like a thousand or two thousand even sometimes and so um you know if you want to ensure that you're going to get on channel early way the first thing you got to say is what's the state of the mempool is it calm or is it congested right and then you can structure your transaction based on that certainly the priority fee it's basically the the fee that you pay to a

builder to include your transaction the higher that is the more likely you're going to get their attention but again you don't want to overdo do it and and completely overpay the part that gets tricky is let's say there's a major enough tea drop or there's some major D5 and the other thing that happens is the price of it collapses you know ether's off five percent oracles are updating liquidations are happening people are trying to defend their positions and so you know there's a lot of uh competition for Block space the the real time when the priority fees can get really wild really quickly and so um in those circumstances you're going to have a much larger priority fee in order to get included but how much larger you need to use a gas estimator like ours to figure that out that make

sense yeah yep it does and um yeah I've I've had some interesting experiments where um yeah Jack the priority if you weigh up quite a few times so it's definitely worked out in my favor and I also noticed what you said which I think is a common misconception that if you just Jack the base fee up regardless of what it is you'll just get the basically the highest level of of that of what it actually is if for for that block which is you know it's it's usually much less than what you jack it up as but I've also found that when you do jack it up you do get filled uh quicker because you uh you you do basically represent yourself as willing to pay more um in that scenario now another kind of

like speculation and kind of from uh uh make money on chain for our our community is um a lot of people in our community ourselves you know just all over the entire space are staking eat with Lido or rocket pool or uh even you know as advanced as doing their own kind of node um on their own now you've talked in depth about how you know just by being a validator you don't necessarily uh get all the you you don't reap all the benefits of Mev and using Mev boost these types of things so is there a way for let's say like the average Joe who's staking on Lido or who wants to stake ethereum to also get the validator or to

also get the Mev kind of uh on top of a Val of the validator um staking fees um it's a good question I'm not super familiar with the inner workings of Lido or rocket pool I know both do support Mev boost but not all of their validators do so there may be a mechanism to declare um when you stake that you want to use Mev boost and and participate in media Rewards or if you're a self-staker if you're you know operating your own rig at home I would very much encourage you to add Med boost and then what you need to do once you add a media boost which is fairly easy to configure you need to uh add relay so this is basically the the sources of transaction that you pay attention to and what I would encourage

folks to do is employ A diversity of relays the relays are published publicly and and interestingly and not insignificantly even though Mev boost is produced by flashbots they don't default include their own relay you got to manually add it yourself um but I would there's a bunch of advantages to supporting multiple relays and I would encourage everybody to support the block native relay and we call it Dreamboat and there's a bunch of interesting and unique things that ours does that that others don't do that can improve yield across the board but just in general as as a Staker this will be expressed in yields right so what you're going to be doing is trying to figure out where you get maximum yield and it's pretty well established only by now if you're going to get maximum yield you're

going to be getting maximum value blocks so the way you get maximum value blocks is by using a maybe boost in the relay Network so um under the covers most folks will be doing this if they're trying to maximizing them anyways yeah so I was thinking I figured that a lot of these services or ones that would like to compete in the coming months to years we'll just have to integrate so um that's exciting now last thing this is a little bit a little bit more of like a prediction or kind of looking forward over the next six months to a year what's what's uh what's one of your extremely um extremely um bullish takes on ethereum and kind of the deflationary aspects um you know kind of how you see the

merge playing out right because what we're seeing right now is like very low levels of activity in D5 if we return to even half of what we had I mean it's going to be insane how how deflationary is going to be so I've kind of spilled the beans a little bit but walk us through kind of what you might see or what you're expecting with uh um eip1559 the merge triple having in kind of for eth Price or just kind of user-based growth no all that so so I like to say like I'm a technologist not a Trader you know Traders going to trade price is going to price but I think the merge establishes pretty clearly that ethereum can ship right maybe an ethereum is not not great at calling dates because you know the merge was six

months away for four years but you know it's pretty hard to bet against you know when the ethereum ecosystem sets its mind to achieving certain technical Milestones it's pretty proven to do so and that's makes it quite different and so you know just a macro level uh I never bet against Innovation you know Innovation is like a force of gravity which is every single day every single minute every single second the technology gets faster cheaper and smaller and it doesn't matter if it's if it's phones if it's airplanes if it's you know uh blockchains right and once that the that Innovation flywheel gets started it's effectively Unstoppable and that Innovation flywheel is Alive and Well in ethereum

um the thing to realize is there's the merge and then there's the sir urge and then there's the Verge and then there's the purge and then there's the splurge and these are like big groupings of major upgrades to the network that are all planned moving forward people are always surprised to hear that they thought the merge was the end of the road like no the merge is just a waypoint it's a milestone on the way and there are equally ambitious maybe not equally but but still very ambitious upgrades to network that are coming that seems pretty bullish for encouraging and fostering academic research and Innovation on ethereum bringing more participants and bringing more investment and more Innovation that does things like reduce complexity so it's

easier for more users to be a part of um much of the the coming upgrades particularly the next one's called The Surge it's all about L2 scalability so you can get more transaction score to the network at lower price and so now you can start to do things that you couldn't do before because you have block building and there's this new sort of programmable element to the network this whole new experiences that could be built up there so I think we're on the verge of a golden era of innovation in the ethereum ecosystem and and this will drive just a huge amount of new experiences to have um one would think that that would then drive engagement transaction volume transaction value and therefore be net constructive to the price of eth one of the things which is amazing about the

economic model is as the network gets more active it dynamically balances its rate of issuance and sometimes can get deflationary so the more successful it is as a as a network the lower and even negative rates of issue would start to happen so for each holders one would expect price to go up but there's so many factors out there right now including a very uncertain macroeconomic situation it's sort of tough to tell but you know my advice is stay heads down stay building stay active web 3 is a full context Sport and it's proven time and time again that the biggest rewards are those who are given those who are most active right and so I would encourage your leader your listeners to continue to be active in the category and to stay on top of all the Innovation

because our brightest days are in front of us without any question and we're super excited to be building in this category and we know many many others that are um for those of you who are not super technical the the largest technical event of the year is called Devcon that just happened in Bogota and it was an incredibly optimistic in collaborative events from all accounts and so I think it sets the stage for a whole bunch of really positive developments on the network moving forward um so anyways I'm I'm of course long eth um but but my time Horizon is measured in many years not many months very cool that uh you know proposers contact and Builders contacting you know validators and bouncing into each other with the

you know the gravity of Mev just pulling them into you know one sphere or the other um and I think I mean the the ethereum virtual machine has has um you know built the resolution mechanism for uh determining whether or not these these you know what which blocks are profitable the censorship resistant ones non-censorship resistant ones the evm has like the you know been built in a way that supports uh both and kind of uh provides a competitive landscape for them to uh combat each other um I think like I've got a ton of tons of questions

like and on you know Andy that's a great question about how like solo stakers can uh extract Mev and I think that opens an entire can of worms as far as Mev redistribution and how there's uh organizations like flashbots who are decentralizing the the Mev uh distribution there you know that that value distribution rather than you know over that can of worms now you know towards the end of this podcast we'll save it for another time um maybe we could close on uh some of some of the learnings that you had from Devcon you know what what were your major takeaways um maybe some realizations or breakthroughs that that you have as a result of of uh you know that one of the

most technical conferences of the year so so a couple different thoughts so first off you have the supply chain where where value starts with users conducting transaction flows downhill and the Meb has historically flowed downhill and flowed downhill to Miners and now it's flowing downhill the validators but because you have block building and because you have programmable infrastructure you can redirect this value in new and different ways and one of the things that we at block native and now and increasingly others which we're really excited about are advocating for is wait the value of the med originates with the user conducting a transaction with a Dap and a protocol and a wallet and and today the users are not made aware or participate in that Med and so hey in the block building reality you can

create recirculation effects where the med value can be returned or some portions can be returned to users uh wallets daps and protocols which we think is really net Constructor for the ecosystem and we're really excited to hear many of the thought leaders in the ecosystem you know thinking deeply and proposing solutions to this so that's pretty exciting um unfortunately I wasn't able to be at Mev I mean sorry at um uh Devcon I had some family commitments but we had team members there and and you can listen to all the recordings I mean this is the other thing about the ethereum foundation it's just remarkably transparent so if you were not able to be in Bogota you can get many of the benefits you needed from it and and there were I don't know some some very large number of sessions that were focused on Mev and focused on PBS and

proposal Builder separation there's a number of side conversations in it by all accounts it was one of the top topics of the of the of the entire session so Mev is sort of been a fringe discussion and in sort of a Dark Shadows discussion if you will and it's very much coming into the the light and coming into the Forefront which we think is really constructive um our world view is um Mev is not something for end users to worry about it's something for intelligent infrastructure to deal with on on users behalf and we now have all these new expressive ways for the infrastructure to do so and again that's super exciting for for entities like us who are who are active in the category um but I just think in general like the the the values of the ethereum ecosystem

are are holding true and at the core of the network there there is not wide this you know there's not there's not disagreements or dis or or like negative debates or fractures that you see in in many other ecosystems there's even broader society as well I think what we have is a fairly um cohesive and values aligned set of really intelligent folks we don't agree on everything we debate things fiercely but at the end of the day um we all want a maximally decentralized maximally um participatory incredibly neutral uh next economy and we're all committed to helping to build that it's challenging particularly in the face of some of the developments that are out there today but you know that's what makes it an interesting thing for for really capable

people to do so I look forward to continuing that conversation down the line okay sweet yeah that sounds great thank you for joining the podcast this was a great learning experience about Mev and the entire ethereum network and and about the healthy competition that that ethereum um you know uh supports and encourages and um helps to create this landscape of healthy competition around you know the entire network um which is really cool to see these experiments and in decentralization and censorship resistance play out um and and it's really exciting uh times ahead to see these experiments play out um yeah yeah I look forward to having you having you on the uh on the show

Once Again absolutely appreciate being here appreciate everybody listening if you want to follow me I'm at M Cutler on Twitter and you can find blockman about blocknative.com or at block native and um really appreciate having me on and happy to to come back in the future if appropriate okay thanks Matt