Episode 291 - MEV, Mechanism Design & the Censorship Problem with Mallesh M Pai

Transcript

[Music] welcome to zero knowledge I'm your host Anna Rose in this podcast we will be exploring the latest in zero knowledge research and the decentralized web as well as new paradigms that promise to change the way we interact and transact [Music] online this week tun and I chat with MES p associate professor of Economics at Rice University we explore mechanism design in an economic context and his worker on meev topics specifically his work on censorship in meev this discussion brings us back to the meev

topic where we revisit the proposer Builder separation concept PBS and the impact that this may have on efficiency and censorship resistance of these systems but before we kick off I just want to remind you to check out the ZK jobs board this month with the ZK Summit around the corner it's happening on September 20th in London many of our sponsors have put their jobs on the ZK jobs board if you're looking for a new job or opportunity in the field be sure to check it out we'll add links to the show notes also a quick note we're going to be taking a few weeks off of the show so that the team and I can focus in on the ZK Summit but expect another episode later this month now Tanya will share a little bit about this week's sponsors anoma's first fractal instance namada is launching soon namada is a

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lzk podcast to learn more and to sign up for the bonsi weight list and now here's our [Music] episode today I want to welcome mesh pie associate professor of Economics at Rice University and someone who's working on mechanism design at the the special mechanism group welcome to the show mes hi GL to be on uh we have tun joining this one as well hey excited to be back yeah and today we're going to be doing uh kind of a return to the meev topic I'm going to add links to I think we've done at least four episodes that touch on meev specifically and we're going to add these in the show notes and yeah I think what we wanted to talk about in this particular one was the work that

mes has been doing around this field and also maybe a little bit more of a focus on me and censorship but before we start that mes tell us a little bit about yourself what got you interested in this topic and what exactly are you actually working on when it comes to this awesome uh yeah thanks for having me on so I'm like you said I'm an associate professor of Economics at rice and uh my day job or my training is in mechanism design and mechanism design is kind of the engineering wing of Game Theory so Game Theory looks at tries to study strategic interactions and tries to understand how participants will play mechanism design is the engineering wing of that so

instead of studying a specific strategic interaction we ask how can you design strategic interactions to get the right kind of outcome so auctions uh and tun was on the show about that a few months back is a specific example of a of a broader set of uh sort of tools that we have in the mechanism design toolkit now um around the pandemic so I've I've always had friends who've been talking my years off about crypto um I sort of understood it from the background but I wasn't super into it um around the pandemic I I decided that there was only one way I was ever going to learn this which was to teach a class on it and I decided to teach a sort of undergrad

economics class trying to put together how do we think of uh crypto from like a game theory perspective and the really hard part of doing an undergrad class is you really have to understand it and you you have to be able to break it down that got me started on my journey and then sequence of unlikely coincidences later I'm here now nice when you say mechanism design like I guess auctions is a form of mechanism design but what else would fall under that category that we might be familiar with things that don't use money so for example matching mechanisms if if you know anyone who's a doctor in your family uh they got matched after their MDS to go to a hospital using a mechanism that doesn't use it money but does take preferences

from people both the people the doctors and the hospitals and tries to come up with a match that has good stability properties another example is voting systems we need to select a president a governor a mayor different countries different cities do things different ways and all of these are examples of mechanisms that take people's preferences shove them together and try and come up with a good outcome that's interesting as you said it as you said mechanism design what kind of popped into my head was like incentive design but I guess incentive is the type of design with money usually or with some sort of benefit I mean even even like stuff like voting is a form of incentive design because you care about your mayor

or you care about your president so you do need to design uh even there you're designing incentives I I think things like auctions are just the incentives are your money and your profit but mechanisms can be much more broad I I mean one thing I will say is I I remember going to you know one of the main conferences on mechanism design like last year EC which I think M mil was a chair of this year or virtual chair I what it was virtual chair yeah I remember going to the mechanisms without money conversation and talks and honestly I find that everyone who talks about mechanisms without money is lying to themselves so that they can say that there's no money used cuz you're still

metzing something you're still giving like numbers and weights and solving some optimization problem which is not that different than number you just don't want to call the numbers money you want to call the numberers some other like embedding of preferences into you know some space but it I find the the phrase mechanisms without money a bit duplicitous in the sense that they're both solve end up solving some optimization problem that well definitely it's just that we explicitly mean money isn't changing hands but you still might value the stuff in money it's just yeah exactly so I think mechanisms without money just means money doesn't change hands on the other hand in crypto money or things that are worth money often does change hands well has to change hands right to yes yeah

you're an associate professor of Economics um is me mechanism design traditionally in economics is that where that is is being developed so it's it's it's sort of a long history it um started in the ' 7s it it was sort of a part of operations research so Game Theory and mechanism design started off in a applied math and operations research then moved to economics through the ' 80s '90s 2000s and then in the 2000s late '90s 2000s the computer scientists joined in okay and now we have sort of EC the conference that tun refers to is is now one of the largest places and it's sort of so we have a lot of people in computer science working on this we have a lot of people in

economics still working on this and the operations uh researchers have joined back in so there's a bunch of people in O also work work on like mechanism design questions and it's because all three Fields like economists think a lot about incentives computer scientists think a lot about well you can think about incentives but you need a mechanism that's computable or that can be efficiently computed and run and operations researchers are thinking about okay if you're going to you know use this mechanism for a kidney uh for kidney exchanges or things like that which is things that they've been used for you want to think about the actual Logistics of these markets and how they weigh with the designs that you've sort of proposed oh interesting that's cool you are part of this group called the

special mechanism group mhm can you describe what that is so this is outside of your academic work I guess okay that's right so I'm a a senior mechanism designer at special mechanisms group and what this is is it's a um me research sort of research and tooling outfit so we want to push forward uh the research and the thought space that comes around me and and ideally we'd like to be part of sort of helping to solve these questions or at least make them better cool one question that maybe more listeners who've listened to Prior episodes on M might ask is what is the difference between say special mechanism

group versus Flash Bots versus Frontier you know how would you how do you characterize the things that are you know different in your view well these are questions that go above my pay grade no um up and down the stack we care about uh decentralization we care about not having sort of a monopoly on any one part these are competing firms that we respect uh but broadly we we also need sort of a collection of solutions and some kind of competition in the thought space around what kinds of mechanisms are we going to propose what sort of solutions are we going to do at different parts of the stack so I guess in in terms of like things that are happening outside my perview there's uh differences like flash BS as pushing

privacy and Suave uh Frontier um has has its new Builder uh f1b uh we have nothing to announce on that front but um from the research angle it's just three teams of smart people who are you know thinking as hard as they can trying to come up with Solutions and hopefully some of them will work and work well and I guess I mean I don't know if this feeds into the topic of censorship but it seems like the censorship phenomenon is partly due to one of these groups kind of like winning and then making choices about what could be or not included I I've always found it kind of funny like the flash bot's whole Mantra was like we're going to democratize it we're going to democratize meev and yet if everyone uses only their system then

it's actually not as democrati like it doesn't have the anti-censorship it doesn't it like there is still a controlling body in a weird way but when you add competition it's almost like they had to request competition like they they're competitive and yet their whole sort of philosophy won't work unless there's other players like themselves right I I guess part of the problem is this trade-off between we want competition and we want sort of a diversity but uh a lot of the solutions that we propose are two-sided markets and two-sided markets inherently like I guess you were referring to like Mev boost if all the validators are selling their blocks and Mev boost then all the builders have an incentive to uh bid on Mev boost and if all the builders are

bidding on Mev boost then Mev boost blocks a a lot so uh validators have an incentive to be there it's really hard to break out of these cold start problems so credit to them for like actively looking for competition and trying to say we need more uh democratization in this part of the space too yeah I mean I think there's a maybe a more different take is that there's probably many different solutions to designing Market places here for me but you have a cost of actually trying them out it's sort of like uh the the classical sort of like exploration versus exploitation tradeoff where it's like which is for listeners who haven't heard of that that's sort of

this idea of like suppose I have 100 coins and I go into a casino and there are 50 slot machines each of them has a different expected value like one slot machine might be minus one one slot machine might be plus five if I keep putting coins in so how should I figure out which slot machine to go to you know have to play to to to figure out what the expected value if I play too much at one then I won't have searched and found possibly the a better one so there's this trade-off between the two and it does feel like the mechanism design landscape of me has a bit of that where like like in order to learn how the mechanism works you have to go implement it but then you've already like caused

the market to change by doing it oh wow exactly and and the only thing I'll add to that analogy is at least in just to show you how Troublesome this is is it's at least in sort of tun's uh Casino analogy the the casinos were you know each of these slot machines were paying out the same were paying out a fixed amount there's some unknown but true sort of you know plus 5 EV minus one EV here the EV changes based on how many people are using it so you know the casino if a lot of people like a given slot machine if a lot of people are using it maybe it's e goes positive or maybe It suffers congestion and it EV goes negative so you got we got to work through that entire thing since we're on the topic of me a question I like to ask

everyone given that the thing is dynamic as you're pointing out is what is your current definition of me you know in fact one of my co-authors on a paper recently GMO refused to use maximal extractable value and wanted us to go back to minor because he was like he was like it we were not achieving the maximum anyway I saw that on your paper actually so yeah I think like as as you know any good topic of research no one agrees on the definition of it so what's your definition all right so I guess I have a more functional uh definition I I don't have a strong religious view like I've seen memes going around or you know the one

with the sniper and then another sniper pointing at the sniper and stuff and it's like is it all meev and yeah the last guy says yes it always has been I'm I I just have a simple functional view which is for me sort of currently the interesting part about me is that there's this one person uh the proposer who down the line gets to decide what order transactions hit the blockchain and that ability that you know sort of everything sort of stems from that original sin which is there's one person with this Monopoly power there are valuable things happening on the Chain so ordering removing uh inserting transactions all of these things have value they can

extract some of that value and then the questions are who gets to influence that value how does that value get split up what happens to sort of the overall economic efficiency of the chain as a result of this that's the way I think about M what do you make of the sort of M blocking techniques that have been proposed things like the threshold decryption where that role gets sort of altered okay so two parts one this could seem I'm you know I'm still too much of a professor I hate um I hate making broad sweeping statements which makes me a bad podcast guest but U it really makes you bad at making memes not necessarily bad at being a podcast guys oh I I I make the memes and I pass

them along to my colleagues who are happy to post them um just I I don't attribute um some of them I guess I saw this one really good meme about threshold encryption which is privacy based Solutions aren't actually at least the way I understand them they aren't giving you they aren't giving sort of creating this Level Playing Field of privacy they're just choosing winners and losers who gets to see something first so when it comes to threshold encryption if it's like n threshold encryption once n minus one people have um in some sort of basic implementation if once n minus one people have decrypted now the last person has a latency Advantage they can decrypt know what's happening and maybe take other

actions before they reveal it to the rest of the world so my broader take is sort of these encryption schemes expand the possibility space of a mechanism designer or an incentive designer but they don't make incentive problems go away in and off themselves those incentive problems are there you just need to think about think more carefully about where they've where they've been and migrated yeah but do you still think that those should like does that mean don't bother with those Solutions or does it mean def do like put them in oh bother with those Solutions definitely we like I said we need a diversity of thought and we have like some of these things might play in interesting ways with uh everyone's incentives so we definitely need to push on every angle

before we figure out which ones work and which ones don't especially while there's you know energy and lots of smart people are trying to move it forward I just I I dislike the people who seem to think that if we just threw enough encryption Firepower at the problem all the other problems go away off their own just because you muttered the right sequence of incantations as as as someone who's written a lot of paper for proving this type of stuff I I agree there are a lot of computer scientists who like I feel like somehow think like oh because I've encrypted something somehow no one's able to statistically decrypt things it reminds me of like the the the philosophical split between cryptographers Capital C who like live

in the Ivory Tower and lowercase C Crypt analysts who like try to break crypto systems like practically and it turns out like hey they actually find lots of ways that have nothing to do with like the number theoretic guarantees they have to do with like you wrote to the wrong place in memory or like you sent the same message five times in a row so I can figure out that's from this this sender like there's like lots of little stuff that I think goes into this there's also this fact that like fundamentally and I guess I've said this five million times on this show so I I'll say it only once to not waste Air Time fundamentally Finance if we take the following Axiom one all cryptocurrency things are mechanisms

that have transfers at every step because there has to be some transfer right you're paying gas you're paying something to a protocol your protocol is paying you then you sort of like inherently are in in finance land you're not in like this like mechanisms without money land you're just fundamentally in finance land and once you're in finance land finance just only works in the following way there has to be some public data and some private data the private data can be empty uh but the public data is non-empty there's always some public data there's a price there's an interest rate because why would you put your resources into something you don't know any public information about right and the moment you have this public data the public data always says

something about the private data and you have to like be very careful about that partitioning and you can't just be like ah I just threw everything into encryption and somehow I ignore that fact yeah it's funny that you pull it into Finance right away because like do you not think that it's some sort of weird hybrid thing because it is yes there are these sort of like Finance like things happening always under the hood but they're used in different dimensions much more computer science like Network I don't know like would you still put it in sort of like that traditional Finance framing I mean also like even tra what we call traditional Finance is a whole bunch of computers and algorithms and infrastructure it's just traditional

Finance is evolved or it's matured to the point where that infrastructure is you know it's it's moved into the background it's become invisible so that the average user or the average Observer of that traditional Finance doesn't see all the nuts and bols crypto is relatively new that those nuts and bolts are still there for everyone to see and that's why everyone's thinking about when you do a transaction you think about okay which chain which pool which swap what uh what Transaction what gas fee all those things used to exist in traditional Finance I used to have to think not me but maybe my dad or my grandpa or whatever had to think about you know what broker should I call should I call a bunch of Brokers what exchange are they going to trade on how competitive are their quotes going to be

if they ever wanted to trade a stock my grandpa didn't trade socks but that's a different story well well I I think it is fundamentally still Finance it's just different in that the decentralization aspect and the continuous time aspect in some ways change how the math looks like in the same way that you know if I perturb kind of like an economic system by perturb an assumption in an economic system I can completely change the equilibria I can change the number of equilibria I can change how hard it is to get to an equilibrium and crypto's clearly done that like in some ways the decentralization aspect changes the set of equilibria but inherently you're

still trying to figure out you know like these Financial properties like I think that's in some ways inherently why all of the kind of like let's just say the the the fools Russian Venture boom of 2021 into like nft and gaming stuff led to like very bad games or very non-usable social apps because everyone thought like Hey we're going to like use this thing that's fundamentally about finance and do something very non- financy with it and we're going to just shove in the finance and hope that you know it works and it doesn't really it doesn't like work that way it's it's kind of like the cryptographers just like pretending that like put throwing everything into a ZK shielded pool means like finest all the the you know

malicious effects go away it's it's this naivity that reminds me of like being a freshman in college well I mean you just Associated though like the nft YOLO pile into to ZK which I think is well I'm I'm saying they both they both have naivity they're just one is highbrow naivity one is kind of like animal animal senses naivity do you actually think then is there nothing this is like sort of a question maybe to both of you but kind of a little more to tun is there nothing new Under the Sun is everything you're seeing sort of just a replica of these Finance type principles and like is me does me exist in traditional Finance me is quite

different right like like the point is is like the assumption that there is kind of like a single entity that controls that sequencing and inclusion thing means like okay well there's no point in looking at all the different types of equilibri mechanisms like in some ways the fact that this is decentralized basically means that you know you have many different possible equilibria that can come out of this and you know one way of of you know a very crude way of measuring like how much the equilibri of a system change is like what's the ratio in some sense of like the best case social welfare to the worst case social welfare like which equilibria gives gives everyone highest

utility which equilibria gives everyone lowest utility on average and like how much what's the ratio between them like how much worse is it you know is the the worse than the best or vice versa and in the case of the centralized person it doesn't matter it's the same equilibria there's just one equilibria which is like whatever they chose to include or not include here there's many some of those equilibria could be worse than the centralized equilibria some of those equilibria could be better and the question is is like how do you constrain the mechanism so that that ratio is kind of well balanced and and like I think that's the part where like economists kind of poo poo crypto in some ways because like they don't see that there's anything new but but like fundamentally I think that's really the thing is that

like you you know your choice of mechanism does change this this welfare Gap you know the traditional Finance welfare Gap is just there's no there's no Gap there's just the one thing that the venue operator chooses MH I add a couple of things to that which is um one I mean is there anything new Under the Sun uh probably or hopefully uh but we also see Echoes of the same thing in in the past so for instance what we call me now there's a version of that that you know well documented version of that that plays out in Trad five which is latency games so uh highfrequency hedge funds pay a lot of money to get their computers as close as possible to the exchanges computers so that they can get

orders in quicker and exploit some informational Advantage it's it's it's I mean it's first come first serve but who gets to be first can be determined now uh by milliseconds or so literally they're like okay we first want a fiber optic cable that goes from Chicago to New York so I can see the quot on Chicago when I trade in New York and no wait actually the fiber optic cable is too slow let's use a microwave that bounces off the Earth and then if that no wait the microwave is too slow let's use a fiber optic cable that goes through the middle of the Earth so I don't have to suffer the curvature um so I I I I would actually dispute and and maybe this is bias because I used to work in that industry but I I would I I would dispute that it's very similar to

muv there's a couple couple reasons for that the first is the fact that you don't control the order types like the CME tells you like here's a limit order here's an iceberg order here's a g yourself Market order and then that's it right like you can't really program that much around that mhm uh you can program a lot around like when you send orders and how you know like how how you aggregate orders but you can't really create new orders and one of the interesting things about me Searchers right is that they like write these throwaway contracts that like try to basically you could argue they're creating order types and destroying order types as needed they're creating SEC security like objects I did not I

did not call anything security uh created security like objects and destroy them and this creation and destruction thing on demand doesn't exist anywhere else and that actually changes the set of kind of out large scale outcomes quite a bit sure and and let me just uh maybe maybe I should walk that back a little bit so um I mean I think a lot of what makes the crypto meev space interesting is there's just such a wide design space there's also a lot of flexibility like it's not an aifi space where like if I had a better Market micr structure and I wanted to propose it to the New York Stock Exchange I I I don't know like I could put together a Consortium of like 50 famous professors with eight Nobel prizes and

spend five years trying to Lobby Congress in the New York Stock Exchange and still get nowhere whereas here it's literally like I call up a few searches I call up special mechanisms group I come up with a few ideas we code up something and it could be off you know up into the races uh you know after a weekend of coding so that that's what sort of what makes it exciting there's definitely a lot more richness in this space but some of the um ideas that sort of how trades happen respond to incentives so so the idea that like if there's a trade on a public menol and it's front runnable someone will try to front run it someone will back run it if it leaves uh an Arbitrage open those things versus uh some uh hft will do a stat statistical Arbitrage between

Chicago and New York I I just feel like at some economic level those two are conceptually similar even if how they play out is kind of different in the mechanics yeah but but I I I still will say and maybe this this is a good way to dovetail into your research the idea that you can create destroy ad remove versus just like here's an interface and like that's it you can't change it yeah um the idea that the the the users are also changing the types of structure that they're interacting with is very different than normal Finance like versus like Tech where it is you know is built off user generated content so the the user sort of influences the network in some ways

that just never really exists in finance to be honest it only exists in the sense that like okay like Yeah The Exchange has like a a board and the board has a bunch of the market makers on it fine whatever okay fine they can influence that a little bit but they can't really influence that much other than like fees and rebates and stuff and it's not like they could like wholesale be like hey we're going to actually get rid of the order book and put an amm mhm and exactly you like something like that can't happen and this idea of user generated Finance is what I think crypto offers that's uniquely differentiated but that's the thing that like the Silicon Valley people don't get is that like it's not that doesn't mean user generated Finance doesn't mean like Minecraft 2.0 is going to come out of

that it might look just very different and they're unwilling to believe that yeah I think that's what what makes it exciting though like this this sort of richness of stuff that you could do whereas everything is aif fi and Tred to FY H I hope I've memd user generated Finance into existence because I I think that's like kind of something that's never you know that's something that the people haven't you know really focused on but it it is a thing that it seems to be what's attractive to to users you just sort of mentioned this like sort of Silicon Valley mentality looking at this stuff do you actually sort of see that where it's like a lot of investment in Tech in the past just had a very different framing than the cryptospace

and all of a sudden it's like now they're faced with trying to evaluate and understand this very different Paradigm where Success is Not based on sort of very quick up and to the left user growth but on something else I think the the fundamental difference between user generated content and user generated Finance is user generated content has this traditional like hey we put in some money do you get certain metrics up like number of users number of clicks whatever number of likes whatever and then based on that we use that as our like collateral to underwrite Future investment right like it's basically like hey like you've it's clearly achieved this ability to do this

with more Capital maybe it can achieve more and then with the idea that like at some point you find a way to turn those views into dollars right like you've basically made a security and I I explicitly think if you're going to count crypto security you should count YouTube views and online know if they want to go a this is a good good way to go after it there's a sense in which user generated Finance doesn't is is actually those metrics need to be the cash flow to them needs to be realized much faster so it's not so it's sort of something that's like in between trading where it's like it's already a

fully liquid asset that you're moving moving back and forth and these kind of like Hey we're Venture underwriting this thing for many years based on some metrics that are non-financial with the idea that like eventually this thing is able to con have some way of making an exchange rate between the non-financial and the financial right in some ways that like I think the the crypto apps are successful somehow thread this needle where they like find a way to to have that type of growth but then all also have a a way find iing it and like that's the part I think the ideal idealism of like the old school view of crypto of like for for privacy reasons or non-state owned money I think that

kind of misses this seemingly weird aspect of how investment Works in this SP but that's also why you got so many of these like kind of bad investments into things that are like hey it looks like a duck it walks like a duck it should be like a normal like Silicon Valley investment but actually doesn't work because it doesn't have a fast Financial ization angle as as you describ this stuff what at least pops into my mind is a lot of the metrics that are being used especially when you have things like airdrop Hunters it's like numbers in this don't mean the same thing but I guess in in traditional like web 2 stuff they also inflated numbers all the time yeah like SoftBank SoftBank filed a

lawsuit uh last week two weeks ago against this this company called IRL or something that was like a social media app that I'd never heard of and not surprisingly it turned out that they faked all their users and then Ed that to to raise money and whatever I mean isn't there talk of like Tik tok's view counts being kind of like fudged as well just to like make people feel really popular like there's no one checking any of this stuff are they well that that's the problem with the the centralized version of this now the problem with the decentralized version is you have no way of d duping right like you have no way of knowing it's the same really the same person 500 times right so the the middle ground will be the thing I think that looks will give you these like Silicon

Valley style things but until then it's only going to be Financial stuff and like you just have to be okay with that but you know one interesting you know to go back towards me one interesting aspect of this is like in most cryptocurrency designs you have a Serial sorry a temporary monopolist like you know the the block proposer or like someone who is making a block or adding a block and this temporary Monopoly is sort of this interesting weird thing that I I I think like you know in the in the case of these you know views and metrics you have this Perpetual Monopoly and the Perpetual Monopoly allows you to kind of like inflate those views and metrics but in these temporary

monopolies it's actually quite quite a bit harder to do that but there's still things that can happen like hey I don't want you to increase your user accounts so when I'm a proposer I don't include your transactions right and you know meses researches on that type of stuff of like even in these decent systems where theoretically The View counts can't be manipulated I mean they you know you can sible by making many versions of yourself but you're not manipulating a single identity you still have some other things that can go wrong so let's dive into that yeah mes tell us a bit about the work and research space that you're focused on sure so I mean I'm focused on a bunch of stuff but the censorship um

sort of question that we started to that that started this all is um like tun said you know we we talk about decentralization and there's we say things like oh like ethereum has millions of validators or pick your you know pick your number and that sounds like a lot and that's it sounds like you're getting a lot of competitive properties and nice outcomes from the fact that there are so many people uh validating or proposing blocks but every 12 seconds there's only one uh block proposer who's out there and that means that for that 12C if you want something on that block for that 12 seconds you got to go through that proposal there's nobody else there's no competition uh you can wait wait for the next 12 seconds hope to find the proposal you

like more but uh you know and and Economist will in general tell you that unless um I I made this comment and got in trouble with my colleagues but unless a monopoly is paying us we think monopolies are a very bad thing so uh un monopolies are paying us okay this is a case where this Monopoly has two properties so one is um and okay so the other thing I heard from someone is that anytime you think of something vitalik has thought of it 5 years ago and in this case vitalik thought of it s years ago so okay um he walks us through this in he has this blog post you should look it up it's from 2015 it's called the problem of censorship and he walks us through a very simple thought experiment

which is let's say I write you an option I will pay you the positive difference between the price of ethereum and 50 $100 let's say 100 blocks from now or 1,000 blocks from now whatever and that means that if if you sign this contract with me I promise we are smart contract that as long as you put in a transaction a th000 blocks from now it'll look up the price of ethereum and if that price is larger than $1,500 it'll take uh the difference and put it up uh you know it'll take that difference and transfer the money from my account to yours now suppose the price of ethereum that day $1600 so exercising that uh transaction in that block is worth $100 to you m

that means you're willing to pay up to $100 to include a transaction on that block right uh if you pay $90 you still make uh $90 as the transaction fee that's the tip you're still going to make a $10 profit the trouble is I'm willing to pay $100 to keep it off that block so you and I are going to be in this competition to get either your transaction included on the block or me uh trying to keep that transaction off the block the person who walks home Happy is the proposer the monopolist who's the only person who can decide whether that transaction gets up on the block or not on the Block they get to you know in equilibrium the price of that transaction or the price of

censorship will be somewhere close to $100 The Proposal makes off like a bandit but the financial system as a whole is not well served because the proposer is taking a large fraction of the economic sort of benefits whatever economic value we were making by hedging has now all been moving moved over to that proposal secondly you can't trust that this uh even getting into this transaction in the first place is worth it to you because you're concerned that you won't be able to execute that option uh thousand blocks from now when the chance comes through yeah so that's sort of the uh problem of censorship that that we started thinking about and we proposed a solution this is with the my colleague at special mechanisms group

Max Resnik and uh Elijah Fox who's at Duality and um we proposed a solution that we called multiple concurrent block proposes it's a solution that works particularly well if um all you need to do is get some set of valid transactions and you're not concerned about how to order those transactions but we use uh principle in Game Theory called the prisoners Dilemma to uh make it so that transactions are very cheap to include but uh very expensive to sensor so that's sort of the high level idea of the censorship problem and what we think about it in that example do sort of those aggregator groups like The Liquid staking or things

like flash Bots do they have any impact or would the individual proposer still be like an individual like and they could use that and it doesn't really matter like I'm trying to figure out if like the existing system that I mean obviously had not been envisioned has any impact on that problem I I can tell Anna that you run a validator because that question sounds like a validator asking that so I mean I you know it's not like I want to point a finger at specific entities I'll say a couple of things one is that the sort of me boost type propos a builder separation it it's a good thing in many dimensions but one thing it does do is it puts an explicit market for this uh kind of censorship so before

propos a build separation in order to keep your transaction off the block I would have to know the validator who's going to propose that block and I'd have to call them up and I'd have to say make sure Anna's transaction doesn't hit that block but if I'm uh now it's you know post proposable Builder separation I just need to you know fire up a builder and propose a block that doesn't conclude your transaction and is willing to pay more than any block that includes your transaction yeah and uh we actually did a sort of at special mechanisms group we did a little um toy version of this demo uh a couple of hours of Builder time uh put together a little Builder and uh for $100 and plus the value of a few hours of builder of our

Engineers time we literally won a slot and uh it's a blank slot I can send you the number for the show notes later but it's a blank slot and all it contains is a name to the first sensor of Rome as a block graffiti and uh a link to our paper so we sent in an empty block basically an almost empty block only one transaction which is the payment from the Builder to the proposer and uh the name of the first sensor of Rome as as your graffiti yeah and now I mean you know the attack sounds like a bit you know it was almost a prank so it's not it's it's not like this is meant to demonstrate a serious attack on ethereum

but imagine if we had done the same thing we had included 100 50 other transactions could have included 150 first but just chose out of spite to leave out your transaction Anna you would never have known or nobody would ever have noticed that this uh could have been done Anna's transaction could have been on chain but the Builder that was uh in charge or the validator that was in charge chose to censor and that's sort of I think part of what we view as the pernicious uh sort of problem when you don't have censorship guarantees you you know people ask have you seen this kind of attack in the wild and part of the story is a you wouldn't see it we don't know if if we don't see it exactly

um that's part one and part two is we don't know what else or we have some thoughts about what else is happening because people are concerned that this censorship attack is a theoretical possibility so in terms of what kinds of mechanisms are people trying to run on chain they're trying to run on chain mechanisms that they reasonably show will execute in a faithful manner given what they understand about the Dynamics of the chain that's why you see more and more like you see a few things on chain you see gradual Dutch auctions on chain but you've start you know after a few original liquidation auctions that used to happen on chain you don't see ascending auctions in a liquidation

auction on chain you either see some of these things offchain or move to other faster more you know things that are reasonably sure will work in the light of these kinds of censorship attacks if that makes sense the person who got censored might notice it right they might notice especially if there was any sort of like bet or like you know block mentioned in something yeah they they they might notice it they might say hey I tip I was willing to tip a lot cheaper transactions got in there was still block space available but uh you know if you're talking about time sensitive transactions what are you going to do about it like I describe this as like oh this is an option that has to execute in

that block but that's just a thought experiment there are lots of things that are time sensitive for example a lot of Current financial activity is what's called sexex ARB so Arbitrage that tries to use prices that are coming from traditional centralized exchanges and use them to trade against Unis swap or other pools on chain and if you don't get that transaction in you know 12 you got 12 more seconds and the price might have moved quite a bit on binance so that's sort of the issue could that be happening is there any sort of like game happening where just like certain me folks and Traders hate each other and are kind of like tracking each other's

activity and constantly kind of screwing each other up is that possible a lot of the top Builders are Searchers and Builders so like ostensibly that does happen but it happens from the form of like hey I want this Arbitrage transaction and in my block I'm not going to include yours like why would I include yours because like I'm doing the same transaction exactly and and just I mean like in in a separate paper we talk about these ARB transactions and so there's one so these integrated Searcher Builders so they have a Searcher and a builder and what they do is at the top of the block they put their Dex ARB sex Dex arbs and then the regular transactions go in the bottom of the block now uh one of the blocks we pointed out to in this paper the first

37 transactions were all arbs to different pools and different tokens by the same me bot so in some sense this is not censorship but you know already what you said has just happened because it's unlikely that this particular me bot was willing to pay the most for every one of those 37 arbs it's just that that me bot is owned by the same person who happens to own that Builder and just put all of them at the top of their block so there there's an inefficiency in terms of block production that then dis engenders down the road got it when it comes to censorship I mean there was another example that we did talk about on an episode with Martin celan this had been around the time of the tornado cash case and ofac bringing

its sanctions against that smart contract yeah in this case it was more about like excluding addresses right it was certain addresses that were like on a list that were meant to be disallowed and this really had more to do with like flash Bots or an meev system an me piece of software that could then censor does this Factor it all into your work is this something that you're also thinking about so our motivation was not that form of censorship our solution we think to the extent that you want to uh reduce censorship coming from other agents regulations uh regulatory bodies the kinds of designs we proposed are just

resistant to all forms of sensor censorship it's just the our motivations were these time sensitive trans censorships rather than uh the sort of OFA saying that certain accounts just should not hit uh the chain and what that results in is like a whole bunch of validate uh proposers don't look at those blocks at all yeah but your solution actually would help that how does that work so it would help in the same way I don't mean to claim that this is sort of a turnkey solution out there uh ready to go it would help in the same way it helps against this form of sens against the forms of censorship that I described in the sense that what the solution does is it has multiple proposers simultaneously so a block is

not a single block it's like the union of n blocks that are proposed by n independent proposers and the way tipping works is you propose two tips so you propose one tip which is the tip that you would pay a proposer if it's the only person to include you and that tip could be large and you propose a much smaller tip if multiple proposers include you so this sets up a prisoners dilemma between the multiple proposers who are all independently trying to decide which transactions to announce so they they would all sort of uh choose to include transactions because if they're the only one they're if they're the only one they're in for a nice uh exactly they're in for a nice little Bonanza huh

in this case though like in your system you could actually be running a different kind of software then yeah it just needs to be end different block uh and different blocks it could be that you use meev boost and someone else uses something else um someone else is like a literal you know old school validator who in 12 seconds calls up other people and says hey what transactions do you got for me uh all that's fine but I think you almost have the analogy right but uh the the thing I remember that was hilarious now I'm sure luckily no one with a brain who listens to this podcast is big cardano whale so I can make fun of them as much as I want here uh whereas on this other podcast I'm on anytime I do they come attack me on

Twitter uh the cardano mafia but there was a time when like cardano's uh utxo system had some issues because it like locked state in like their Unis swop the first Unis swap clone they had and uh basically there's only one transaction per block so people were like on Discord trying to like the proposers would be on Discord being like hey like running an auction in chat for that one particular slot so it it is basically what you're saying except it's a Discord chat not calling out yeah yeah this and and these things I mean yeah they happen I remember one of my

first sort of people who talk to me about mechanism design was literally concerned about hey you guys do all this mechanism design and you're concerned about you you think about like efficient bidding and competition but we have all the people who are going to be bidding in this auction they're going to be on the same telegram chat and they're going to be talking with each other and we're really concerned about like the fact that these people have a side side side Network to sit and swap notes with so yeah so one tradeoff I think that maybe is worth highlighting about trying to do multi- proposer is like the extra communication complexity and like latency issues so like you're sort of

inherently introducing Some Like O problems as you pointed out earlier of like well now I need to coordinate the proposers so that they can each coordinate like the segments of their blocks or the lanes of their blocks and then that now adds in some extra overhead maybe someone could dos them and then slow you know cause a view change like like in B bft so like how do you think about the tradeoff and sort of some like like bounds on how well you can do in sort of the Practical environments because inherently right having multiple block Builders compete is not that bad latency wise but having multiple proposers have to handle multiple auctions and then merge them

turns this into a combinatorial auction versus like a single item auction and you know we know all the bad results for that so like what what's your sort of like response to that my part a response is I'm an economist so I no but uh I think economists have to care about practicality too you know it's 2023 2023 exactly no I wish I could I okay and um I think my more serious answer to that is I think this is useful for some part so we've been talking and we've been trying to think about can we can we take these ideas and we don't want this to be it's also like with all that added uh communication complexity it feels

like it would be a waste to use this for a blockchain because you've done all the work to engineer Up N separate block uh proposal but then you're not at least in equilibrium you're not getting a lot of extra bandwidth you'll get the same top end uh tips included in a censorship proof way so you're sort of killing censorship proofness with a very strong Hammer uh and and you're suffering a lot of other commun you know communication complexity cost attack surface in terms of equ equivocation to make all this work uh we think it might be useful for things like uh that this design might be useful for things like EPS so how to get in the set of uh blocks that people should be sort of considering or how to

even get in the set of transactions that should be part of the common me pool before you do a sort of block building competition on top of that so that's that's the part where we're hopeful this could be useful for uh something that's core and somewhere where having some common knowledge of a set of transactions is more important than the underlying communication uh this brings me to my my natural next question which is you know the place where we do have this type of partitioning showing up at least in ethereum land so like let's ignore other l1s because they'll all get anger at me somehow for missing some design detail that is probably irrelevant to the mechanism question but whatever is uh rollups because rollups

effectively right now you could argue their sequence are sort of running effectively an auction I mean right now they're not exactly doing it now it's latency based but like but then the rollups have to get matched you know have to have some interaction with the L1 so there's this question of like I have these two separate auctions arguably the rollups are taking like part portions of space of the main block so like Suppose there were no transactions to main net M and it was only roll up transactions now I can split the block into like each rollup set of transactions and the between rollup ordering doesn't affect the rollup execution and so now you could argue

that hey maybe maybe the rollup sequencers are your multiple proposers like they act as that instead of having the raw prop because they're already the ones kind of like handling that so if you there's sort of this interesting weird dichotomy where like the rollup sequencers could be your your your multi- proposal in some way that's interesting do you think of that especially when you start to decentralize them so you'd have these different exactly exactly that that's sort of in some sense I would argue that's like the real benefit to these decentralized sequencers I think everyone else's if if we if we're reading between the lines of everyone talking about decentralized sequencers all of them are just thinking of it as legal cover my ass for my token but like

if we get past that part it it is actually could provide this censorship property which role does the sequencer take here the Builder the proposer like they well one of the proposers right like assume assume every like let's just say I have like every block let for Simplicity I'm choosing simple numbers but obviously practically you have to be much more careful where like onethird of every block is optimism one third of every block is arbitrum one third of every block is ZK sync and they're each about on the L1 yeah on the L1 and like each of them acts as a proposer only for their subset right and so the the chosen validator The Chosen sequencer at that moment yeah if there's like a decentralized sequencer system is acting

as the proposer on the on the L1 yeah and and I mean the part that I guess I'd have to think about is sort of you as the user who wants to get your transaction and for all these guarantees to work you as the user have to be sort of indifferent at that instant on of doing your transaction on arbitrum versus optimism versus ZK sync so you'd need to have sort of the same appropriate bridge that if you were doing an ARB of some sort You' need to be able to do it you know if you were doing a sex tax ARB you should be willing to uh execute on any one of the three and the three should have like a closely synced State something like that so that you're indifferent on which one you show up I guess I was thinking about this more as like the proposer not the

app you're thinking of like oh the trader I'm saying the if you go one level up where does the trader what does the trader need to like the trader need for multiple concurrent block proposal it has to be that you don't care which proposer includes you as long as at least one proposer includes you so if you're thinking of the three l2s as the three um concurrent block proposers you need to be willing to have your transaction executed on any one of the three at least right I I think like I see why you're saying that for the analysis like to to use the same proof you Ed but I don't think that's the pract the in real life thing though I I think you would have to analyze it you'd have to like analyze it differently where you assume assume that they they like the arbitrageur have some amount of

eth or whatever they're let's just say eth and usdc on each of the rollups and can do this equally like I agree that the doing the rebalancing of like where their balances are will make this much harder because like that involves a transaction that may have may have to inure the withdrawal period and all this other stuff so but like I I get what you're saying from the to try to use the same methodology but I think like I suspect the the more useful kind of version of this will have to have a slightly more General threat model fair enough I think the the the main you know that's a very very simplified model right obviously like the percentage of each block that goes to each roll up

varies over time the amount of ARB that's actually to main net also exists so like it it's competing with those three but I was just trying to give like idealized setting in an idealized setting M you could imagine something where your multi- proposer thing really comes from and ironically this is sort of what some other lir ones have had proposed but for very different reasons under the name of like fishermen or caters or whatever but then all of those things didn't get used in production because they kept causing liveness failures because like they you like they weren't able to synchronize fast enough and like they they had all these like latency bandwidth trade-off problems you think is that a prediction for the future then do you think the same kind of problems could happen well we're kind

of going into a world right now where people want all the stuff that is getting rid of like liveness guarantees in some ways like intense intense are effectively no liveness right like the market makers all drop out they don't fulfill any orders because they're like ah the Market's too crazy well you've lost liveness your transaction is not going through right so the question is like how much we do this trade-off of like liveness of like the network versus kind of like these other properties you might want like better settlement or censorship or dot dot dot right and like I think it's it's always going to be this kind of experiment um I was just kind of proposing that the rollup sequencers already kind of serve as pseudo proposers for the at least in some ways so like yeah using their already the

fact that they're already doing that might be one way uh of doing this and and you could argue EIP 4844 is like a a poor man's way of doing it or dank sharding is sort of like a closer way of doing but but but there is some sense in which all of the reasons people wanted those are for purely State efficiency reasons but You could argue that they maybe provide censorship benefits so you know I think uh as you can see there's like a lot of concerns with this type of stuff right there's the economic concerns of censorship there's the Practical concerns of latency and bandwidth and implementation you know just like you're talking about with mechanism design where you had all these different you know types of parties involved in

research so maybe we should turn the mirror on crypto and say what do what do the people who are doing these kind of interdisciplinary research on the outside think of of crypto well it's sort of the current view outside of probably a scam so there are it sort of splits into few sets so there's the people you just said probably a scam uh there's definitely a sort of I'd say the silent majority unfortunately is people like that or at least people who are broadly like this sounds interesting but I don't know what this does that I can't already do and and those are people who are waiting for somebody to come up with an application where they're like this is

how it adds value to my life or adds value to you know some demand case that I hadn't thought of um I think the interesting set of people uh there's there's a growing community of people within econ especially within economic theory uh mechanism design people like that uh who view this field as a Full Employment Act for our people so uh there's there's you know there's a growing is is Roosevelt that's what you're saying Full Employment Act literally means that there there will be I mean jobs there will always be jobs until me is solved or until and and you know every use case generates new forms of me we can't solve meev problems purely

based on like throwing more cryptography at it or throwing more alisation at it that might be part of a toolbox but you also need to think about the incentives of all these parties and decentralization means there's a lot of parties involved there's the user there's the wallet there's uh the Builder there's Searchers there's the proposer that's the validators you need to align their incentives and uh who better than a bunch of mechanism designers so there's more and more people who's uh who who've seen through seen this and are sort of hopefully seeing interesting questions along the way mes I want to say thank you for coming on the show and sharing with us a little bit of your background the work you've been doing the research you've

been doing and yeah helping us sort of tease out a little bit more on the me front thanks for having me on thanks for coming on I uh you know I think one thing I'm left with at the end of the show as I always feel when I think about the censorship problems due to me is that I still feel like there's not really a good solution but it's good to it's always good to kind of go through the idea Maze and then realize that it's probably yes like you said a Full Employment Act in that each each time you hit one thing and you you know you you you put you play that slot machine in the meev casino somehow you've changed the reward of some other slot machine and then like when you get there you're like a now I got to go build

a new mechanism I think what's interesting is vitalic thought of this like it's literally there in his 2015 blog post and then no one was really concerned you know people started getting concerned about censorship from the ofac angle but how much has this sort of censorship affected what we've actually done on chain like you've thought about it I know you have but I don't know how many other people were actively thinking about this until it sort of come front and center this year where people are thinking a lot more about onchain mechanisms and uh how they interact and you know all the stuff that's coming with down the pike with Unis swap V4 Hooks and all the spaces of me all the sort of richer design spaces that we now have available to us well I

I also think it's more that people realize that onchain transactions are real and uh centralized transactions may not be real and so now people are valuing them a lot more in that sense depending on when the SS that's good well no I I'm really meaning like I'm really meaning like FTX right like in the sense of like the fact that they wrapped Bitcoin didn't even have the Bitcoin behind it is like still my favorite is my like like I think people value onchain transactions more and they're realizing why and so that's why I think this is becoming more important and that's why we need to hopefully like you said we're not going to all these questions but at least think through them carefully and work out where we want to be on the tradeoff space interesting all right thank you again

thank you and I want to say thank you to the podcast team Henrik Rachel and Tanya and to our listeners thanks for [Music] listening