How MEV can help DeFi instead of destroying it

Transcript

[Music] foreign [Music] we need one of those too hi everyone I'm URI clarman I'm the CEO and co-founder of blocks route thank you everybody for coming and today we'll be talking about how maybe Mev can help defy instead of destroying it and we're going to use a bunch of memes because it's fun but also it leaves the right mental model in mind

but before we get started why even listen to me um so I've been in crypto since 2016. um I took an academic idea blocks route from my PhD thesis and created a company out of it and blocks out is a major actor in D5 and Mev in the last bull market we were routing for our customers something like one and a half billion dollars of Trades per day that's like 40 of all D5 that was happening on all chains um we built front running protection before flashbot even existed we run in Mev block Builder we run an Mev relay we

work with Searcher we work with D5 Traders anywhere from jump and winter mutant GSR and you name it to a solo Searcher in a basement in Taiwan that and anywhere in between but beyond all of that I really care about D5 okay I think Defy is important I think we need a global always-on transparent single um Financial infrastructure and we can't mess it up and so I want to start with my issue with Mev and my issue with Mev auctions specifically

it really came to my mind um when FTX imploded okay FDX imploded it took a bunch of C5 actors with it am I a hot no it's fine it took a bunch of C5 actors with it not defy actors but it did make me realize that defy did fail okay D5 failed to be good enough okay it failed to be an alternative so people would go and use D5 products instead of keeping their money in FTX Mount gox if you go back enough and so the end the reason that they kept their money there is a bit bizarre like we all know exchanges blow up right it's no surprise we've been

here for long enough and so if you think what do we need in order for D5 to be successful and actually compete with C5 not just be you know a cartwheel running behind Z5 defy needs to be useful now if I take a thousand dollars and I want to buy if I don't need to be faster than jump okay or winter or whoever I don't need to identify the Pico second that the price just went down slightly and make the best trade I'm not looking for that but I do want and I do need to get the current correct price right I don't know what that price is I don't have five monitors looking at all the different

venues all around the world and how they're volatile and whatnot I don't know I don't care I want to give a thousand if sorry a thousand dollars and get Eve and I also don't want to get front run I don't want the carbon correct price to change because I'm about to make a trade if I can get that from D5 then thank you very much but I'm staying with coinbase quite literally okay why would I buy Eve on uni swap or wherever if when I go to coinbase I know there are arbitragers if the price is off they will immediately correct it I know I always get the current correct price and this is where it goes to the Mev auctions okay MAV auctions are a negative sum game not a zero-sum game

they're a negative sum game because validators try to extract as much value as they can from D5 users and D5 LPS okay Mev isn't money from thin air okay this is money being taken from somebody and if validators extract that value from D5 users then D5 is now worse it is less useful than what it was and if it's less useful and is worse that's going to have less activity and less liquidity and funny enough the validators are actually going to end up with less Mev because we just shrink the pie so you really can think about it that in auction what an auction does is

that it maximizes the slice that the validators get right there's an auction somebody offers me this amount somebody up tops him and I will take eventually the validator extract most of the value but in the process of running an auction we make the pie a lot smaller now avoid Trad fire latency games has a really nice ring to it okay I actually believed that for about a year a year and a half okay it makes sense we're building defy it is a new system we don't want to rebuild the D5 sorry rebuild drive fight it's bad there are all these high frequency traders who are

expecting money and front running actors and it's closed and it's not open for everybody so it makes sense that we don't want to rebuild that but what we end up really building is a system which on the one hand is slow and less useful and on the other hand normalizes front running so the bad thing about Trad five the really bad thing isn't that it's fast isn't that there are arbitragers it's a good thing that they are Arbitrage but they make sure everybody who wants to trade get the car in correct price the bad thing is somebody sees your trade and gets ahead of you and now we're saying oh that's fine that's part

of fly like this is part of the model but I don't want slow less useful defy with front running I want to get the current correct price when I'm Trading so I honestly think even though there are a lot of great people who I really like are working on Mev auctions Mev auctions are pushing people from defy out to C5 okay they maximize the validators slice but making the pie smaller and they make defy less useful and as I started by saying this is serious stuff this means that in two years we're going to have another FTX

okay if we continue down that right nobody is going to use D5 by default because it suck and they'll stay with that and we're going to have run through the same story again now I want to give an anecdote about Bitcoin about BTC it doesn't matter if you like it or don't like it if you think it's a pet rock or it's awesome it doesn't really matter but if you look at C5 BTC volume is twice as high then each volume okay there's a lot of activity there but if you look at D5 half a percent two percent of that volume trickles into D5 the rest of it is happening on C5 why why do we see activity and liquidity of Eve if usdc it is the largest for

half of all D5 activity is that units were poor each USD C5 basis point on on uni swap because this room is filled with etheads who are like Eve and like D5 and want this to succeed and willing to try all sorts of stuff so we take eth and wheel p and we try all sorts of stuff so there's some liquidity but we see that BTC holders do trade it it's not about hodling and not giving it away they do trade it but they trade it on C5 because it's useful it's better okay if D5 was better if Phil ping was actually very good people would take their BTC rapid to wrap the BTC or something and use it in D5

not because of an agenda because it's better because it pays better so to summarize this and I really like this picture Okay auctions maximize the value that validators get and PBS make sure that that value doesn't stay with the evil high frequency Traders no no it goes to the validators and we have MF burn coming up soon probably if where's Justin I don't see him here all that means squat two D5 users okay that's money that's being taken from them like well let's redistribute it it doesn't matter how you redistribute it you make D5 worse now you could come and say well Ori doesn't Mev add something even so like what about Jeep liquidity just in time

liquidity somebody is about to make a trade and then somebody puts the trail the more liquidity into that so jit liquidity is strongly adverse selecting okay when would you counter trade somebody else when that somebody else is making a terrible trade okay so you'll get liquidity for all the bad trades that trade in the wrong direction but if there's a trade in the right direction nobody will add liquidity there and make a bad trade on purpose it doesn't make doesn't make sense so you'll have liquidity standing on the sidelines not really participating and only allowing for bad trades to happen and if you go towards well what about

yes there is front running and we normalized it but I make a trade and then I get an Mev rebate I get some of that money back isn't that good enough or what about intents like I want to sell a thousand dollars and I want to eat in return and try to get as much as I can all that really boils down to an RFQ system okay request for quote and if you want that we already have that shout out to Hash flow I don't know if Victor is here somewhere okay cash flow takes winter mute and jump and anybody who wants to participate in GSR and whoever and pit them against one another and whoever would give you the best quote they would give you that you can get an

RFQ system and rfu systems are great for some purposes okay they're great if I am a user and I want to make this thousand dollar for for Eve but always always always RFQ systems are indirect defy and they'll be worse than direct D5 like markets like clubs like like amms because whoever gives an RFQ has to make a profit right they'll give you an RFQ and they'll trade it on the other side on the real you know C5 on binance or coinbase or wherever so they will make a profit and you need to also compensate them a bit for the risk so by definition this thing would never compete with C5

it would keep defy as a side card to sorry it would keep D5 as a side card to C5 see if I would be the real thing where things are happening and D5 would be the side guard we need direct defy so this part was oh boy do I hate Mev auctions okay smart ass you said this is bad but what are you actually offering an alternative to that here's the idea what if we offer validators instead of capturing most of the value out there 90 of a small pie whoever then well you capture some half 50 of a much larger pie 10x hot bigger 100 x bigger

and to set the mental model right around it we're talking about very vanilla ethereum okay there is no meta transactions which are being auctions to Searchers who then create bundles which go to block builders on an Mev focused L1 or something like that like no validators buildbox the good old way and I want to talk a bit about okay where I'm taking it I'm not starting here but they're like What's what direction am I taking us in this in this proposal that I'm that I'm giving here validators build blocks okay no relays no block Builders no other l-1s no token nothing like that validators build

blocks users make transactions no meta transactions no protected rpcs no private order flow no auctions pretty simple and validators make more money offering services to these users then they would if they were front running them and extracting value from them and when I say Services first and foremost I mean instant inclusion which I'll explain in a second there are other services as well think like real-time trade routing a few other stuff but we don't have time for that today so we'll stick with the first and

foremost instant inclusion what's instant inclusion think about it that the validator receive transaction and in real time provide pre-confirmation first come first served Fair ordering transaction come and this is one and this is two and this is three and this is four and this is five no sure Ori but that doesn't solve the problem of Mev because if the validator would see a transaction that's about to buy eth for a million dollar it would inject their own transaction we're back to square one it will try to take advantage of that transaction so we talk about something that Ari Jules from Cornell built it's called famous okay Themis is a very simple

system I'll call I'll outline it in in three um sentences the idea that instead of the proposer organizing the transaction in a block the proposer only gets to aggregate what all the other validators saw so all the validator C transaction everyone say oh ISO one two three four five sign it send it to the proposer this guy saw one two three five he didn't see four so we sent that and the proposer can play with that it can only aggregate what the majority of the network had seen with signatures and whatnot Etc it can play with it and putting my networking PhD hat on you could also use such a system to

completely prevent front running by broadcasting transactions slightly smarter okay if I want to make a transaction I broadcast it to all the validator but instead of starting from the closest one I start by sending it to the one who's on the other side of the world and gradually send it to the other validators over a course of something like 70 80 milliseconds why 70 80 millisecond that means that if I'm getting to my the closest one and that guy is a jump okay he sees my transaction pick a second after that he took that he created the front running transaction he sent it as fast as humanly possible to the other side of the world my transaction has a 70 millisecond advantage over him he would

never beat me light of speed is playing in my part you can't beat somebody to the other side of the world if he started 70 80 milliseconds ahead of you with at least a basic routing and so if you actually go to jump crypto and look at their website Jump's largest obstacle is the speed of light you can learn if there's an exchange one here and the other is there they could only go at the speed of light between them there is something that they cannot solve so taking a step back for a second but the high level idea validator build blocks um users send transaction with some smarter broadcast and validators capture bases when they're being paid for this

service why would they accept transaction like that because they're being paid now you could ask is it worth it would it pay more than just like front running the users should they do that and here's why it makes sense I wonder if this works by the way let's see if I click it no it's a PDF that animation died um there's a lot more activity something like 10 times more activity between the start of a block and the end of the block or during that block then if you just look at the start at the point and look at the Delta so if you look at the example here you know price started one then it went down it went up it went down it went up it went down Etc and eventually finished five and a half

basis points later and then in the Mev auction somebody would send a transaction would capture that Arbitrage that validate would capture more of that and it would let's say the value they captured 90 out of that we'll see in a second why that's not actually true but let's say that they're getting it but if you have 10 times more activity happening there later makes money on all these trades going up and down and up and down and up and down not all the money some money but there's 10 times more activity then it just pays it better so for the lp if you're lping in such a system instead of making one terrible trade every 12 seconds you make a lot of Trades a lot a lot more half of them are

actually good trades because price went up one pressure now eventually it will go in One Direction or the other and all the buys you went in that direction were actually good ones if you look at the user if you have arbitrars as price goes they keep correcting the price price go up they buy price go down they sell and ET certain correcting the price then you as the user can get your current correct price I send a transaction and I know the price that I'm going to hit is the correct one because if it wasn't correct somebody would have sent a transaction to capture that Arbitrage you'll also get immediate result you send a transaction you actually know what you got back you don't get front run validators make more money because you get more activity and more activity

and more than anything else I think the thing that I really get excited about is that it changed the Dynamics between C5 and D5 right now difa is a side card being dragged by C5 so C5 moves in real time price always changes all the time and then every 12 seconds D5 changes and kind of okay catches up if defy moves with instant inclusion then all of a sudden this is bi-directional just like some the price on coinbase effect binance and binance effect core invest in the effect okay D5 all of a sudden is an equal member there if somebody somebody buys on D5 it changes the price it affects others it's not the side card it's in equal points or in equal position as the rest of them

now stop here for a second all of that that I just talked about doesn't mean anything if validators don't make more money if validator make more money this way then they'll do it because they'll do what makes them more money um the guy from DVT before that kind of mentioned it validators don't really have a choice they will extract as much money as they can because if they don't then people won't stick with them they'll stick with somebody else who has 0.1 more higher apy so they will do whatever pays them the most they're good actors they don't want to screw over users but sometimes they don't really have a chance or sorry a choice so the question is does it really can it

pay validators more that's the only question now if you look here this is coming from Frontier who are awesome and Jeet and um Stefan who I love both um you remember that we talked about that like well you have an auction and it maximizes the value that validators are getting turns out that's not really true okay if you look here at the red line behind me that or the that's the atomic Arbitrage okay there is some opportunity that everybody are competing with it about it it's super competitive and people out beat one another and validators capture 91 to 99 off of the valley but 60 off

um Mev is actually C5 D5 Arbitrage and C5 defy Arbitrage is risky and it requires capital okay you don't know that you're going to win you're going to have to make a trade on C5 and you're going to make a trade on D5 and turns out that they only pass 55 percent on average of the Mev to the validator so we built this whole Mev auction thing they don't even validate or even capture all the money validate or make if you kind of like round it all up something like 66 of all the value so first of all validate don't make as much money as you might think because most of the Mev is c5d5 arbitrage and just half of that money goes to them

now the second point is if we build this and it's useful then we'll get more liquidity and more activity the more liquidity and more activity you have if you think about like validate or mental I think they Capture One basis point we get more liquidity we get more activity they make more money if we double the amount of liquidity they double the amount of money that they're making if we make the pie bigger 10x 100x that's way better than capturing 50 rather than 66 percent so the only thing that matters is whether validate would make more money this way staying with a Metallica theme enter sandbox okay

I was trying to think can we try this forget about them is forget about decentralization I don't want any of it this is like next year or two years or something can we do a POC can we check whether validator actually make more money this way so I was thinking about can we stand box a market outside of the Mev auction and I came up with all sorts of ways to do it and then uni swap came with hooks like wait I can use hooks hooks could pay to a validator hooks would decide on whatever fee you want really exciting stuff and then I realized that ambient already have all that on maintenance so ambient is used to be Croc swap I'm very glad that they

changed the name I kept conflating it with cow swap ambient hand swabs and the Singleton and built-in order limits and Main and it's already live on mainnet and it's open source and it's kind of like I'm not invested in any of it I like like this is great we could play with this so I decided this is what I'm working on and I'm hacking with the with Doug and the ambient team currently on testnet not on my internet yet we stand back two markets okay if usdc and BTC usdc and we create a sequencer just like an L2 sequencer which decide the order and do first come first serve and it pays three basis points to the LPS and it pays half a

basis point to the validator so this is on top of the Mev auction okay there's the MVP auction but we just sandbox a piece which nobody can touch outside of the sequencer and let's see how much money this thing pays so without this still yet being on mainnet we're like okay who is this valuable for well if we build this and we add liquidity here users from the get-go get 30 discount why because it's three and a half basis point sorry 30 percent discount on their fees so instead of paying five basis point fee they'll pay three and a half basis point fee so from the get-go it's better for them but also this is real time so people Arbitrage

that will keep correcting the price they get to the current correct prices send a transaction to the sequencer the sequence they say oh it got in here are the transaction here are their order they would know whether the transaction executed or didn't execute it won't be front run it's great for users for validators also great why because it's on top of the Mev auction we're sandboxing it and in addition to any money that they're making in the Mev auction we're trying to show that this pays better so they'll get more money from this sandbox they get a sustainable model so instead of like right now you're seeing it already validated used to take all the money and

now you say oh no I want to take some of it back and protocol try to and the Mev that values are getting is declining so it's a sustainable they get we did a simulation around it they should be getting something like 15 of what uni swap LPS are making right now something like 40 million dollar per year if we add BTC in there maybe it's 80 million dollar per year if we make it to double the liquidity because it's useful then it maybe it's more really should be great for validators okay let's 10x D5 for the LPS who are actually paying for that because there's so much more activity if you just look at the toxic order flows the bad trades you already see that

they're making 20 more fees than they would in the eth usdc 5 basis point and again that is the largest most active biggest piece of of D5 out there um non-toxic order flow should be even higher skipping for a second just because we're at the end there are all sorts of weird implications for that if again we need to prove that this pays better but if we do this we don't need PBS okay PBS was only designed to validate or big and small are on the same level but if you just order transaction you don't do anything fancy we don't need PBS should this happen on L1 or in L2 well this is a lot of volume maybe you want it on L2 but maybe validators wanted on L1 maybe one users

want the decentralization of a theory maybe they want to keep it I don't know what about MF burn there's a question and so really reaching to the end of the presentation thank you everybody for being here the question is are you joining me on this okay like we're doing this I don't care if you jump you're not like we're doing this super awesome and the idea is to make defy compete with C5 there is tons of way to participate in this okay you could add liquidity if you're working on an L2 and you want to include that in yours if you're a protocol whatever if you have a cool idea of additional Services whatever I'm super pumped about it this is going to I assume it's going to make big waves anybody who wants to jam on this and think about cool ways to use it and improve it or honestly if you

have some ether usdc or or BTC and say well I'm willing to chip in and add some liquidity to jumpstart it that'd be awesome thank you everybody just on time [Music]