Espresso co-founder Jill Gunter recalls Ethereum’s ICO token heyday, when she first tried to buy into a token sale.
Comparing the experience to the ruthlessly competitive efforts to acquire Taylor Swift tickets, Gunter felt compelled to “keep putting in higher and higher fees to try and get my transaction actually accepted.”
Gunter says it was then that she realized that the nodes running Ethereum were operated by “actual humans,” who could insert their own transactions and front-run the crowd. “Or, they were just asking for astronomically high fees in order to get your transactions into the system.”
“I thought that this was a fair, decentralized system,” she says, “what are the dynamics at play here?”
Speaking to Chase Chapman on the On the Other Side podcast (Spotify/Apple), Gunter delves into the complexities and pitfalls of Ethereum’s transaction environment.
The ICO token sale, Gunter says, was her first interaction with maximum extractable value, or MEV. It’s a buzzword, Gunter explains, that describes the value that participants operating the system can extract from it by ordering transactions in a way that favors them.
Naive crypto users might imagine transactions entering a waiting room and then getting picked up in an orderly manner, Gunter says. In reality, she explains, certain network participants can insert transactions between multiple sets in order to capture arbitrage between two decentralized orders or frontrun a transaction if it’s set at an unfavorable price.
“You as a user,” Chapman adds, “are now having to deal with, basically, miners who should be relatively neutral but are no longer neutral because they’re playing this weird meta game.”
“What does it mean that they should be neutral?” Gunter asks. “Part of the reason why this works is because there’s this game theoretic around this.”
“There are these surprise dynamics that then we have to figure out,” she says. “As the architects of these systems, how do we want to approach this?”
“What we’ve seen crop up are all kinds of approaches to mitigate the negative effects of MEV, this notion of extractable value from smart or clever ordering of transactions.”
Gunter mentions the example of specialized actors who build blocks and order transactions in a way that makes “maximal economic sense,” performed independently from nodes in a process called proposer builder separation (PBS).
“There’s an interaction that happens between the builder and the proposer now, and this is actually the case for how most Ethereum transactions work today.”
“I’ve been lied to all of these years”
It seems counter-intuitive, Gunter says, “because you might hear, ‘Oh, there are these specialized players who are just taking all the value.’”
But the idea is to figure out how to make the system as efficient as possible, Gunter says, and then determine ways to redistribute that value back to users while combating monopolistic tendencies.
“When I first found out about this, my mind was blown,” Gunter says. “I was like, ‘I have no idea how anything works.’ I’ve been lied to all of these years.”
“It’s not actually that nefarious, rest assured, but this is indeed again, how most of Ethereum actually does function today.”
Gunter acknowledges, “there are no perfect solutions to this that we’ve come up with.”
“We have this decentralized open source financial infrastructure that we’re building,” Gunter says. She contrasts the open transparency of Ethereum development with the “Wall Street Flash Boys dynamic,” where no one knew that a few specialized firms were secretly frontrunning the stock market for years. It was this phenomenon that inspired the name of MEV mitigating organization, Flashbots.
“I am very glad and grateful that all of this research is going on and that these issues are being addressed and discovered out in the open.”
Chapman observes the double edged sword nature of transparency in blockchain. “So many things in the crypto ecosystem are so transparent that sometimes it feels like we have way more problems than anyone else does.”
“But really we just know. We can all see everything. All our shit is out in the open and everyone’s like, ‘that is not great.’ And I think that does push us forward.”
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