Writing

Tokenizing MEV

September 08, 2021 | 6 minute read

Today, I am excited to announce that Multicoin Capital has led a $17.4M round in Eden Network, alongside participation from Jump Capital, Alameda Research, Wintermute, GSR, Defiance Capital, and Andre Cronje, the founder of Yearn.Finance.

Ethereum block producers (i.e., “miners” in proof of work, “validators” in proof of stake) have two major powers: the ability to select which transactions are included in a block, and the order of those transactions within the block. This power is the source of what is commonly referred to as “M.E.V.” or miner extractable value. MEV on Ethereum is estimated to be greater than $700M since the beginning of 2021 and naturally grows as total DeFi activity on Ethereum grows.

MEV is expressed in many forms. The most basic form of MEV is arbitrage between decentralized exchanges. If the price of an asset is different between Uniswap and SushiSwap, there is a guaranteed profit to be made by the first trader who can execute the arbitrage. The block producer for each block chooses which transaction is going to be first in that block and can decide who will earn this arbitrage profit. MEV can be defined as the sum of guaranteed on-chain profits that block producers can claim.

Simple arbitrages like this are considered “beneficial MEV” because they promote the healthy functioning of DeFi markets by keeping prices in line between exchanges. This is in contrast with “malicious MEV,” such as "frontrunning and “sandwich attacks”, and other tactics from the high-frequency trading world. Another form of malicious MEV is called the “time bandit attack.” This is a more advanced attack where a block producer (or cartel of block producers) re-orgs a blockchain to capture MEV.

Malicious MEV has massive negative externalities. It makes the whole system less secure, less stable, and less efficient, and is purely value extractive. If left unmitigated, it will likely pose a major obstacle to the widespread adoption of Ethereum DeFi.

What is Eden Network?

Eden Network protects users from malicious MEV and financializes beneficial MEV in a token. Eden does this by setting fair and transparent rules to decide the order of transactions within a block.

Eden’s core loop is simple. Block producers propose blocks according to the rules described by the Eden Network (by running Eden-Geth, the network’s augmented version of Geth), and are rewarded with both ETH and EDEN tokens for doing so.

Users of the Eden Network must buy and stake EDEN. The order of transactions within a block is ordered by the amount of EDEN an address has staked, and the more an address stakes the higher in the block the transaction is placed (this is a bit of a simplification, for more details read this). This drives demand for EDEN tokens because traders will always compete to stake more EDEN so their arbitrage transactions go first.

Users can also get access to a private relay connection and private mempool with the Eden Network’s block producers by staking a minimum of 100 EDEN . This protects the user from front running attacks because the potential attackers cannot see the user’s transaction until it is mined.

Our investment thesis is that rational arbitrage traders will continue buying and staking EDEN until the value of staked EDEN is equal to the discounted cash flow value of expected future arbitrage profits on Ethereum. In addition to that, EDEN has tremendous utility in the form of front running protection for regular users who will buy and stake the token. This will drive demand for EDEN and make participating in the Eden Network the most profitable option for Ethereum block producers.

Eden Network Growth Loop

Ethereum Security Post EIP-1559

Ethereum went through a major upgrade one month ago to enable EIP-1559. Under EIP-1559, transaction fees, which used to go to Ethereum block producers, are instead burned. This change was lauded by many because it burns a significant amount of ETH, making ETH less inflationary, and possibly even deflationary. However, this reduction in earnings for Ethereum block producers has reduced the security budget for Ethereum.

Many Ethereum block producers are looking to MEV to supplement their earnings post EIP 1559. MEV has historically been very spiky, one block can contain 1,000x the MEV profits of an average block. If block producers collect MEV directly and do not win the block with the 1,000x MEV profit, then they have to make a choice: either accept the block their competing pool proposed and forfeit the jackpot, or ignore the block their competing pool proposed and keep trying to win the jackpot. When a block producer chooses the second choice and succeeds, this creates a chain fork within Ethereum called an “time bandit attack.”

Time bandit attacks slow down Ethereum and provide a poor user experience for all Ethereum users around the world. During periods of extreme market volatility there is a lot of MEV which means the incentive for time bandit attacks is highest when the need and demand to use Ethereum is also highest. Time bandit attacks are most easily carried out by larger pools. If time bandit attacks become a significant source of revenue, it becomes a centralizing force on Ethereum block production because it’s easier for larger pools to execute this attack than smaller ones.

In contrast, the Eden Network increases and smooths out block producers’ rewards. Within the Eden Network, block producers earn a smooth payout of EDEN tokens, which track the value of priority blockspace, rather than spiky MEV. This eliminates the incentive for Eden Network block producers to execute time bandit attacks and helps increase the security and decentralization of Ethereum block production.

Other MEV Projects

Other MEV projects such as Flashbots and BloXroute attempt to create efficient markets between mining pools and bot operators to extract as much value from average network participants. These systems do not attempt to mitigate malicious MEV, instead they make it easier to extract. Their systems are closed, with centralized integration processes that exclude some block producers and leverage opaque reputation scores that favor certain addresses over others.

Eden is focused on reducing malicious MEV and creating positive externalities for Ethereum as a whole. Eden is fully transparent and permissionless: all block producers, bot operators, and users can join the network as long as they are in compliance with the open and transparent rules of the protocol.

Traction

The network launched on Ethereum mainnet at block 12,965,000 alongside the London hardfork. Since that time, the network has converted over half of Ethereum’s hashrate; 54% of all blocks mined in the last week are a part of the Eden Network.

There are currently over 2,000 EDEN stakers and that number is growing quickly. Recently, Andre Cronje, founder of Yearn Finance and Keep3r Network, announced that Keep3r will use the Eden Network for its trading activities.

The adoption of Eden Network has demonstrated that there is a demand for explicitly defined rules for block construction that incorporate the realities of MEV. The use of the EDEN token as a coordination unit in block construction has enabled a more fair, open, and consistent distribution of MEV across Ethereum network participants.

WRITING Tokenizing MEV By Tushar Jain SEPTEMBER 8, 2021 Today, I am excited to announce that Multicoin Capital has led a $17.4M round in Eden Network, alongside participation from Jump Capital, Alameda Research, Wintermute, GSR, Defiance Capital, and Andre Cronje, the founder of Yearn.Finance.

Ethereum block producers (i.e., “miners” in proof of work, “validators” in proof of stake) have two major powers: the ability to select which transactions are included in a block, and the order of those transactions within the block. This power is the source of what is commonly referred to as “M.E.V.” or miner extractable value. MEV on Ethereum is estimated to be greater than $700M since the beginning of 2021 and naturally grows as total DeFi activity on Ethereum grows.

MEV is expressed in many forms. The most basic form of MEV is arbitrage between decentralized exchanges. If the price of an asset is different between Uniswap and SushiSwap, there is a guaranteed profit to be made by the first trader who can execute the arbitrage. The block producer for each block chooses which transaction is going to be first in that block and can decide who will earn this arbitrage profit. MEV can be defined as the sum of guaranteed on-chain profits that block producers can claim.

Simple arbitrages like this are considered “beneficial MEV” because they promote the healthy functioning of DeFi markets by keeping prices in line between exchanges. This is in contrast with “malicious MEV,” such as "frontrunning and “sandwich attacks”, and other tactics from the high-frequency trading world. Another form of malicious MEV is called the “time bandit attack.” This is a more advanced attack where a block producer (or cartel of block producers) re-orgs a blockchain to capture MEV.

Malicious MEV has massive negative externalities. It makes the whole system less secure, less stable, and less efficient, and is purely value extractive. If left unmitigated, it will likely pose a major obstacle to the widespread adoption of Ethereum DeFi.

What is Eden Network?

Eden Network protects users from malicious MEV and financializes beneficial MEV in a token. Eden does this by setting fair and transparent rules to decide the order of transactions within a block.

Eden’s core loop is simple. Block producers propose blocks according to the rules described by the Eden Network (by running Eden-Geth, the network’s augmented version of Geth), and are rewarded with both ETH and EDEN tokens for doing so.

Users of the Eden Network must buy and stake EDEN. The order of transactions within a block is ordered by the amount of EDEN an address has staked, and the more an address stakes the higher in the block the transaction is placed (this is a bit of a simplification, for more details read this). This drives demand for EDEN tokens because traders will always compete to stake more EDEN so their arbitrage transactions go first.

Users can also get access to a private relay connection and private mempool with the Eden Network’s block producers by staking a minimum of 100 EDEN . This protects the user from front running attacks because the potential attackers cannot see the user’s transaction until it is mined.

Our investment thesis is that rational arbitrage traders will continue buying and staking EDEN until the value of staked EDEN is equal to the discounted cash flow value of expected future arbitrage profits on Ethereum. In addition to that, EDEN has tremendous utility in the form of front running protection for regular users who will buy and stake the token. This will drive demand for EDEN and make participating in the Eden Network the most profitable option for Ethereum block producers.

Ethereum Security Post EIP-1559

Ethereum went through a major upgrade one month ago to enable EIP-1559. Under EIP-1559, transaction fees, which used to go to Ethereum block producers, are instead burned. This change was lauded by many because it burns a significant amount of ETH, making ETH less inflationary, and possibly even deflationary. However, this reduction in earnings for Ethereum block producers has reduced the security budget for Ethereum.

Many Ethereum block producers are looking to MEV to supplement their earnings post EIP 1559. MEV has historically been very spiky, one block can contain 1,000x the MEV profits of an average block. If block producers collect MEV directly and do not win the block with the 1,000x MEV profit, then they have to make a choice: either accept the block their competing pool proposed and forfeit the jackpot, or ignore the block their competing pool proposed and keep trying to win the jackpot. When a block producer chooses the second choice and succeeds, this creates a chain fork within Ethereum called an “time bandit attack.”

Time bandit attacks slow down Ethereum and provide a poor user experience for all Ethereum users around the world. During periods of extreme market volatility there is a lot of MEV which means the incentive for time bandit attacks is highest when the need and demand to use Ethereum is also highest. Time bandit attacks are most easily carried out by larger pools. If time bandit attacks become a significant source of revenue, it becomes a centralizing force on Ethereum block production because it’s easier for larger pools to execute this attack than smaller ones.

In contrast, the Eden Network increases and smooths out block producers’ rewards. Within the Eden Network, block producers earn a smooth payout of EDEN tokens, which track the value of priority blockspace, rather than spiky MEV. This eliminates the incentive for Eden Network block producers to execute time bandit attacks and helps increase the security and decentralization of Ethereum block production.

Other MEV Projects

Other MEV projects such as Flashbots and BloXroute attempt to create efficient markets between mining pools and bot operators to extract as much value from average network participants. These systems do not attempt to mitigate malicious MEV, instead they make it easier to extract. Their systems are closed, with centralized integration processes that exclude some block producers and leverage opaque reputation scores that favor certain addresses over others.

Eden is focused on reducing malicious MEV and creating positive externalities for Ethereum as a whole. Eden is fully transparent and permissionless: all block producers, bot operators, and users can join the network as long as they are in compliance with the open and transparent rules of the protocol.

Traction

The network launched on Ethereum mainnet at block 12,965,000 alongside the London hardfork. Since that time, the network has converted over half of Ethereum’s hashrate; 54% of all blocks mined in the last week are a part of the Eden Network.

There are currently over 2,000 EDEN stakers and that number is growing quickly. Recently, Andre Cronje, founder of Yearn Finance and Keep3r Network, announced that Keep3r will use the Eden Network for its trading activities.

The adoption of Eden Network has demonstrated that there is a demand for explicitly defined rules for block construction that incorporate the realities of MEV. The use of the EDEN token as a coordination unit in block construction has enabled a more fair, open, and consistent distribution of MEV across Ethereum network participants.

Disclosure: Multicoin has established, maintains and enforces written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to its investment activities. Multicoin Capital abides by a “No Trade Policy” for the assets listed in this report for 3 days (“No Trade Period”) following its public release. At the time of publication, Multicoin Capital holds positions in EDEN.

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