SEDA Twitter Spaces - MEV/OEV Fair Capture & Distribution

In SEDA’s Twitter Spaces which took place on March 28, 2024, Matt hosted Campbell from UMA Protocol and Jasper from SEDA Protocol to discuss advancing blockchain value, exploring OEV and MEV dynamics in Web3, and more! Read our notes below to learn more.

Background

MattDavid (Host) – Web3 Marketing Specialist at SEDA Protocol

Campbell (Guest) – Contributor at UMA Protocol

Jasper (Guest) – CTO & Co-Founder at SEDA Protocol

SEDA Protocol – an intent-based, modular data layer that allows any blockchain to configure & interact with custom data feeds for price data, RPC data, or any available API endpoint

UMA Protocol – an optimistic oracle and dispute arbitration system that securely allows for arbitrary types of data to be brought on-chain

Exploring OEV and MEV: Innovations and Impacts in Blockchain Technology

Campbell highlights the significance of Oracle Extractable Value (OEV) due to the vast sums of money being lost in the space, which could be redirected to more impactful initiatives.
He mentions that UMA has developed a solution and is working to consolidate research to make it accessible to the general public.
Jasper describes OEV as a unique concept for valuing data on the blockchain, where state changes triggered by Oracle updates create new opportunities for value extraction.
Jasper says he is excited about the potential new monetization methods that arise from directly linking value creation to data updates.
Matt discusses MEV and OEV, suggesting these are significant but not widely understood phenomena within the Web3 community.
Campbell explains MEV, starting from the basic principles of transaction processing on Ethereum. He discusses how economic incentives influence block builders in selecting transactions with higher fees, and he extends this concept to more complex strategies like sandwich and arbitrage attacks. He defines MEV as the profit derived from managing the order of transactions within a block to maximize returns.
Matt asks how complex operations like MEV occur rapidly, initially visualizing it as a manual process but learning it’s automated and happens in fractions of a second.
Campbell explains that the reality involves sophisticated bots and smart contract infrastructure, comparing it to high-frequency trading in traditional finance. He uses the example of an Aave liquidation to illustrate how these automated systems work to capitalize on quick financial opportunities, highlighting the high level of technical expertise involved.

MEV and OEV: Maximizing Profits Through Strategic Transaction Management

Jasper introduces OEV as a subcategory of MEV, explaining it involves the strategic insertion of transactions in response to pending transaction flows and Oracle updates to maximize profits.
He explains how this process involves simulating state changes and optimizing transaction lists within block gas limits.
Matt attempts to simplify the concept for beginners by differentiating between MEV and OEV with practical examples involving transaction timing and strategic buying based on upcoming price changes due to large transactions or data feed updates.
Matt says that they have shared a blog co-written with UMA protocol to provide an entry-level understanding of the topics discussed today, which includes a link provided by Campbell at the beginning of the blog to the Flashbots dashboard, showing significant Ethereum losses to MEV.
Matt expresses surprise at learning that approximately 30,000 $ETH was lost to MEV in the last month and is amazed by the long-standing and widespread occurrence of MEV across various blockchains.
Campbell notes the Flashbots as credible experts on MEV on Ethereum and expresses shock over the $100 million monthly losses to MEV that are largely unnoticed despite the presence of a few projects addressing the issue.
Campbell says that launching MEV points might bring the necessary attention to MEV, highlighting the challenge in explaining and understanding MEV and the difficulty in obtaining data on it.
Campbell explains the labor-intensive process required to assess OEV, involving analysis of individual protocols’ liquidation mechanisms and historical data, highlighting the lack of incentive for conducting such research.
Campbell explains that the concept of MEV was first introduced in 2019 with the publication of Flash Boys 2.0 and gained public awareness in 2020 through a blog post titled Ethereum is a dark forest.
Campbell describes the complexities involved in understanding block building and block production, stressing the difficulty even for experts in the field.
Campbell says that MEV-like activity is occurring on Ethereum and various roll-ups, with expectations of its increase in a multi-chain future, noting recent discoveries of MEV issues in other ecosystems like Solana and Bitcoin.

Debating MEV’s Impact and Management in Decentralized Finance

Campbell says that perspectives on MEV vary, with builders and bot operators viewing it as an opportunity, while the main losses involve liquidity providers and naive users, particularly through sandwich attacks. He highlights the necessity of addressing unresolved issues once they are identified, especially for protocols using Oracles.
Jasper questions whether the blame for losses due to MEV should be placed on poor Oracle design or protocol design, noting that Oracles built before MEV became prominent are less equipped to handle its consequences.
Campbell discusses the disproportionate benefits validators receive from MEV, using a specific Aave liquidation as an example. He suggests that solving MEV issues might be more effectively addressed at the Oracle level rather than through protocol redesign.
Jasper reflects on the origins of Oracles and the need for MEV-aware designs in new technologies, highlighting the pervasive impact of MEV across all levels of decentralized network design. He advocates for a comprehensive understanding of MEV among technical teams.
Matt asks if there is a traditional finance equivalent of MEV-OEV, mentioning he recently got the book Flash Boys which discusses similar concepts in traditional markets.
Jasper says that similar concepts exist in traditional finance involving advantages like co-location and exclusive trading flow through partnerships, as seen with Robinhood and market makers.
Campbell describes the MEV supply chain involving users, MEV Searcher bots, Block Builders, and Block Dial. He outlines how value is created and transferred among these participants, highlighting the distribution of profits among validators, block builders, and searchers through strategies like front running, back running, and sandwich attacks.
Jasper discusses the distribution of value in MEV, suggesting that most value currently flows to validators due to their control over block space. He predicts a shift towards middleware and end users gaining more value as systems evolve to prioritize smarter transaction flows.
Campbell says that the value in Aave and similar lending protocols is created through multiple entities including the Oracle, the lending platform, and the user taking on loan risks.
Campbell says that the OEV should primarily return to the protocol that generated it, turning it into protocol revenue. He points out that for some protocols, this could significantly exceed their annual revenue, using Compound‘s potential revenue as an example.
Campbell expresses excitement about conversations with Morpho, a protocol with complex vaults on Aave, about a use case where OEV from liquidations increases vault yields, highlighting new ways to add value to the ecosystem.
Campbell notes that ideally, there should be a fair distribution between Oracle, the data provider, and the protocol, with the protocol deciding how to utilize the OEV without external influence on its use.
Jasper highlights that the distribution of OEV should be market-driven and dynamic, reflecting the diversity of the MEV landscape. He argues against a fixed distribution mechanism, proposing that a dynamic auction mechanism could more appropriately dictate the flow of value.
Jasper explains that this dynamic mechanism should account for the varied needs of different protocols, suggesting that the percentages of OEV allocation could change based on specific circumstances, like the scale of liquidations and the demands of the protocol.

Exploring Oval’s Impact on MEV Dynamics and Ethereum’s Ecosystem

Campbell explains the technical architecture of Oval, stating that it involves wrapping an existing Chainlink price feed to capture and delay price releases, allowing MEV searchers to submit bids for liquidations through auctions. He describes this process as simple but almost too good to be true, highlighting its potential to generate revenue effortlessly.
Matt asks how MEV searchers feel about the increased competition due to Oval’s implementation, questioning if this makes their role more challenging.
Campbell says that while MEV searching has become less profitable over time due to increased competition, Oval does not substantially change the profits for searchers as the major share of liquidation bonuses previously went to block builders and validators.
Matt asks about the impact on validators, considering their potential loss of revenue.
Campbell says that while validators might earn slightly less, staking remains profitable and desirable. He downplays the impact of Oval on Ethereum’s ecosystem stability and the ongoing profitability of staking.
Matt points out the importance of considering the Web3 ethos and democratization in these discussions, questioning if builders adopt this philosophy.
Campbell discusses the existential threats to Ethereum, such as centralized block building, and mentions efforts by Flashbots to counteract this through infrastructure that supports proposal builder separation, highlighting its long-term benefits for Ethereum.
Matt asks how SEDA and Oval approach MEV, highlighting the importance of fair value distribution.
Jasper outlines the differences, explaining that while Oval uses an auction system for price feeds, SEDA also functions as an MEV-aware oracle. He discusses the strategy of auctioning future Oracle updates and the leverage this gives the protocol over the transaction supply chain, aiming for a fair market auction to determine the distribution of value.
Jasper says that the concept of data providers earning a percentage of the value their data creates is innovative. He mentions that the other receivers will be the applications, and this split should be dynamic, based on the competitiveness of the MEV strategies.
Campbell explains that they foresee no major challenges with Oval, despite the unique issues they’ve encountered, such as unmonitored liquidations at smaller protocols.
Campbell says that Oval does not negatively impact the efficiency of liquidations and that the worst-case scenario would be a minimal delay in price updates on Ethereum mainnet. He says that Oval has passed an audit from OpenZeppelin and sees no significant attack vectors.
Jasper notes the competitiveness in the liquidation landscape of lending markets and introduces SEDA’s solution to potentially attract liquidators to newer lending markets. He says this middleware evolution in crypto is a logical step, and he does not foresee fundamental challenges that could be exploited.
Campbell highlights the challenges of communication within the industry and expresses excitement for upcoming integrations and developments with Oval V2.

Check out these important links

Show Information

Medium: Twitter (Audio)
Show: SEDA Twitter Space
Show Title: Ep# 6 MEV/OEV Fair Capture & Distribution Ft. UMA protocol
Show Date: March 28, 2024