133 - Flashbots Saves Crypto with Stephane Gosselin

Stephane Gosselin is the Founder of Flashbots, an R&D organization that’s trying to fix the most pernicious problem in crypto—the problem of MEV (Maximum Extractable Value). Many of us are massively optimistic about crypto and aren’t worried too much about its future. However, this MEV thing could be our achilles heel. On this episode, we dive into what Stephane and his team are doing to make MEV less of a potential weak point, how MEV works, and what our industry would look like if Flashbots didn't exist. And of course—so much more. This is another fundamental Bankless episode that you won’t want to miss. ------ 📣 Chainlink | Register for SmartCon 2022 with promo code “BANKLESS” https://bankless.cc/smartcon ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: 🌱 LENS | ACCESS CODE: MERGE (only valid for 24 hours!) https://bankless.cc/Lens 🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave 🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync ------ Topics Covered: 0:00 Intro 9:28 MEV Explained & Its Importance 13:35 The Evil Side of MEV 21:26 MEV Utopia vs. Dystopia 28:54 Competitiveness, Market Structure, Equilibrium 32:10 MEV Supply Chain Crashcourse 37:24 Timeline 38:56 Flashbots Thesis 42:31 No MEV Geth Scenario 45:15 Flashbots Continued 49:10 Solutions 51:15 MEV Boost 1:00:18 MEV Boost Adoption 1:05:10 Differences in Staking APY 1:08:20 Flashbots Incentives 1:12:57 Infinite Problems to be Solved? 1:14:35 PBS 1:17:54 Relayer Role 1:20:05 Weird MEV Potential Merge Issues? 1:22:40 Byproducts of MEV Boost 1:27:17 New Builder Market Speculation 1:31:15 Stephane’s Optimism 1:32:55 Closing & Disclaimer ------ Resources: Stephane Gosselin https://twitter.com/thegostep MEV-Boost in a Nutshell https://boost.flashbots.net/ Flashbots Blog Posts https://writings.flashbots.net/writings Guide to Ethereum Roadmap https://newsletter.banklesshq.com/p/guide-to-the-ethereum-roadmap-jon#details Ethereum’s Hidden Power Structure https://newsletter.banklesshq.com/p/125-matt-cutler#details ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, great episode for you today, on the topic of Flashbots, on the topic of MEV, on the topic of crypto dystopia versus crypto utopia, and how we propagate the utopia. This is an insanely important topic to cover. We're going to talk about a few things, a few things to look for during this episode. Number one, why this thing called MEV, that is maximum extractable value, why it poses an existential risk to everything we are building in crypto. We are on this knife's edge between dystopia

• 0:46Ryan Sean Adams?

  and utopia. Number two, what the world looks like if we ignore the MEV problem. We cannot afford to ignore it. Number three, the blockchain supply chain. What actually is that? How MEV can increase your ETH staking rewards by something like 6%? Stefan is the map. That's a high number. That's a very high number. Number four, how all this technology is getting embedded in the Ethereum protocol, long-term, in something called PBS, that is Proposer Builder Separation. We get into the Ethereum roadmap a little bit. Number five, what's next for Flashbots after this thing called PBS is deployed and makes them obsolete? We talk about the Flashbots organization as well. David, there's so much here. How would you

• 1:31Ryan Sean Adams?

  rate this episode in terms of like, skill level or knowledge level? Is this accessible enough for the straight beginner? Does this veer towards a little bit expert level?

• 1:43David Hoffman?

  I think if you have not heard the term MEV before, you are going, well, first off, I remember my first time I heard MEV, and like, if you like rabbit holes, I'm so envious of you. Going down the MEV rabbit hole for the first time was so much fun. If you have not yet heard of MEV, this episode should be fine, but it'll start fine, it'll get challenging towards the end, but overall, it'll throw you down. Down a fantastic rabbit hole. The MEV part of this crypto industry has attracted some of just straight up the giga brains. Like all the giga brains just get attracted to MEV because it's such a complex nuanced problem to solve with so much at stake.

• 2:25David Hoffman?

  There's a lot at stake if we do not solve MEV or if we solve it incorrectly. And so there's just these certain types of people that have really been captivated by the MEV problem and have really put some of the the highest amounts of IQ all on all targeting the same problem, which is solving systemically. How to solve the MEV problem? Just really, really quick, the MEV problem. Maximally extractive value is this thing that we discovered back in like 2017 or 2018 as a function of smart contract blockchains where you have DeFi. And anytime that you make a trade on like Uniswap, you imbalance the pool, right? Like if you are trading USCC and ETH and you're you put in USCC and you pull out ETH, that changes the pool.

• 3:07David Hoffman?

  That changes the price and arbitrators can come and rebalance that pool as a function of how it relates to other exchanges. So it'll balance, it'll balance out like the price of these things. You can also talk about MEV in the context of like liquidations on MakerDAO or AVE. It's basically when users use a smart contract blockchain, they leave arbitrage opportunities in their wake. And so arbitrage bots will come and make transactions to pull out some of that value. They'll rebalance the pool, take a little bit of arbitrage, and this is all normal and healthy. But there's, it gets more and more malicious as you get further down the MEV rabbit hole. There's like front running.

• 3:46David Hoffman?

  And so they, if you were trading on Uniswap, you can get front run by a bot and they'll sell you what you were going to buy, but at a higher price. That starts to get a little bit malicious and it can go, it can go down to what some people will just define as straight up theft. And it can even get even more systemic than that. It can start like disrupting actual blockchains as in like a couple of blocks will have passed. But there was an MEV opportunity that was so incredibly lucrative that MEV like people will try to actually unwind the blockchain and go backwards for blocks in order to capture that opportunity before going forwards again. So like, not only is it just about arbitrage, it's about. Just like, you know, bot attacks in the mempool, but also destabilizing the blockchain. And so it's critically important that we get this right. So that's like your quick TLDR rabbit hole on MEV.

• 4:31David Hoffman?

  And Flashbots is an organization of people that have targeted this problem directly, creating this sort of sandbox, if you will, for MEV players can play in this sandbox that doesn't impact users maliciously or disrupt our blockchains. And Stefan here is one of the co-founders of Flashbots and has a lot to say with where Flashbots currently is in this proof of work paradigm, but also where it's about to be in this proof of stake paradigm, because proof of stake definitely changes the game of MEV and the role that Flashbots has to play in this ecosystem.

• 5:04Ryan Sean Adams?

  Absolutely, guys. You find there are some strange god mode type abilities in the transaction ordering of our blocks. And that is the source of MEV's power, where a certain party has the ability to order blocks in a certain way. Anyway, we're going to get into all of this. It's a fantastic episode and how we solve it, how it relates to the Ethereum roadmap. And by the way, guys, if you are watching, if you want to watch Bankless Podcasts on video, you could do that on YouTube, but you can also do it now on Spotify. So all Bankless Podcasts are now published on Spotify with video. So you can go ahead and check that out. Let's get right into the conversation with Stefan from Flashbots. But before we do, we want to tell you about the fantastic sponsors

• 5:48Ryan Sean Adams?

  that made this episode possible.

• 5:50David Hoffman?

  Lens Protocol is an open source tech stack for building decentralized social media applications. It is the new era for social media. We all have toxic relationships with our Web2 apps. We want to break up with them, but we can't. These applications own our digital lives and all the relationships that we've made. We need to break through to a new paradigm of social networking applications that we control, rather than them controlling us. Lens isn't a social media app. It's a protocol to let 1,000 Web3 social apps bloom. Lens is a permissionless and transparent social graph that is owned by the user. In crypto, we say not your keys, not your crypto. And on Lens, we say not your keys, not your profile. With Lens, your followers go with you to whatever social media application you want to use. And instead of being trapped by an algorithm chosen by that app, Lens lets you choose the way you want to experience your social media.

• 6:33David Hoffman?

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• 7:17David Hoffman?

  you can increase your APY and get some extra tokens by adding your node to the decentralized Rocketpool network, which currently has over 1,000 independent validators. It's yield farming, but with Ethereum nodes. You can get started at rocketpool.net and also join the Rocketpool community in their Discord. You can find me hanging out there sometimes in the chat, so I'll see you there. ZK Sync is an Ethereum Layer 2 network that is pushing the frontier of high-performance blockchains that don't compromise on security or decentralization. ZK Sync has combined the power of zero-knowledge rollups in the Ethereum virtual machine, enabling developers to build the greatest Web3 projects possible, ones we haven't even seen yet. Crypto needs its killer applications to onboard the world, but crypto killer apps need ZK Sync as a platform to build on first. It's generally accepted that zero-knowledge rollups are the conclusion of crypto blockchain scaling technology,

• 8:02David Hoffman?

  and ZK Sync is leading the charge into the final frontier of crypto economics. So if you're a developer who wants to build your app on a future-proof foundation, which gives your users the best UX possible, check out ZK Sync's website at zksync.io. And yes, there's also going to be a token, so give them a follow on Twitter, too, @ZKSync.

• 8:20Ryan Sean Adams?

  Hey, Bankless Nation. We're super excited to introduce you to our next guest on a very important topic today. This is Stefan Gosselin. He is the founder of Flashbots. What is Flashbots? It's an R&D organization that's researching developments, trying to fix what we think is one of the most pernicious problems in crypto, maybe the most pernicious, the problem of MEV. That stands for Maximum Extractable Value. And while David and I are massively optimistic about crypto, and we're not really worried about too much in crypto. I mean, we think this thing is going to be pretty much inevitable. We are kind of worried about MEV. It could really be crypto's Achilles heel. So we're going to talk about it today with somebody who is trying to solve this problem.

• 9:04Ryan Sean Adams?

  And actually, whose work in Flashbots is getting ready to become important enough to actually get embedded in the core Ethereum protocol. So we'll talk about that as well. Stefan, welcome to Bagless. How are you doing today?

• 9:17Speaker 02

  Hey, I'm doing great. Thank you so much for having me. This is exciting. Always a pleasure to talk with more people about, yes, the very scary problem of MEV.

• 9:28Ryan Sean Adams?

  Well, I can't promise you about the smart part, but hopefully you bring the intelligence for David and I. Because in fact, you know what? We want to kind of start at the less smart level of this MEV problem. So I called it the most pernicious problem in crypto. Do you think we're like blowing this out of proportion? Can you tell us why MEV is important at a high level? And what it is for somebody who is just now hearing about it?

• 9:54Speaker 02

  Yes. So, no, I don't think you're blowing it out of proportion, though I am very biased in saying that. We did, you know, literally get every single person that we could figure out that agreed with this point of view together sometime in 2020 and start this organization together that's sole mission is to figure out how to solve the problem of MEV. So I am definitely in my little MEV bubble where I spent all my day and night thinking about it and worrying about it. So why am I in this bubble? Why did I surround myself with a bunch of people who worry about this?

• 10:36Speaker 02

  Well, MEV is sort of this emergent phenomenon that we've observed on smart contract blockchains when people start to actually use them. What we realize is that there's a lot of different powers that miners have that they can use to extract sort of extra value out of the protocol in ways that the protocol wasn't necessarily designed for. So when the initial sort of paper by Phil Dianne came out and defined the term miner extractable value, it looked at things like reordering censorship and insertion of transactions

• 11:15Speaker 02

  within blocks, looking at basically arbitrage opportunities on decentralized exchanges and how When you have miners that start to target these, they might do things like doing reorg attacks against the chain and some other sort of nasty behavior.

• 11:35Speaker 02

  At the time, it was mostly like a theoretical, you know, paper that looked at, okay, well, here's what would happen if these DEXs would get a lot of traction. And lo and behold, a couple of years later, they did. And so, and around, you know, summer 2020, during DeFi summer, we started seeing a lot of these bots becoming very active, to the point where it started having sort of a negative impact on the rest of the system.

• 12:03Speaker 02

  The two years following that, so between summer 2020 and where we are today, has just been sort of an explosion and sophistication of bot activity on Ethereum, but also in every single other smart contract chain that has any sort of meaningful economic activity. And we've seen sort of the space go from very simple sort of arbitrage strategies to evolving into like very complex, generalized front-running liquidations, cross-domain arbitrage, all kinds of NFT sniping and strategies that have just created a ton of demand and activity for these chains.

• 12:44Speaker 02

  Now, the role that Flashbots plays in all of this is we see MEV as being probably the biggest centralization risk for crypto. The way to think about it is if chains aren't actively thinking about MEV in their design, they're guaranteed to make some fatal mistake that will, you know, have some negative externalities on their users, or cause them to become very heavily centralized. So we sort of take a research-first approach of saying, okay, we know that this is a risk, let's try to understand it better. And then let's develop solutions to help blockchains deal with this risk. So we launched on Ethereum and we have this solution MEV Geth on Ethereum that's running with all the miners.

• 13:29Speaker 02

  And then we're preparing, as everyone is, for the transition to proof of step.

• 13:36David Hoffman?

  So Farin, before we go into flashbots and MEV get and some of the solutions to this problem, I'd really just like to define the scope of the problem a little bit more. At the very basic level, MEV is just basic arbitrage opportunities. There's a difference in the ETH price between Uniswap and Balancer and an MEV bot can arbitrage those differences. And so like, in theory, the idea is that some bot will come in and balance out those two pools, but then whoever's actually mining the block will see that bot come in and they will front run that bot and they will balance those two pools instead and they will be able to pull out that arbitrage. They're just able to arbitrage faster. And at this level, things aren't all that crazy, things aren't all that evil or so,

• 14:20David Hoffman?

  and this is kind of actually considered healthy in the ecosystem, in the DeFi ecosystem. Pool, liquidity pools stay balanced faster, liquidations in Avey or Compound happen faster, keeping those systems more robust. So there's like a lot of good MEV that's out there that just helps stabilize the DeFi ecosystem and like, it's almost synonymous with just general arbitrage. And this part of MEV, we don't really have a problem with. Can you illustrate the worst part, the more dark side of MEV, the evil side of MEV, down to the point of things that are considered ethically poor or ethically dubious, but also down to the point of destabilizing a blockchain? Can you tackle those two things as to like the bad side of MEV?

• 15:02Speaker 02

  Yeah, no, this is where even a good thing has drawbacks, right? So in many ways, MEV is what makes a lot of DeFi systems work. It's what makes AMM possible. Like AMMs, you would not be able to be a passive liquidity provider if there wasn't someone doing arbitrage between Uniswap and Binance, right? It just would not work as a strategy and like, no one would use the system. But because there's someone doing that arbitrage, the prices on Uniswap were able to stay in sync. So it has some value there. Similarly, for liquidations, right? If you run a liquidations protocol that's using some kind of oracle system, you need some bot operator to come in and actually execute the liquidation to say, to keep the

• 15:47Speaker 02

  collateral ratio of the lending platform in balance.

• 15:52Speaker 02

  And someone literally just needs to like send the transaction that triggers this function. And that is MEV is rewarded in some way. So, you know, MEV, good MEV is really, it takes place when a protocol or like a DAP designer thinks about, okay, what are the permissionless functions in the system that we want to incentivize third parties to take? And then how much money do we need to pay them to take these? Where it can, starts to become a little bit more questionable and nefarious is when protocol developers and DAP developers do not think about the MEV that's exposed through just regular user interactions.

• 16:33Speaker 02

  So when their users start to interact with their protocol, they might actually be exposing some MEV as well. And that might have some negative sort of impact on their experience. So, you know, on Uniswap, for example, the example, the case that happens quite frequently, right? Is you set your slippage limit too high and then send a transaction for a swap into the transaction pool. Some bot operator out there sees this, they sandwich your transaction and provide you the worst, the worst execution that you accepted using your slippage limit, right? And so Uniswap, by like allowing users to set high slippage limits and like allowing them to send it to the transaction pool,

• 17:17Speaker 02

  might in many ways be giving them a worse price execution. And so those kinds of behavior end up being sort of, you know, less beneficial to the end users because there isn't really any reason for the system to have these, this kind of value exposure.

• 17:34Ryan Sean Adams?

  Got it. So like what you just described is maybe in a bad MEV scenario, the user gets ripped off a little bit, right? There's some, you know, additional costs that they're paying to these kind of MEV rent collectors. But can you take that a little bit further? So like, what is the worst case scenario here? And I'm, I'm almost like maybe talking more from a system perspective rather than the kind of the user. So the user experiences this in that like they're getting ripped off in small ways here and there. Maybe they notice, maybe they don't. I would have to get really, really bad for them to maybe like fully notice. But I think there are some more pernicious like system level attacks.

• 18:16Ryan Sean Adams?

  And I want to ask the question of like, okay, so this is a problem, but what happens if we just? Don't solve it. Like, what happens if we just, like, leave it? How will the system evolve in that condition?

• 18:30Speaker 02

  Yes. So I sort of mentioned briefly negative externalities. I think from a system designer perspective, from the perspective of Ethereum core developers, Solana core developers, whoever, right, who's looking at how do I build a blockchain? You have to see, okay, what incentives am I creating by these, like, different mechanisms I'm implementing?

• 18:57Speaker 02

  Three ways in which, like, M V V tends to be extracted is either a spam war, a latency war, or an auction. This is like different ways that you allocate opportunities, or you design a system of block space, and how competition for that block space ends up being targeted is using one of these three systems. And each of these have these negative externalities, right? So if you use some kind of system that says, "We're going to order transactions randomly," right, "all the transactions are going to be hashed and, like, ordered by the hash," something like this, then you can have bots that, like, still target these arbitrage opportunities

• 19:39Speaker 02

  by sending thousands of transactions into the transaction pool, and hoping that one of them is going to be the one that targets the opportunity. And that, what that does is it takes up a ton of block space and crowds out regular use cases. If you use a system that says, "Okay, we come, we take first-in, first-out ordering, and we say whoever is the first to submit a transaction is going to be the one that gets the block space." Then all of a sudden, you create sort of a race or an incentive for everyone to invest very, very heavily into colocation. So you'll have basically the most dominant validator or miner selling sort of server racks next to their Ethereum nodes, saying, "No, whoever is willing to pay me the most for this immediate access

• 20:24Speaker 02

  is going to be able to capture these opportunities." That creates a huge centralization vector at the validator level, right? So now, all of a sudden, you have, you know, whoever is the best miner or validator at doing this arbitrage or at selling colocation services is going to continue accruing more rewards than all the other validators, and can start to sort of take over the network and start centralizing it. And then the final option on like how to deal with with MEV is what we call block space, block space markets, right, or block space auctions, which is sort of the the the solution space that the Flashbots has been building towards,

• 21:05Speaker 02

  which is saying, actually, let's not, you know, focus on this latency war with with validators and miners. Let's let them outsource completely the block construction to to third parties. Let third parties compete on price as opposed to colocation. And whoever is willing to pay the most for the block space is the one that ends up being selected and included.

• 21:26Ryan Sean Adams?

  So Stefan, like, take a one blockchain that decides to kind of like solve this, bake it into the protocol, like, you know, do something about MEV and another chain that doesn't. Like, what happens to the chain that doesn't? Does it and like, does this just kind of evolve back into the existing financial system we have, where we do have colocation, we do have like, you know, Flashbots and all of these things like? I'm just trying to get a, you know, escape of the dystopia. If we let MEV run wild and we actually don't make protocol changes and and don't decide decide to build solutions to address it. You said centralization, but like, sometimes that's um, it's hard for people to get in their in their heads

• 22:09Ryan Sean Adams?

  because they don't see how this abstract idea of centralization actually affects them.

• 22:14Speaker 02

  So, yeah, let's try to paint sort of a picture of what two different like futures looks like. We had this um, we had this conference um, in in Amsterdam a few months ago that was themed around the MEV utopia and the MEV dystopia. And the reason why I think it's quite powerful to draw this comparison is to try to give more of a a feeling for what these two different futures look like and the impact it has on users of of these systems. So we can start by the the dystopia side. So let's say we have a chain that doesn't like.

• 22:52Speaker 02

  Solve much for MEV. It doesn't implement a MEV block space auction. It has a dominant strategy of colocation. And perhaps the validators start to sell sort of colocation services. Right. What you end up having there is you have a single entity who's investing very heavily in these MEV strategies become somewhat gatekeepers to the chain. Perhaps they start running the majority of the validators on this chain. And they start aggregating the majority of the order flow because they control most of the block space. So now, all of a sudden, every single entity or user that's trying to send a transaction to this chain has to route their transaction through the server of this of this mega fund, this mega MEV fund.

• 23:38Speaker 02

  You know, this mega MEV fund then has the power to arbitrarily censor, control sort of any protocol changes, issues, sort of,

• 23:49Speaker 02

  you know, soft forks that that that control in one direction or another. And like overall, just have, you know, more influence over the system. So it undermines this this property that we want of blockchains, which is permissionlessness and and makes these blockchains trend a lot more towards what's what, you know, traditional financial systems look like. Right. You have broker dealers and then you have like a few internalizers. And then and then like a few exchanges that are all sort of permissioned entities with a lot of a lot of certifications and and and sort of government induced monopolies over over the work that they do that that restrict what they're able to do.

• 24:33Speaker 02

  This is the less permissionless future, the dystopic future. Under the utopic future, we sort of maintain how transactions and blockchains have worked historically. Right. Which is you can send transactions to, you know, a local node or a local system with high confidence that it won't be censored somewhere between when you sent it and when it gets included and finalized into the chain. And you have some clear understanding over what are the different steps that this transaction took. You're not just sending it into like a black box where you don't really know how much you're paying or like what's happening to it. But you have some transparency over every step of the system. You know, who is operating on top of it?

• 25:17Speaker 02

  And, you know, what value are they taking from it? So we call this the MEV utopia. There's also this idea of the MEV supply chain. So this is something that maybe listeners can look up. The MEV supply chain aims to define who are the different actors that are operating on the transaction between when the user has an intent to issue a transaction and when it's finalized. And looking at if we are trending more toward utopia or dystopia is actually just looking at how vertically integrated is the supply chain? Is it sort of a single entity that's doing all of these?

• 25:57Speaker 02

  Or is it more modular where each entity or each service added is done by a different entity in sort of a modular way?

• 26:06Ryan Sean Adams?

  That's good. And I think we want to talk more about the supply chain, the MEV supply chain in a little bit. But I just want to paint this picture for bankless listeners who've been with us on the journey from the beginning. The dystopia and the utopia. One way to describe that using our parlance is the dystopia is the existing banking system that we have. Centralized actors, highly permissioned. You have to ask them in order to engage with your banking services. And the utopia solution where we solve parts of MEV is the bankless system that we're striving for. So you can see why it sounds like such a heady topic like MEV, maximum extractable value.

• 26:47Ryan Sean Adams?

  And we're talking about terms like PBS, protocol builder separation and all of these things. But this is really core. Like, we actually need to fight for this in order to get the bankless money system, financial system that we actually want. Like, at some level, everything hinges upon this. And the outcome will decide whether we're left with the old system we left or a new bankless system where everyone can be their own bank. That's why this is so important. David, I think you wanted to say something.

• 27:19David Hoffman?

  Yeah, the only thing I'll add to that is that the people that identified MEV very early on, like Phil Dian really brought it to the world and then with his presentation, early presentation, I believe it was the Flash Boys 2.0 presentation, which really pulled some very similar patterns that we've seen in the stock market, which Stefan, you've already kind of identified as like colocation, right? There are these high-frequency traders in the traditional stock market that are fiercely competitive with each other and like very specific on how long of a length the fiber octaves cables are between them and like the New York Stock Exchange, because they can get their trades in quicker and then they can collect all the value. And so when Phil Dian and others in

• 28:03David Hoffman?

  the space identified this thing that they dubbed MEV, they could predict this in the future, that a new equilibrium will become established as a result of MEV. And that particular equilibrium is one that capital creates capital at a faster rate than what we are really comfortable with, in a way that does not create decentralization, it creates centralization vectors. And so when Stefan here is talking about like the supply chain of block building, the supply chains of a transaction, and Stefan, you said it's good if it was horizontal rather than vertical with many, many different participants playing rather than one central actor. What we're trying to do

• 28:46David Hoffman?

  is create an equilibrium that is something else than what we would just see if we just let MEV go rampant without trying to solve it. So Stefan, like leading into this a little bit more, like you talked about like there's like the three different outcomes of like MEV, there's like the spam attacks where like MEV extractors will try and just like fill the blockchain with all their transactions, as many as possible. The other one is colocation, which we've already seen in the traditional world. And then the third one is something like flashbots and what we're going to be talking about for the rest of the podcast. The theme with flashbots is that this horizontal supply chain, really what we're talking about is we're putting something into a marketplace. Everything that...

• 29:29David Hoffman?

  Would otherwise be centralized refining mechanisms to turn that into a competitive marketplace. Can you talk about this strategy of making the MEV extremely competitive? And turning it into like a public market? And how this aids in our effort to make sure that the equilibrium that we are creating is one that stays in a decentralized world?

• 29:51Speaker 02

  Yeah, it's really interesting. So a lot of my background is sort of a mix of computer science and like market structure. Theory. And if you look at like a health of a market or industry in terms of competitiveness, you know, like anti-trust laws. A lot of it centers around barriers to entry. This is why I think the MEV supply chain, you know, description is quite useful. If you, if you look at the supply chain as what's the barrier to entry for a new actor to come in? And start participating in one of these like economic roles? You directly start to think about, you know, competition, how much competition is there in this market?

• 30:32Speaker 02

  And when you start to think about competition, you also start to think about how decentralized and permissionless is it? So, you know, this, this framework of, of competition is the, is the most useful way to, to start analyzing how, how the ecosystem evolves on MEV.

• 30:50David Hoffman?

  So you're talking about a competitive equilibrium, like, so why is this equilibrium important to maintain?

• 30:57Speaker 02

  Yeah, so.

• 31:00Speaker 02

  There's a couple of aspects to, to the competition that we can look at, right? There's the, just the competition between individual miners or validators, right? And we all want these validators in the ideal case to be extracting like a proportional amount of value to the amount of stake or the amount of hash power that they have. And really that's like a key metric that we look at for, for the health of the, of the system, the competition in the system. Are all the validators in a given chain accruing value at the same rate that's proportional to their stake? Or are they accruing value at a rate that's disproportionate? In which case we start to see trends towards, towards more centralization.

• 31:42Speaker 02

  We can use this right same model of evaluating concentration and competition at other layers as well, right? Our wallets extracting at the same rate, fees from their from their users, our bot operators, you know, capturing value at the same rate as other bot operators. You know, this this this concentration metric of the market is useful in each of these these verticals.

• 32:09Ryan Sean Adams?

  So let's talk about that for for a minute in the current state, right? So I think for the for the rest of this episode, we might talk about kind of like, you know, the past state where we really didn't see much MEV activity, maybe didn't need much MEV protection. But, you know, that's kind of the past. Now we want to talk about the present state of how blocks are made in Ethereum and what the MEV supply chain looks like. And I think we'll get to kind of the future state where things get really interesting, especially in a post-merge world, something really big happens with this thing called MEV Boost. We want to talk about that. And then even in the kind of the far future of incorporating some of this MEV technologies part of the Ethereum protocol. There's a lot to unpack

• 32:54Ryan Sean Adams?

  here, but but let's start with the present state. All right. How how does a block get made in Ethereum? What does the MEV supply chain look like? What are the parties that are involved? And how do they all work together?

• 33:08Speaker 02

  Okay, MEV supply chain crash course. Here we go. So it's right when Ethereum initially launched, the idea was everyone would run their own Ethereum node, right? And they would send transaction to their local node, propagate it over the peer-to-peer network, where it would reach a miner, and then the miner would include in a block, and then propagate that back to the network. So there's really only two actors involved here, right? There's the user, then there's the peer-to-peer network, and then there's the miner. And you sort of route transactions to them and they get included. Eventually, right, we have these intermediaries that came up to help users submit transactions and and sort

• 33:52Speaker 02

  of clarify the intent of how they want to operate against the chain. So I would Classify these sort of parties like the MetaMasks, the Uniswap's, the Infuro's of the world as this wallet layer, right? They help take user intents or user preferences and then convert those into a transaction that then they relate to the peer-to-peer network and then like makes it all the way to a miner and then the miner includes it in the chain. So great, we have this additional entity, right? Like the wallet application entity. What started happening when MEV opportunities became very big is that there was these new

• 34:33Speaker 02

  entities, bot operators that emerged and they started looking at the transaction pool and saying, oh, here's a transaction that creates an arbitrage opportunity. Let's send another transaction that either takes this arbitrage opportunity or front runs it or back runs it or whatever and then include it in the chain. Eventually they realized, you know, we're competing on sending these transactions over the transaction pool. What if we were able to, you know, just communicate it directly to the miner and not have to use the same public transaction pool as users did? So it created a whole other side channel, right? To the public transaction pool where users are used to sending their transactions, where

• 35:16Speaker 02

  transactions are now being routed directly to the miners using sort of a different network. So what Fashba did was realizing that this trend was emerging and then trying to provide more transparency to it. So create sort of this open permissionless market where you could route these transactions with sort of more advanced preferences to the miners. So we now have this sort of other, this other intermediary in the system, right? Which is the user sends preferences to a wallet, the wallet encodes these into some transaction, those transactions make their way over to bot operators, right? The bot operators then do their MEV thing and add transactions to it and then they

• 35:59Speaker 02

  send those transactions as a bundle to the miners for inclusion. This is the current state of the world. This is how Ethereum has been working for the last year and a half, right? Now with the merge quickly approaching, we're introducing yet another actor into this, into this supply chain and that is the one of the builder. So we're taking the role of the miner, right? And then we're untangling it into two different roles. The role of the block builder and the role of the block proposer. So a block proposer is just your average Ethereum validator, right? Anyone who has 32 ETH stake and is running an Ethereum full node.

• 36:39Speaker 02

  What they're doing is they are outsourcing the job of taking transactions and producing sort of a maximal value block to this, you know, network of builders. So the builder now sits between the operators and the validators, collects a bunch of transactions from the transaction pool, from block, from, from, from searchers, and then creates an optimal block with it that they then provide to, to the validators for inclusion. So that's going to be the world immediately after, after the merge. This is powered by, by, by, by what's called PBS, right? Block proposer, block builder separation.

• 37:21Speaker 02

  And the, the specific software that's used to achieve this is, is called MetBoost.

• 37:25Ryan Sean Adams?

  Okay, so, so you, you gave us kind of the, the tour, the warp tour through, through all of that. I want to kind of, you know, double back and, and make sure we understand, you know, the present and then getting into kind of the future. So the, the present state, for the first, like, I don't know, five plus years, the first, in Bitcoin, really, we didn't have an MEV problem. And the reason why is because we didn't have smart contracts. Is that the case, Stefan? So we started to notice these MEV extraction type of opportunities when in the timeline? Was this like 2017, 2018? When did Phil and others start noticing these things?

• 38:03Speaker 02

  So 2017 is when I started getting involved. And I think some of the initial explorations of MEV started happening on the research side. I think there's always been bot operators understanding where opportunities were. But, you know, in 2017 is when we started seeing ICOs and ICO sniping, which is MEV. We also started seeing sort of initial versions of, of Bancor and Ether Delta and sort of the, the MEV that gets exposed by, by those early DeFi applications. But there wasn't really meaningful volume. It was hobbyist MEV, if you will. It was all sort of individual bot operators that, that were targeting this. And it was maybe like five different people doing this.

• 38:48Speaker 02

  And when when things really picked up is when, you know, smart contract and DeFi really picked up, which was which was summer 2020.

• 38:56Ryan Sean Adams?

  Okay, summer 2020, and then it's accelerated from there, I would imagine. And, okay, so, enter Flashbots. It's it sounds like there was sort of this this informal arrangement, this informal selling of MEV, or, you know, paying a miner in order to get your your block through quicker. It was all very informal. But, Gover, what did Flashbots do? You created a marketplace, I believe, for this MEV activity and made it permissionless, transparent, and back to kind of the the core idea you were talking about earlier is you made a competitive environment for it.

• 39:34Ryan Sean Adams?

  So it wasn't an insider network, you know, talking in Telegram quarters behind the scenes to make these arrangements. It was completely transparent and now no open. Am I getting that correct? And how would you describe that?

• 39:48Speaker 02

  Yes, so the biggest risk we saw was exclusive access to hash rate. Right? And and we've seen this play out in other chains. So it's been really nice to see our sort of thesis be accurate here. Because this exclusive access hasn't really occurred on Ethereum. But but how this gets expressed is, you know, a large mining pool, you know, the largest on Ethereum right now is Ethermine, would say, okay, we have this MEV opportunity here. We know we're in the like best position to extract it. Let me take a contract with some MEV hedge fund and say, you can operate our nodes for us, do any type of MEV extraction that you want, and we will split the proceeds 50 50. Right?

• 40:31Ryan Sean Adams?

  Wow.

• 40:32Speaker 02

  You know, the the mine pool is happy because they're getting additional revenue. The the hedge fund is happy because they're they're they get to exploit these opportunities and and collect some some some fees from that. But ultimately, this is this is a closed market. There's no there's no transparency to it. And it shrines sort of two individual parties to compete against all the other miners and all the other bot operators. Instead what we thought was, okay, well, we need to have a system that is democratic, transparent, and is able to redistribute the revenues or the value that's accrued through

• 41:11Speaker 02

  MEV to the appropriate stakeholders. And so the initial auction that was designed using the system called MEV GETH basically did this, right? It allowed any miner to start accepting these bundles from third-party bot operators and then include them into their block, thus accessing all of the MEV opportunities available and likewise allowing any bot operator to start sending these bundles to all the miners. By multiplexing, right, all the bot operators with all the miners, all of a sudden you can have this transparent auction and market for price discovery.

• 41:53Ryan Sean Adams?

  And GETH, MEV GETH is just like GETH is an Ethereum client, of course, that miners run, and you're just adding the MEV software on top of that, right? And that's basically what the miner horizon, instead of vanilla GETH, you're running MEV GETH. Is that correct?

• 42:11Speaker 02

  It's a surprisingly simple change, like 100 lines of code.

• 42:14Ryan Sean Adams?

  Wow. And so how many miners are running this now?

• 42:18Speaker 02

  So yeah, about 90% of the miners have been running this for over the last year now. And yeah, because it's a very simple change for them, it's easy for them to maintain. And then, yeah, it allows them to connect to this.

• 42:32Ryan Sean Adams?

  This is why, I don't know if Ethereum users are aware, but like Flashbots has been kind of like a silent guardian of Ethereum at the protocol layer, protecting us against some centralization vectors here. If the MEV GETH was not available, what do you think would have happened with Ethereum over the last couple of years? Play that scenario out for us.

• 42:53Speaker 02

  Yeah, so you know, the place to look at for the counterfactual here is looking at other chains that don't yet have sort of an MEV solution.

• 43:02Ryan Sean Adams?

  Is this basically all of them, or do some have an MEV solution?

• 43:06Speaker 02

  Basically, all of them. Yeah, yeah, yeah.

• 43:08Ryan Sean Adams?

  All of the apps?

• 43:09Speaker 02

  And and a lot of them have experienced things like like deep reorgs or spam.

• 43:17Speaker 02

  Or just like a lot of concentration in the validator hash rate access. Now, we hear of anecdotal stories of many of these networks, you know, over 70, 80% of the hash rate or validator power being controlled by single entities, even though on-chain it looks sort of distributed amongst a large set of validators. Because they can then sell all that block space in bulk to to third parties and connect and collect sort of revenues from that in a in a sort of off-chain manner. So so there's a lot of much shadier things, you know, going on in these other chains that don't have these permissionless, democratic, transparent marketplaces.

• 44:02Ryan Sean Adams?

  So we already have the dystopias. We're not really waiting for them. We already have them. Like, what you're trying to prevent is from Ethereum specifically, and maybe for Chains of the Future, from becoming dystopias.

• 44:14Speaker 02

  Yeah, that's true. I mean,

• 44:19Speaker 02

  we have it and we don't. You know, some of these other chains are just much more centralized by nature as well. Right? Just the way that they've done sort of ecosystem development. A lot of, you know, the chains are controlled by the foundation, and then the foundation can have a lot more say over the type of activity that that ends up happening. But, you know, for the for the more decentralized ones, then we have seen a lot of this this sort of concentration through through MEV. We have seen this sort of dystopia emerge. It still is the case today that the majority of economic activity, sort of by by orders of magnitude, is is on Ethereum. So, you know, our stance at Flashbots is,

• 45:02Speaker 02

  if there's one place to protect decentralization, it's on Ethereum. And then hopefully, whatever abstractions and and solutions that we're able to develop in this ecosystem can then be ported over to to the other ecosystems.

• 45:16David Hoffman?

  I want to drill down on two parties really quick, really just to emphasize why this new equilibrium emerges with flashbots. So we talked about earlier, there's the largest Ethereum miner, Sparkpool. Is that, is that the largest one?

• 45:30Speaker 02

  There used to be.

• 45:31David Hoffman?

  No, it's Ethermine. Ethermine. And then say, let's have some like, you know, imaginary like prop desk, Jump Capital, for example. Jump Capital and Ethermine, make a handshake and be like, alright, Jump Capital sets a Sparkpool, give us all of your order flow, like, show us all of your transactions, so we can do all of our MEV and Sparkpools. Like, okay, sure, great. Like mutually beneficial relationship to the loss of every other non-Sparkpool, non-Jump Capital entity. The reason why, if you are a miner, and you are a miner, it's like sending your hash power to Sparkpool, or, or just a miner in general, or you're the other party, you're an MEV arbitrager, like, you know, balancing unit swap pools,

• 46:13David Hoffman?

  doing liquidations on MakerDAO. The reason why you would choose flashbots instead of choosing Sparkpool, or if you're Jump Capital, I guess if you're an MEV miner, you can't join Jump Capital, and that's kind of the problem. The reason why you would choose flashbots is that if you are a miner, you get more money if you choose to go through flashbots than you would if you were to Sparkpool, because Sparkpool is giving 50% of that rewards over to Jump Capital, not to you. And so there's, you have a raw financial interest to joining flashbots, because you pull out a larger proportion of that MEV. If you're an MEV bot operator, and you have a really good MEV like algorithm, highly refined,

• 46:56David Hoffman?

  well, if you, you can't join Jump Capital, so you have to go to somewhere else, and you got to go to flashbots, because it's an open permissionless marketplace. And so what flashbots has done is created a highly competitive environment that is extremely beneficial to proof of work miners, because they extract the most MEV that way. And it's also the only place where MEV like bot arbitragers can have their like playground of, you know, sandbox of their, to run their bots, because it's the only open permissionless marketplace for bot operators. So flashbots is really just like a meeting place for hash power and MEV bots. Am I explaining this correctly? What would you add on to that?

• 47:38Speaker 02

  I think that's exactly right.

• 47:41Speaker 02

  So here's one thing I want to add about this. We spend a lot of time thinking about incentive compatibility, right? And we think that the only systems that are robust long terms are ones where like every single actor, it doesn't have a benefit from deviating, right? So this is, you know, this is the equilibrium that we want any of these crypto economic systems to have. Everyone is incentivized to play the same game and the game is sort of beneficial to all the other actors. It doesn't have some negative externality on like end users that they're like stuck paying forever. So the system is designed in this way, right? It maximizes the amount of value that miners get because this is inherent to MEV. Maximal extractable value, right?

• 48:26Speaker 02

  Like they own this value. And so the only way to create incentive compatible system is one where they end up extracting the majority of this value. You can also create system in which you minimize and like reduce the amount of MEV or like the amount that miners can can operate on top of. And those, I think, are also, you know, extremely valuable design approaches. But they sort of start at the application layer, right? They start by building applications that just do not expose as much of this value in the first place. So incentive compatibility here is crucial to have these systems that that everyone is happy to adopt.

• 49:10Ryan Sean Adams?

  It's really interesting because like an example, David, that that you were just saying, if you've got Sparkpool and you've got Jump Capital, right? It's like, like what we know is going to happen over time. If there was no flashbots in between, if there was no MEV geth, is that Sparkpool gets enough money and they just vertically integrate and they, Jump Capital gets enough money rather than they vertically integrate and they buy Sparkpool, right? And then it all becomes one, like that is the nature of these markets where even somebody hearing that, they're like, well, it's actually like two parties. No, it's not going to be two parties. They're just going to acquire, they're going to consolidate, they're going to merge, they're going to. Integrate, it's kind of the way like, you know, Disney owns freaking every brand.

• 49:55Ryan Sean Adams?

  They've got Marvel, they've got Star Wars, they've got everything. It's a big conglomerate. That is the nature of these types of capital markets unless you enforce or create some sort of decentralized marketplace where everyone, no one's disadvantaged and everyone has the freedom to advantage and you've, as Stefan was saying earlier, you've lowered the barrier to entry. I just wanted to make that point too, as you were talking, David, I was thinking about that.

• 50:21Speaker 02

  You know, the only way to see this is like, if we allow a single party to have sufficient market power, capital, to be able to purchase other parties and like integrate, they will, they will. So the only solution is to try to maximize competition. It's the only way to protect the decentralization of the system.

• 50:42David Hoffman?

  Well, the other solution is of course, top-down regulation, but you know, maybe, maybe in the world of crypto and crypto people, that actually is not a solution. That's actually a failure scenario. So the, yeah, you're right. The only solution is, is bottom-up competition. And so this is why this, this solution for this is so elegant and so, so honestly, like what makes people like me and Ryan like really optimistic about the future, that we can solve some of these centralization problems with natural, like not anti-trust regulation, but anti-trust mechanisms, like which are just marketplaces at the end of the day, like making sure that competition can flourish, because the more competition there is, you know, the better it is for everyone, everyone involved. Stefan, I'd like to take this conversation into the next phase, because this is, we're talking

• 51:27David Hoffman?

  about the current state of Ethereum, but Ethereum never, never stays the same. Ethereum is about to change. So what we've been talking about so far has been MEV GETH. But as we go into proof of stake, post-merge, we get into a future state of Flashbots, which you guys have been working on tirelessly for, for many, many, many, many months now, which we, you guys have been calling MEV Boost. Can you talk about MEV Boost and how it's different from MEV GETH?

• 51:53Speaker 02

  Yes. So we started working on this over a year ago, knowing that there was a lot of progress being made and commitment from Ethereum core developers to move towards, towards the merge.

• 52:09Speaker 02

  You know, for us, obviously, we didn't have much of a choice but to look at this because all of a sudden, this 90% of miners who are running our software becomes zero. And then there's this entire new set of stakeholders, node operators, and so the validators, who don't have software to run. So the immediate, obvious answer would have been, okay, well, let's just port the software that's already working, right? And apply it over to the validators. And happy days. We still have this timeline patch on top of the client. We can still run Gath. Everything is sort of running the same way. But we thought we could do better.

• 52:52Speaker 02

  So, you know, one of the principles that we have is to incrementally improve the trust assumptions of the systems that we're building. And right now, there's sort of a few properties of how this auction works that relies on trust. Miners see the full content of the payloads that they receive. They see the full content of the bundles. And so they still have the ability to front-run those bundles, or deprioritize them, or censor them completely if they so wanted. What this meant is that you couldn't send these bundles to just anyone, right? This would be like a market-breaking flaw in the system, where no one would then trust

• 53:37Speaker 02

  the privacy and the integrity of this auction, and they would no longer participate in it. So there was a scalability limit in the number of entities that you could have participating in this marketplace on the miner side. So we wanted to solve this. We wanted to create a system that was more permissionless, where you could have 100% of the validators on ETH2 participating. And the way to do that is to shift from this idea of having bundles to the idea of having full block proposals, introducing this role of a block builder. There's this blog post by Vitalik on ETH Research introducing the concept of PBS, which is achieving exactly this.

• 54:22Speaker 02

  It's achieving separation between the block proposer and the block builder in such a way that the block proposer no longer needs to see the content of the block that they're proposing to the network. They only need to make sure that they're selecting the block that has the highest amount of value. And then they can outsource completely the job of block instruction to these third parties, block builders, that can themselves be more centralized potentially, and they're having less of a risk for the integrity of the chain because all of the validators can participate equivalently. So this is sort of the key change that we aim to have with the merge.

• 55:04Speaker 02

  And it took a while to figure out what was a design that was compatible with the merge. PBS as a whole, the idea behind it is to have a consensus level change, right? A change that would require an upgrade to the Ethereum network as a whole, modify the for-choice rule in a way that sort of embeds this directly into the protocol. And we knew that we didn't want to delay the merge any more than it's already been delayed and didn't want to ship any of these like large, you know, features at the protocol level before the merge. So we started working on a design that could sit at a layer above consensus, right? This sort of marketplace approach that Flashbots has, but with some of the additional properties of the system.

• 55:49Speaker 02

  So this is called MavBoost. And yeah, it's in the final stages of testing now with node operators. We have this landing page called boost.flashbots.net, where you can keep track of the progress on adoption of that software. And yeah, it's promising to bring a lot of neat benefits to Ethereum.

• 56:17David Hoffman?

  And so this is really a product for validators, for people that plan on staking their ETH and running a node. This is a solution for them. And we can go, and we probably will, go into the details about like how MEV Boost, preserves the decentralization of Ethereum, where we've already alluded to it a lot. But you can kind of take it on faith when the function, when the mechanism is that validators are presented with an array of blocks, like a little Mr. Menu comes up and says, "Here are your available blocks, sir," or "ma'am." And then you can say, "I picked the one that gives me the most money." And you'll pick that one because you're rationally incentivized to. And you'll pick the one that has the biggest MEV tip that's associated with it.

• 57:01David Hoffman?

  And you can just take it on faith that that is going to be the thing that preserves the decentralization of Ethereum the most because you're capturing the most value. The value is being captured by the Ether stakers and not who is ever bundling up all the transactions, doing all the MEV. And because of the, by nature of like, all the other ones are paying you less, you pick the one that's paying you the most. So you know that you are pulling the most money off of the table and leaving the least amount on the table for jump capital. And so it goes to the individual staker, who we hope is a decentralized network of stakers, rather than a much more professionalized block builder or expert block builder that is like an activity that I have no idea how to do

• 57:45David Hoffman?

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• 1:00:19Ryan Sean Adams?

  So let me make sure I understand this. So we've got, right now, we're in the stage pre-merge of you have this software called MEV-GETH, which is just like 100 lines of code that you add to the GETH client. Cool, got that. 90% of miners have deployed that. All right. Now, you're taking a similar model, I think, and you're saying, in the proof-of-stake world, post-merge, we've created some additional code that can be added to an ETH validator client, and we're calling that MEV-boost or MEV-boost. That's where we get the MEV part. And I would assume individual client teams, you know, we have like Prism and Nimbus, all of these teams, do they have to adopt it? Are they deciding

• 1:01:03Ryan Sean Adams?

  to adopt it? Or are the individual validators or validating pools, you know, like all of the validators in the Lido network, are they having to adopt MEV-boost? What does the MEV-boost adoption path depend on?

• 1:01:19Speaker 02

  All of this, all of the above. So this is one of the challenges with developing these pieces of software is there's so many different stakeholders that you want to work with and get their input into development process. So it's sort of a fully open source approach, collaborating with everyone from EF research team, core developers of all these different clients, node operators, everyone from, you know, the more distributed, decentralized ones to the fully custodial centralized one, creating a piece of software that meets all of their diverse requirements and that they are all sort of on track for

• 1:01:58Speaker 02

  integrating. A lot of cat herding, right? But yeah, so at the core rate, what this the software aims to do, that's somewhat different from MEV-GETH, is aligned with the objective that the Ethereum core developers had with shipping clients for the merge. So protecting client diversity was super important. You know, as we all know, the majority of nodes on Ethereum today are GETH nodes, right? GoEthereum nodes.

• 1:02:30Speaker 02

  And that creates some, some, some risk because if there's a, you know, a consensus uh, issue within the, um, the Ethereum client, this all of a sudden sort of becomes a canonical, um, the canonical chain, um, and requires some, some social coordination to recover from. So, um, in, in effort to avoid this, the goal with, uh, proof of stake Ethereum is to have a, a wider diversity of, of clients. What this means for us is we shift away from just having the single patch on top of a, a client to now wanting to build a sidecar or an individual piece of software that can plug into any of the consensus client using a standard API.

• 1:03:11Speaker 02

  Um, so there's this thing called the, uh, we're getting into the weeds here, but the Ethereum Builder API, right? Which is a standard specification that all the different client development teams have implemented. Um, and, and, uh, the MEV Boost software plugs into this, uh, protects the, the, the client diversity of, um, of Ethereum.

• 1:03:30Ryan Sean Adams?

  Okay. So this is pretty cool, but it's like, but like your pitch to all of these different stakeholders is, um, I don't know. It seems like a good pitch. It's just like, add this code and you get more money. Right? Whether you're validator, pool operator, I guess maybe the client teams have to do some extra work, but they probably want their client to be able to get their validators who use it more money. So the pitch seems like it would be as adopted as, as MEV get was like, how long do you think it'll take to get to basically everyone is, is using MEV Boost? Does that happen from day one or will it take some time?

• 1:04:09Speaker 02

  Yeah. Our goal is to target everyone having that, uh, as soon as a merger arrives. Um, and, um, you know, it's, it's mostly a question of the node operators at this time. Um, how comfortable they are in their deployments, um, and when they have done so the background work, work to be able to, um, to expose, um, you know, MEV rewards to their, to their stakers.

• 1:04:34Speaker 02

  But you know, all the interfaces within the Ethereum clients are implemented. MEV Boost itself is feature complete. And now it's at the stage of testing in testnet environments with node operators.

• 1:04:53Ryan Sean Adams?

  So this is going to be cool. And guys, I just want to remind Bankless listeners, this kicks in right after merge. So much is happening at the merge, right? Proof of work gets turned off, new blocks and proof of stake start producing. And MEV Boost will be in play too. And I'm curious, Stefan, what kind of difference might we see in the APY for staking? Right? So like, let's say, I don't know, it's 4%. What is it right now staking APY? 4.2. 4%, something like that, 4.2%. That's without MEV Boost and that's without staking. Do you have any numbers on what it would look like with MEV Boost turned on?

• 1:05:36Speaker 02

  Yeah, a couple of things I want to touch on. So one of the things you brought up is, you know, it's cool that this is ready right at the merge. The real answer is like, we don't have a choice but for it to be ready at the merge. Because MEV will keep happening.

• 1:05:49Ryan Sean Adams?

  Yeah.

• 1:05:49Speaker 02

  You know, whether it's on proof of work or proof of stake, MEV will stay there, right? And it'll keep happening. And what happens if you don't have like an efficient block-based market for MEV after the merge? Is you go back to the way that Ethereum was during like summer 2020, which is like a lot of spam, a lot of gas wars, and everyone ends up paying more for inclusion and getting like a degraded experience. So in order to mitigate that, you want to have these like efficient marketplaces in place as quickly as possible. So that's why like immediately after. And yes, in terms of, you know, how much reward this provides validators? Well, as we all know, right, issuances of ETH after the merge goes down a lot.

• 1:06:33Speaker 02

  And so a lot of the value that miners have been collecting up to date has been this 2 ETH block reward every block. This goes away. And now, you know, MEV becomes a much larger piece of the total reward that validators receive.

• 1:06:50Speaker 02

  We have some numbers that are analysis from last summer, right? Completely outdated. There's a lot of things that happened since then. First of all, the market, you know, went crazy and then died down a little bit. Also, EFP 1559 came out and sort of modified a lot of these numbers. But anyways, the the metric back then was around 60% of the rewards of validators is going to come from from MEV. We're working on outdated numbers, so please caveat this. It'll be potentially lower than than this, but still some significant amount of value that that can't that can't really be ignored by validators.

• 1:07:28Ryan Sean Adams?

  Okay, give us that number again, those numbers again. Sorry, I missed it.

• 1:07:32Speaker 02

  It was 60% was the initial analysis.

• 1:07:34Ryan Sean Adams?

  60% of the total reward would be MEV. So we're talking at least a few percentage points, a few hundred bips on top of like, you know, if staking is 4.2%. An extra couple of percent.

• 1:07:49Speaker 02

  4.2% reward right now, right? You'd look at 10% APY total.

• 1:07:52Ryan Sean Adams?

  Wow. Wow, yes, right. 10% of like 60% of total, right? And that's what he said. So that would be 6%. If total was 10. Wow.

• 1:08:05Ryan Sean Adams?

  And that could change, of course, given like market conditions and MEV potential. But it's like, that's a big reason to go get MEV boost. I'm not worried about your adoption, sir. I think it's gonna be fine. Think everyone's gonna want this. I I guess there are so many different, you know, side quests we could do on this. Like, one part of me wants to ask on a side quest, by the way, are there going to be any big MEV issues? When proof of work is was turned off and we migrate to proof of stake? Like, what's gonna happen there during that kind of during that gap? But but another question I have before we get there is maybe like, why are you guys doing this? Why is Flashbots doing this? Like, do you guys have a token, you know, you're trying to pitch or something like? Are you called an organization at the beginning?

• 1:08:50Ryan Sean Adams?

  Are you kind of a commercial enterprise? You're here to make money? Are you like a nonprofit trying to make the world a better place? Because this is definitely a public good. But how do you fund yourselves? And what's kind of the what's in it for Flashbots?

• 1:09:06Speaker 02

  Okay, which do you want to tackle first?

• 1:09:08Ryan Sean Adams?

  Let's do the second one. I want to hear about the incentives of Flashbot doesn't work.

• 1:09:13Speaker 02

  Okay, yeah, so Flashbot is sort of emerged from a Telegram group of researchers, really. And what we realized very early on was if this is a very difficult problem, and if we want to attract the best talent to solve it, we can't really structure it as just a nonprofit entity. So we did raise some money from investors that are highly aligned with Ethereum. So one of our biggest backers is Paradigm. And the reason why we wanted to partner with them to fund the organization was around their heavy focus on research and so their proven research output. So we are structured as a for-profit entity,

• 1:09:57Speaker 02

  but very deeply ingrained into the sort of culture of our organization is commitment to the principles that we've laid out in our initial foundation. So we have sort of a public record of these commitments that we have towards a community. And really, that is our North Star. We don't have any sort of monetization method right now or plans to have monetization methods anywhere in the future. At some point in the future, yes, but not in the immediate future. And the reason why is we don't feel that MEV has been solved as a problem yet. We sort of have confidence that if we are able to build solutions that actually help achieve the principles that we've laid out,

• 1:10:42Speaker 02

  there will be some way somewhere in here for us to monetize. And really, the main thing that we have to do is commit to those principles and follow through with them. And yeah, that's the way we've been operating so far.

• 1:10:57David Hoffman?

  So in the future, with PBS, Proposer Builder Separation, this will go from, which is more or less what MEV Boost is now, but except in its current say MEV Boost is kind of like the sidecar to a bunch of Ethereum clients. In the future, we'll have an EIP, we'll have a hard fork to Ethereum that will actually enshrine the same role into the protocol and it'll be called Proposer Builder Separation. But once the service of Flashbots becomes a part of the actual core Ethereum protocol, what's the role of Flashbots beyond that? Like, does Flashbot sunset? Or how do you guys have a company, once your guys' service actually just becomes a part of the Ethereum protocol?

• 1:11:41Speaker 02

  So PBS is a small part of the MEV solution, is sort of, you know, the answer there. I'll link us back to the MEV supply chain question. The MEV supply chain is actually multi-dimensional. So not only do you have a supply chain on a single blockchain, but you have a supply chain on every single other blockchain as well. And PBS really only targets the relationship between builders and validators. It doesn't say anything about the relationship between users, wallets, wallet searchers, searchers, block builders. Those are all sort of solved by other solutions. So while PBS is hugely beneficial to the decentralization of the

• 1:12:22Speaker 02

  system on the, at the protocol level, right, and maintaining validator decentralization, the focus then becomes how do you enable decentralization at other layers of the stack? How do you enable block builder decentralization as a whole? How do you solve problems like cross-domain MEV, cross-chain MEV? How do you solve the problem of exclusive order flow? These are all other sort of MEV problems that remain unsolved even in a PBS world.

• 1:12:56David Hoffman?

  We've used this model on Bankless a number of times before called Moloch, this god of coordination failure. And Moloch is something that you fight, but you can never really finally slay. Like, he never goes away. He just emerges in a different place. And so is your answer, Stefan, that Flashbot's focused on MEV Boost right now? And once it gets enshrined in the protocol, that part of centralization, that centralization vector kind of actually does go away. But then there's like other pockets that MEV Boost will like hop around to try and, wherever there's a vertical integration capture, wherever there's like a centralization vector,

• 1:13:38David Hoffman?

  Flashbot will come in and figure out some mechanism to make that more into a competitive marketplace. And then it'll solve that problem. Then it'll go on to the next one, the next highly vertically-integrated centralization vector. And then Flashbot will go there and try to make a marketplace out of that and then move on. Is that, that's kind of the idea?

• 1:13:56Speaker 02

  Yeah, exactly. And I think a lot of these solutions will sort of converge, right? I don't think that it is an infinite problem space. I think it's a very vast problem space. Like, when we think on the research side of the organization about a research roadmap, we think on like the 20-year, maybe even 50-year horizon. Like, there's just some fundamental computer science and cryptography problems that need to be solved if we're going to solve the MEV problem like at the fundamental level. And a lot of these solutions that we're looking at now are short-term patches that move us towards this ultimate solution.

• 1:14:35Ryan Sean Adams?

  Well, super interesting as well about this model is effectively, you guys are like Ethereum Core devs now, I guess, if that's what that means. And what's super interesting about this model is this is private sector developing an important enough feature and, yeah, feature set that eventually, public sector, the Ethereum protocol itself says, "Oh, I want that. Please, we need this. Let's embed it deeper in the protocol." And your work becomes embedded and enshrined in the Ethereum protocol. Therefore, making you, Stefan, an Ethereum Core dev, I guess.

• 1:15:11Ryan Sean Adams?

  I guess that's how it works. And that's very fascinating to me. Can you tell us a little bit more about PBS itself as it's enshrined in the Ethereum protocol? Like, how far away is that? And like, how much do we actually need it? It seems like MEV Boost can like, do a pretty good job of it. So maybe it's not that urgent? Or you tell us, when is it coming? How urgent is PBS getting that enshrined in the protocol layer?

• 1:15:39Speaker 02

  Yeah, so it's, you know, notorious difficult to predict, you know, consensus level changes on Ethereum. I will say, you know, PBS is still at the research phase. There's a lot of ideas for how it can work, but it also is intermingled with a lot of other items inside of the Ethereum roadmap. Right? So, so it has cross dependencies on several other things. And as we learn more about how MEV Boost performs, and how it gets used, it will also help inform how to design PBS. So a timeline is, you know, impossible to

• 1:16:19Speaker 02

  give, but it won't be in the next year or two is my, is my very conservative estimate. So we'll have some, some, some period where, you know, we expect the ecosystem to evolve on top of MEV Boost, you know, sort of stress test it, figure out how it needs to be improved, how it needs to be changed. And then I expect iteratively, we'll move more towards an enshrined system from there.

• 1:16:47Ryan Sean Adams?

  And our, like, MEV Boost kind of gets us what we need, right? Like, we don't really need this PBS feature in order to protect us against decentralization at that, at that level?

• 1:16:59Speaker 02

  We do still need it. So MEV Boost gets us part of the way there. The problem is that it sprinkles a little bit of trust, special sauce onto the system to be able to work. So while it achieves the decentralization on the validator side, it introduces these relayers, which Are sort of delegates of validators, but these relayers still have access to the information. So they are sort of receiving blocks from block builders. They are holding on to them and then they are like submitting them to validators for inclusion. This relay role is the one that that full PBS or Entrain PBS gets rid of.

• 1:17:44Speaker 02

  So it's it's important for improving the trust guarantees of the system. But the system works even even with those in place.

• 1:17:54Ryan Sean Adams?

  Yeah, how how worried should we be about that relay relay role? I guess from a from a practical perspective, is that a large centralization vector? I'm really not sure how to think about the relay role right now. I guess I haven't given that role too much thought.

• 1:18:12Speaker 02

  So the main the main concern with regards to block builders or relayers is really one of of censorship. Right? So if you have a single entity that's sort of accepting these these transactions and holding on to them before submitting them on to validators, they have sort of the opportunity to to perform censorship over those transactions. So if you look at the PBS roadmap, it gets rid of these roles and introduces some mechanisms to help protect against against censorship, which is something called CR list. And and those like help mitigate this this specific issue.

• 1:18:56Speaker 02

  One thing that's worth noting is like while relayers have the ability to to perform censorship, they don't have the the incentive to do so. And they still incur a cost to perform censorship. Right? So it means that all the blocks that end up being produced, either from the block builder or the relay, is going to be less valuable, which means some other relay or some other builder can come in and produce more more valuable competitive blocks. So so really, the censorship piece is is the piece that's that's most crucial to solve in the Entrain PBS.

• 1:19:32Ryan Sean Adams?

  Yeah, it's interesting to think about it this way. It's like MEV boost as a whole is kind of like, you know, plus 10 points, let's say, to the to the character stats of Ethereum for MEV resistance, which is a great thing. But it's also maybe like a minus one point or minus two points from a censorship resistance perspective. Maybe that's the case. And then PBS kind of plugs that hole. So, you know, we get back to the censorship resistance that that we want to have from the Ethereum system. Okay, just a quick branch down the other rabbit hole. So I think we've described past, present, and future for MEV and Flashbots

• 1:20:12Ryan Sean Adams?

  as it emerges from first MEV geth. That's what Flashbots is doing today in the proof of work mining world. But that that that world is fast fading. And hopefully, maybe September, October, we will have the next stage, which is MEV boost. And so we've got this marketplace for proposers and builders kind of achieving a similar objective of creating a marketplace for MEV, separating these concerns. And then eventually, years later, potentially, we get this technology enshrined in the protocol as a protocol builder separation. So this is enshrined PBS. But there's this other thing that's happening, of course, with the merge. And I'm curious, it seems to be the case that there's going

• 1:20:55Ryan Sean Adams?

  to be a lot of MEV type of opportunities maybe stuck on the proof of work chain in this transition to proof of stake. At least I've heard big brain MEV folks talk about it in this way. And I'm curious if, yeah, what would you say about this? At merge time, at merge o'clock, are there going to be some like weird MEV things at play? And what do you expect to see?

• 1:21:20Speaker 02

  So I don't know.

• 1:21:23Speaker 02

  Exactly. What will happen? I know there'll be a lot of chaos. I know that a lot of very smart bot operators have been thinking about this for a long time and like building strategies because there will be a lot of like one-off opportunities, one-off arbitrage, one-off, you know, um, things that can be done, um, between the, the, the two chain. Let's say that the proof of work chain continues to, to march on, uh, or whatever. So there's going to be some, a little bit of, of MEV chaos. That's, that's, uh, pretty much, uh, for granted. Um, I don't think it's anything that's going to compromise the stability of, of the system or like compromise the merge

• 1:22:06Speaker 02

  from, from happening. Uh, but it will mean that, you know, bot operators who are prepared to capture it will, will make a little bit of money, um, at that time. Um, now the, the alpha is knowing exactly what those strategies are and I don't have that. I don't have that.

• 1:22:22David Hoffman?

  I've, uh, I've described, uh, the block one of the proof of work fork chain as that one incident in San Diego a few years ago where they were doing a fireworks show, but because of a computer malfunction, all 7,000 fireworks all got lit off at once rather than, rather than orderly, orderly and, and normal like distribution of fireworks. Anyways, um, Stefan, there, there's a few like happy byproducts of MEV boost that I, I'd like to go into. There, there's some things that it enables that it didn't, doesn't intend to enable, but it happens to just bring along with it. Things like account abstraction. Maybe there are others. Could you walk us through, uh, just some of the extra cool stuff that comes along with MEV boost?

• 1:23:02Speaker 02

  Yeah. So, um, you know, one of the things that's always been sort of a limitation of, uh, of app developers on top of Ethereum is the abstraction of a transaction. You've always had to encode whatever you do into a transaction that you then send over to the network for inclusion. Um, and you know, the reason why that's been a particularly difficult abstraction to break is because a transaction has these properties around, um, around DOS protection, right? That, um, you need to have a fee payment embedded into the transaction and it reverts on chain and like you have all of these things that like require you to pay for it using ETH.

• 1:23:46Speaker 02

  This is all sort of becomes a thing of the past when we start to look at at MavBoost, because block builders can start introducing any sort of abstraction that they want on top of their block building algorithms. They can start to say, you know, if you have a smart contract on chain that accepts signed messages, you can actually issue a transaction by just signing like an arbitrary piece of text and you can pay for it using DAI or USDC or like any other stable coins. And then behind the scenes, it sort of converts that into ETH and then uses the ETH to pay

• 1:24:31Speaker 02

  the base fee and pay for the inclusion.

• 1:24:36Ryan Sean Adams?

  By the way, we did an entire episode on this with Matt from BlockNative called Ethereum's Hidden Power Structures, and we spent a little bit of time speculating who this new builder class would look like. Because so again, in proposer builder separation, right? The proposer, that is kind of the at-home validator individual running an ETH node, like very easy job, kind of you're just running your ETH node. But the builder requires some additional skill and it's probably going to be commercialized. It's probably going to be a set of organizations or companies or entities doing this. Do you have any speculation on what this builder market might look like, Stefan?

• 1:25:17Speaker 02

  It's very difficult to predict. You know, you can analyze any market using some first principles, right? Like building right now is like a blue ocean, like there's no one doing it. So probably what's going to happen is there'll be some players that are like newcomers and they'll have a first mover advantage. Then there'll be like an explosion of competition because ultimately block building is meant to be like a competitive landscape. And then a lot of innovation is going to happen, a lot, a lot of innovation. So we'll start with a few builders, then a lot of builders. Then most of the innovation is going to have taken place. And then we'll see some concentration again back into fewer builders.

• 1:26:01Speaker 02

  Ultimately, it's likely that, you know, the marketplace is going to have some kind of power law distribution, where the top builders aggregate the majority of the proposal power. But one of the things that we want to optimize for is to keep this distribution as flat as possible. Right? So what Flashbot is going to be looking at as this builder market evolves is what are the sources of advantage? And what are the key innovations that some of the block builders are introducing to the marketplace? And how can those be commoditized? So that they sort of remain accessible to all the other block builders. That will be sort of a fascinating journey that I think the Ethereum ecosystem is going to engage on over the next few years.

• 1:26:43David Hoffman?

  Is there a risk of over-centralization in the builder space?

• 1:26:48Speaker 02

  Yeah, I mean, certainly there is. Certainly there is. I mean, implicit into the design of PBS is saying, okay, MEV is a centralizing force. But we would rather the centralization happen at the builder level than at the validator level. The cost of that is the risk of censorship. We as Flashbot believe that like, you know, builder centralization is not necessarily an acceptable outcome. And we want to go one step further and actually achieve builder decentralization. Because we think that even if it's just an economic advantage, that you have a single builder, like maybe a handful of builders, five builders,

• 1:27:27Speaker 02

  you still have a better system if you have a larger number and if they're all commoditized.

• 1:27:36David Hoffman?

  Beautiful.

• 1:27:38David Hoffman?

  We were going through some of the happy byproducts of MEV Boost and we went down the account abstraction rabbit hole. Are there any other happy byproducts as well?

• 1:27:49Speaker 02

  Yeah, I mentioned cancellations, I mentioned

• 1:27:55Speaker 02

  rescuing, white hat sort of fund rescuing. I think mitigation of MEV is going to be one that we'll see and hear more and more about block builders that have various features that help protocol developers or application developers mitigate and sort of reduce the amount of MEV that they expose.

• 1:28:25Speaker 02

  Yeah, it's difficult to predict exactly which direction that things are going to take, but those are early explorations, I think we'll see.

• 1:28:33David Hoffman?

  Well, Stefan, to kind of wrap it up here, you alluded to the theme of MEV Day at DevConnect in Amsterdam, and it was very much good versus evil, light versus dark, dystopia versus utopia. And these are just framings that I really appreciate because they understand crypto and what we're really doing here as this multi-decade-long fight against the evils of centralization. Not all centralization is evil, but systemic centralization certainly tends towards that. And so putting it into people's brains that there is a lot at stake here is a framing that I think we could lean into a little bit more here in the crypto space. So from your perspective, you have some of the best vantage points in all of

• 1:29:16David Hoffman?

  crypto is to like the centralization risk of our base layer protocols. And so if we were a needle going between light and dark, like how optimistic are you that we are able to push this needle into the light as we go forward through our protocols?

• 1:29:35Speaker 02

  I think the future is bright. You always have to maintain an optimistic view over the future. I think that we are going to see a lot more centralizing forces and we are going to see more scary things take place. Ultimately, though, the only thing that matters is like a commitment of the community of the builders and the ethos of caring about decentralization to survive, for solutions to keep innovating and being brought forward. And I think that spirit is still holding out like extremely strong. It's what we tried to perpetuate. And as long as that spirit exists, there is a huge amount of hope. So I'm feeling very optimistic about it.

• 1:30:13Ryan Sean Adams?

  Well, Stefan, thank you so much for joining us. This has been a fantastic episode. I know it was our goal, David and myself, and for the Bankless Nation, to learn a little bit more about MEV Boost and what is happening post-merge, and also how that affects the Ethereum protocol and PBS. I think we accomplished that today. Thank you for all the work you're doing. This is a public good for Ethereum, for crypto, and ultimately for the world, and we appreciate it.

• 1:30:39Speaker 02

  Yeah, thank you. Thank you so much for helping educate and get the word out about it.

• 1:30:44Ryan Sean Adams?

  Absolutely. And Stefan, is there anything listeners can do to find out a bit more about Flashbots and how to get involved?

• 1:30:51Speaker 02

  Yeah, so for MEV Boost specifically, keeping track of the progress there, boost.flashbots.net. And then, we are kind of difficult to keep track of because we don't necessarily have a lot of websites or Twitter activity, but we have a website, a writings website where we publish blog posts called writings.flashbots.net. And yeah, I recommend checking out both those resources to learn more.

• 1:31:24Ryan Sean Adams?

  Bankless Nation, we will include a link to those in the show notes, boost.flashbots.net and writing.flashbots.net. Also, second action item for you. Once you're done looking at what Flashbots is doing these days, listen to our sister episodes if you haven't already. The first is a guide to the Ethereum roadmap, where David goes through the entire Ethereum roadmap and talks a little bit about MEV and PBS. And also, the episode I mentioned earlier today, which is Ethereum's hidden power structure, where we go into detail in this new role, this block builder role, how that's going to affect the economics and power structures in Ethereum. So we've got some homework for you there. And as always, got to end with this. Crypto is risky.

• 1:32:07Ryan Sean Adams?

  You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.

• 1:32:15David Hoffman?

  Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcast and community as a Bankless Premium subscriber to get the most out of your Bankless experience. You'll get access to our market analysis, our alpha leaks and exclusive content and even the Bankless token for airdrops, raffles and unlocks. If you're interested in crypto, the Bankless community is where you want to be. Click the link in the description to become a Bankless Premium subscriber today. Also, don't forget to subscribe to the channel for in-depth interviews with industry leaders, Ask Me Anything's and weekly rollups where we summarize the week in crypto and other

• 1:33:00David Hoffman?

  fantastic content. Thanks everyone for watching and being on the journey as we build out the Bankless Nation.