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ETHDenver Day 3 - Blocknative Daily Dispatch

Written by Blocknative | March 5, 2023

The Blocknative team is live at ETHDenver to meet with BUIDLers and the community at large. We’re soaking in all the discussions and will be highlighting a few of our favorite presentations from each day. Be sure to check back tomorrow for a new round of topics and follow us @Blocknative on Twitter for live updates!

Day 3 Highlights

 

Why are cross-chain auctions so hard?

Tarun Chitra is one of the most respected Ethereum researchers. In this talk, he focused on the problems that surround cross-chain auctions and why it's important to tackle them because of the Ethereum roadmap's reliance on L2s and rollups.

Why it Matters:

Auctions rule many things in DeFi, consensus, and NFTs, with everything from MEV auctions at Flashbots to on-chain NFT auctions relying on this core mechanism. As Ethereum evolves to have to handle multiple domains (e.g. many L2s and rollups), the set of auctions that users and developers have to interact with is set to grow dramatically. There have even been proposals (e.g. proposer/builder separation) to add auctions directly to the main protocol. But how safe, hard, and/or challenging will this increase in auction complexity be? Answering this question will be critical to maintaining the economics and usability of the chains we all depend on.

Key Takeaways:

  • Auctions are used across the internet but are normally controlled by centralized parties. This is can lead to manipulation and frontrunning by the centralized entity. This is what the Department of Justice has recently accused Google of doing with their ad auctions.
  • Crypto can actually improve on these centralized auctions because there are proofs that can be used to verify whether or not an auctioneer is frontrunning participants. This is a unique case where blockchains have a clear benefit over centralized mechanisms. 
  • Auctions are important because they are mechanisms for the price discovery of scarce goods. They are crucial to the economics of blockchains and widely used for applications such as liquidations within DeFi, OTC / large-size transactions, NFT secondary sales, and MEV. Many different types of auction formats are used as well including first price auctions (Flashbots), Dutch auctions (Gnosis, Euler), sequential auctions (NFT editions), and combinatorial auctions (order flow auction). 
  • Auctions are hard when occurring across two different chains specifically because actions on one chain will impact gas prices on the other chain. This means that there is no way to settle on a unique best auction format.
  • Auctions where there are many different actors involved (high dimensional auctions) are tough to design. This includes situations such as an auction where a wallet is looking to sell orderflow to MEV searchers. However, even though these are difficult problems to tackle, they are necessary to solve because orderflow auctions are essential to taming the negative externalities of MEV.

Links:

Fair MEV Distribution

Davide Crapis is a researcher at the Ethereum Foundation within the Robust Incentives Group (RIG). He discussed ideas that are currently under development within the Ethereum foundation regarding how to approach in-protocol MEV allocation mechanisms.

Why it Matters:

MEV creates a centralizing force on the Ethereum network due to the sophisticated nature of the task. The Ethereum Merge’s introduction of proto-PBS, separating the block builder role from the proposer role, helped address some of this risk. However, further work is needed to fully understand the best way to tame MEV and make it beneficial to all users of the network. 

Key Takeaways:

  • It is essential for Ethereum to adapt to the externalities of MEV. MEV changes the incentives of validators, can cause honest users to suffer unnecessary losses, and can allow unethical users to extract rents. Ignoring this impact would severely harm the network.
  • Ethereum needs to adapt to minimize MEV-induced problems. This included MEV-robust incentives for validators, protections to ensure that honest users suffer minimal losses, and rules that ensure unethical users extract minimal rents. 
  • The Ethereum Foundation is focused on developing trustless technology that allows for the efficient capture of MEV for the protocol. If the protocol is not organizing the extraction of MEV, it will happen somewhere outside which impacts security by opening avenues for attacks, centralization, and capture.
  • Examples of designs that are already working to capture externalities for the protocol include EIP-1559 and MEV-Boost. The EF will be using lessons learned from these designs and research into the current MEV extraction landscape to develop solutions that will become a permanent part of Ethereum. They welcome collaboration and, if you are interested in helping, Davide recommended reaching out to him directly.

Links:

Stablecoins and Liquid Staking Tokens: Why they're more similar than different

Liquid staking tokens are a hot topic amongst the Ethereum community. Sam Kazemian, founder of Frax Finance, led this discussion explaining why the best way to design a liquid staking token is to use a stablecoin mechanism design.

Why it Matters:

The Shanghai update's enabling of staked ETH withdrawals will complete the validator lifecycle and open the door to exciting new possibilities for validator modularity. This will likely lead to the increased adoption of liquid staking tokens (LSTs) like Lido's stETH, Rocket Pool's rETH, Frax's frxETH, and other options. But with great power comes great responsibility. If Ethereum's LSTs do not feature a robust design mechanism, the protocol could be at risk of being impacted by depegging events. 

Key Takeaways:

  • Frax believes in the concept of "stablecoin maximalism". That is, most crypto protocols converge to become a stablecoin in the long term (or stablecoins become of central importance to their existence). 
  • While most people view liquid staking tokens as a type of ETH derivative, Frax approaches design from the perspective that they are creating a token that is meant to be pegged to Ethereum. They consider this to be the ideal way to produce a project that is able to scale to a large number of users.
  • This philosophy informs the underlying design of Frax's frxETH liquid staking token because frxETH is designed to be primarily a stablecoin while sfrxETH is the token that accrues staking rewards. This allows frxETH to develop a monetary premium and be used as money in the broader DeFi ecosystem.

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Blocknative Highlights of the Day

 

 

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