How Wallets Are MEV Sleeping Giants | Matt Cutler - Blocknative

Transcript

imagine you go to the the grocery store and you go oh can't pay for your groceries with the Visa card on a Wednesday night if you have milk in your basket like what like oh everybody knows like that's just a really not a great settlement that if you're GNA shop on a Wednesday night you got to use American Express or Mastercard you're like but no I just want to buy my groceries like no you got to pay attention to day of week time of day what's in your part what what grocery store using what the boxes and like what the last three digits of your card are like nobody wants that right but that's the state of users in meev today there's all this crazy sophistication that users are expected to have hey everyone Sam and Dan here and before we dive into today's episode I

wanted to shout out metamask portfolio are you always constantly stressed like us managing your portfolio across different chains wallets LP positions purpose positions I'm excited to tell you about metamask portfolio which lets you manage all of your crypto assets across different networks wallets all in one place do more with web 3 your way with metam mask portfolio you'll hear a little bit more about it later in the show what's up everyone welcome back to another episode of zerx research we have an awesome interview lined up today with Matt Cutler the CEO of block native but prior to that I want to give a quick shout out to our sponsor hexans uh one of the most hardcore security teams in web 3 pioneering in ZK and novel cryptography hexin is trusted by tier one projects like polygon including the

work on their new ZK ZK evm mantle risk zero Lio one-in new bank and more you we'll hear about them a little bit later in the show but uh today is October 5th uh Matt thanks so much for coming on we appreciate it you bet thanks for having me great to be here Sam great to be here Dan so I think the just to set the stage for The Listener can you kind of go into uh the Mev boo supply chain in ethereum in the proof of stake world and kind of the role that block native has played in that uh up to date sure it's there's a lot happening here and and our role within it is changing so about almost exactly a year ago on September 15th 2022 ethereum went through the merge um it was the biggest upgrade to the network in its history and it switched

from being a proof of work consensus mechanism where basically computer solves arbitrary math problems to win the win the right to to write a block uh to proof of stake where instead of solving math problems you basically stake ether and if you uh play by the rules and do what the network expects you get a return and if you play games or try to break the rules you get slashed this had many positive effects on the network including massively increasing its Economic Security but there were other changes that got made to the network at the same time to counteract other concerns and and one of the big n one of the big upgrades was what was known as PBS or proposer Builder separation so uh at any given time there needs to be an entity a

member of the network which is the tip of the chain which has the right to build a block to basically say this is the block that's going to become the new tip of the chain it's going to include the following transactions in the following order under proof of work there was a competitive math uh game where you had to throw compute and power into that to sort of try to arbitrarily solve this it was randomized in this way um under proof of stake it's more Rand it's more like someone gets nominated so uh today there are I don't know 7 800,000 maybe 900,000 validators on the network one of them gets selected to be the tip of the chain and they can um build and propose a block um what PBS does is it says well you can Outsource

that you have the option as the proposer as the tip of the chain to either build your own block or to Outsource it to a set of third-party Specialists and it turns out that in today's ethereum somewhere between 93 and 95% of all blocks are outsourced to this thirdparty network and the reason for that is turns out building valuable blocks is hard that you need a lot of network you need a lot of compute you need a lot of storage you need a lot of relationships um with entities that are going to basically pay for specific preference and and ordering these are known as Searchers generally and so it turns out that a Outsource block is about on average anywhere from three to five times as valuable as a as an internally

built block and so as a as a validator who gets nominated you could either do all this work yourself to get a low value block or you could just Outsource it and get a high value block and that's what people do and this is achieved via a sidecar known as me boost or Mev boost um which was developed by the flash Bots team and so it's it's not technically part of the ethereum protocol but for all int Cent purposes it is part of the ethereum protocol because 95% of the blocks depend on it so this creates a Mev boost creates a supply chain where you have user transactions that are in the public M poool you use your metamask or Ledger other wallet to submit you have Searchers which are more easily

thought of as traders who run Bots that basically watch those transactions going by and if they see the opportunity to extract value by ordering things in a certain way or issuing you know response transactions what they'll actually do is they grab those transactions out of the public M poool bundle them with response transactions either before or after or on top of or something else and then they ascribe a bid price or they send it to these entities called block Builders and say if you include this bundle of trans actions if you get it on chain in this order here's what I'll pay you right and so now you have this notion of me or maximal extractable value that gets expressed in the block building Network the block Builders try to build

the most valuable block so they have relationships with mbb Searchers they have access to the public mol they might have their own transactions and we can talk a little bit about how these things get smushed together and then the builders compete with each other to have the most valuable block as selected by the the proposer of the validator and and there's this intermediary group called relays that basically protect Builders from validators and protect validators from Builders and and again they the the relay Network manages about 95% of all blocks but there's no economics there that's kind of problematic and through this sort of uh intricate Network or supply chain your transactions go from being candidates for inclusion to getting included um

there's a lot of consequences to how this work there's a lot of interesting um uh exploits and attacks that have happened this way and there's a lot of um value that gets moved around by this whole supply chain and and that's how blocks are built today on ethereum is uh via this network so anyways long answer to short question I'm good at that but but that's a a quick reader digest view of what's going on out there today before we dive much further into that process that you just laid out that was awesome by the way thank you so much but can you just explain exactly what it is that block native uh maybe did over the past past year and how the business is kind of evolving as you kind of figure out where you fit in the stack sure so uh we've been building on on ethereum

for more than five years we're a core infrastructure provider and we have we build one of the most uh uh popular wallet connection libraries called Web 3 onboard we do a lot of work in in the mempool so uh we provide apis for mempool Access we provide notification for mempool changes and we provide um mempool Explorer functionality so people can get access to it when the merge happened or as the merge was was coming up and PBS was being introduced we realized we had a lot of expertise to participate in all of this that we have Global infrastructure we have low latency networks we have a lot of relationships with interesting folks and and we decided to sort of evolve the

business into being a block Builder and a Relay operator so at the merge uh we joined into this and we were participants in this ecosystem but last week we actually announced the suspension of those operations that we are no longer uh operating our relay and we're no longer uh building blocks because it wasn't economically viable for us to do so as a credibly neutral provider and we can talk about what that means um we are increasingly focused more narrowly on on helping users and wallets have observability into what's going on so they have understanding of why things settle the way that they do and then protection so that you can protect your transactions from adverse settlement one of the consequences of

how things work today is um Traders sort of have the most valuable transactions they have the highest bids and so the best settlement is at the top of the block and that's exclusively the domain of large Traders right um because they're paying for it but as a consequence of that regular users basically can't compete for top of block so the Miis and use of the world actually have to settle for Mid block or bottom of block which means less favorable settlement and so it creates kind of this two-lane system this sort of Have and Have knots and and we don't really like that about sort of how the network is evolving this way and so uh rather than participating and maybe even contributing to that two-lane situation we're trying to take all of our

expertise and knowledge and relationships and try to level the playing field a little bit to make it more Equitable on behalf of users and the wallets that they do so that's what we're focusing on today but we're in the middle of that transition as as we try to find interesting business opportunities it makes a ton of sense and I I love your ethos driven uh view of of what you know how the ecosystem has evolved and should evolve and and where you kind of fit in in that in that world so you mentioned two interesting things there one was uh how do you be like neutral in this activity and participate you know especially from like us soil or soil where there may not be some regulatory Clarity around how you can interact in this in a legal Manner and the second one was was the

economic incentives so can you talk maybe first about the incentive side of things like where is the economic incentive at least to to participate in this because you see a lot of vertical integration with u Builder Searchers or Builder relays and can you just talk a bit about how that Dynamic shapes and then we can talk about the second piece later oh sure so big topic but but the idea is there is this intrinsic value known as me which is the value that can be extracted from controlling um inclusion exclud exclusion ordering and and I always the example I always give is like an oracle update so um chain link has an IAL update that basically shows the price price of eth is collapsing as a result of that there's a whole bunch of collateralized debt

positions on maker and a and elsewhere that become available for liquidation right and let's in the CA in the arbitrary case let's say it's $100,000 of liquidation there's $100,000 profit on the table but probably only one actor is going to get it and whoever gets it is the one who gets their transaction immediately behind that Oracle update because before the Oracle update happens they're not available for liquidation as soon as the Oracle update happens it's available and the only way to guarantee that you capture the $100,000 profit is to basically slide your transaction immediately behind it so this is known as is controlling ordering now in the old days under proof of work what would usually ensue it was known as a priority gas auction where two or more than two

Bots would go to war and bid up the gas price in order to try to get specific ordering and then everybody would suffer as a result so the mes and use of the world would pay these EX dominantly high gas prices by this happen stamps thing has nothing to do with the nft we want to buy it's just two Bots over here are going to war and and we suffer as a result basically this all got moved offchain into an offchain auction with the idea being that these Traders again they're called Searchers but I always find Searcher to be sort of a funny term because it feels like it's a person who's searching through stuff and they're not they're just software systems right they're they're Trader likee entities who run software to do this all automatically and what they do is they bid for the attention of the

builders right to say well to make $100,000 I'll bid 10 bucks like that's great but but Dan says he'll bid 20 bucks and Sam says he'll bid 50 bucks and then Matt bids 100 and as you might imagine we go around and we bid up the price of that inclusion to pretty quickly reflect like the market of like well if there's a $100,000 of profit we're probably going to bid pretty close to that right and then the builder then passes that along right and so the idea is the economics are that there is margin that can be extracted at each step right that the Searchers are going to basically bid in such a way that they still are profitable and then the builders are going to bid in such a way that they're profitable right and that

there's all this you know uh there's this very healthy network of independent actors each of whom gets a slice and each of whom are economically incentivized turns out that's not how it works at all turns out that in production what actually happens is the value is at the trader level at one end and at the validator level at the other end because the Traders are the ones who basically figure out where there's profit and then eventually they just have to pay most of their profit to the validator and in between there's almost nothing there's there's no value there right and so we were a credibly neutral Builder what is credibly neutral mean in this case it means we don't operate our own trading Bots we're not a Searcher

right we're taking commodity data which is public mol data so everybody else had access to the same stuff we have a bunch of relationships with these Searchers but so does everybody else we have the same bundles as everybody else and we try to put them together in ways that that are different than everybody else but it turns out that it's it's a pretty efficient process and that most everyone puts things together in about the same way with about the same value and so there's there's not a lot of margin to be extracted there the other thing is Searchers are like there's a lot of money to be had in in the trading side of things and why do we roll the dice with a builder who may or may not get our stuff on chain or may or may not see our strategy so you know the

economically rational thing to do is is to become a vertically integrated Searcher Builder right and so you have entities uh that are well established this is not a secret that are very large trading operations and in particular there's something called sexex Arbitrage which is arbitraging between prices on centralized exchanges and decentralized exchanges which by the way centralized exchanges can update their prices very rapidly decentralized exchanges can only update their prices every 12 seconds so unsurprisingly when there's a price displacement between those two if you're a well- capitalized and sophisticated actor you can make profit from this okay and by the way this is net beneficial to the network because they help align prices but why if you are doing sex STX

Arbitrage would you share your transactions with somebody else why would you share your profits with somebody else it's just you're economically incentive iviz to operate your own builder to not socialize your transaction so you can build blocks that nobody else can build because you have transactions that nobody else has because they're yours right and this sort of pattern plays out plays itself out in all sorts of other interesting ways where you could have uh builders that create relationships with wallets to get exclusive order flow and therefore have access to transactions that nobody else does and therefore can build blocks that nobody else does therefore can get margin right and so you know what was theorized at the beginning of the merge was that this

should be a healthy competitive market full of various layers with everybody sort of independent and and it turned out in reality it didn't really play out that way and you know that's part of the reason why you know we competed in this market quite favorably we are we were at times north of 10% share but ultimately there was no money in it there's no margin in fact there's often negative margin you you bid a little more in order to win the right for the block and the anticipation is you're making money on the trading behind but we're not a trading entity and then there's also actors like these relays these really critical operators there's only a handful of them that basically you know do this really economically valuable and security valuable thing for the network but they don't get paid at all okay and

and and and they're perceived as public goods even though they are very clear economic beneficiaries that when the protocol was set up they were not any fees or any sort of mechanism for them to monetize and so it turns out that it's pretty expensive to operate a relay it's quite critical for the orderly operations of the network but there's no money to be made there there actually negative margin because you take on risk associated with being a a relay and we can talk about that and some of the regulatory concerns there and then if the relay doesn't do its job and there's a Miss slot so the relay doesn't release everything there's only so much time to do things in and the validator staking pool doesn't receive the block body they demand a refund for a service they don't pay for right and so uh literally you

know I would talk about and I've talked about this quite extensively relays are critical for the operation of the network but they 100% risk 0% reward and and again you know we were hopeful that we could find out some uh inline economic incentive models to make that sustainable but we weren't able to get there and didn't feel like we're going to get there anytime soon and so we made the difficult decision to suspend our relay last week okay so that that was some great context as well there as as especially as it pertains to like the economic side of things because that's kind of what a lot of this like core ideas are built off is like the rational actor Will will make this economic decision I want to give a quick shout out to hexans as we explore today's blockchain landscape let's take a moment

to recognize them as a premier cyber security provider in web 3 hexans is trusted by tier one projects like polygon including a Security review on their new polygon ZK evm mantle risk zero Lio 1- in newbank and more get a deep dive into your technology stack with the most comprehensive of analysis and cyber security Consulting hexin not only uses widely known methodologies and flows but discovers and introduces new ones on a day-to-day basis with over $55 billion secured they cover everything from Smart contracts to blockchain to web 2 pentests yeah there's been nearly $7 billion of total value hacked in crypto's nent history so it's safe to say your team has a lot on the line don't skimp out take your security

seriously and reach out to hexans don't forget to mention zerox research for a free web2 pen test with your partnership and reach out to hex at hex.io find them in the links in the show notes or reach out to them at permission list they'll be at Booth 832 uh but without further Ado let's get back to today's episode that kind of brings me to the idea of like private order flow and you kind of alluded to this a little bit but do we have any idea like how prevalent the private order flow is and like you know are the largest Builders today is it almost like like is their Edge having private order flow and so they can build more or more uh they can extract more value from these blocks that other builders don't have access to because they have this extra order flow um so short answer is yes so

we have block native have published research that said you know it was a little while ago they published it but over the course of the past six months the amount of private orders meaning uh uh transactions which do not appear in the public M poool but then do appear on chain Grew From about 2% to about 15% and when I surveyed the audience at at Mev day at ECC in Paris generally everyone thought thought that that Trend would continue and in a year or so we'd be at about 50% private transactions right as a mechanism of of protection and so certainly private transactions are a um a growing phenomenon and a fact of life today the reason why you have a private transaction is you're trying to

avoid some of these um concerns about adverse settlement and and your your transaction being part of some sort of meev attack it actually we've subsequently published some research that says it may not be uh so cut and dried because you generally wait longer for a a private transaction to get on chain and therefore you increase you may suffer worse settlement due to increased slippage so there's like trade-offs to do sometimes it's better to be in the public M Pool sometimes it's not and how to do it but certainly the notion of proprietary order flow so uh which is is a subset of private transactions proprietary order flow is orders that only one Builder or some subset of Builders may have right either it's

because it's self-generated I.E they're the trader they have their own transactions they don't socialize them to the rest of the network and again the idea is then you can build a more valuable block than somebody else can okay um there's also things like again you pay for order flow which is not unlike what Citadel does with um Robin Hood right where uh you could have wallets that basically share orders with small you know without it share orders with a limited subset of network participants to give them exclusive rights to um either trade against that I.E you know extract me Andor to build blocks from that and there's you know uh very real money

Changing Hands today you know for those exclusive raid because why is that make sense if I have access to orders that you don't I can create trades that you can't and and oh by the way we went through the example of if we all can see the opportunity then we just bid against each other and it gets a lot more expensive but if only I can see the opportunity then I can make a much more profitable trade because I don't have to worry about you guys competing with me and and that very much is you know fact of life today this has negative consequences for the decentralization of the network there's a a really smart team called special mechanisms group Max Resnik and his team and they published research that said that showed that when asset volatility on binance went up

there was a specific Builder that won 75% of the blocks and you go well what's the problem with that you go well what if that Builder doesn't like you you need to get a transaction on change and then just say no right or or more realistically what if you're a competitor to that Builder that you have similar strategies but the only way for you to get on chain is to give your order to that Builder and that Builder says no I have a better I have my own order and and I'm just going to pretend like I didn't see yours because I make more money that way right and so it's economically rational for these actors to to to behave in this way they're not doing anything nefarious but the consequences for the sort of equity on the network are not great right and

and this is why we're creating this network or the network is increasingly sort of bent in this direction and and it feels not ideal and and I've talked about this publicly like we don't want to have a network where users are suckers we don't to have a network where LPS are suckers ERS where where they don't get a fair Shake where they can't compete for for best settlement and yet some of the forces that play that's kind of what's Happening Here and and we're trying to encourage everybody to both be aware of these situations and to you know create infrastructure or protocol changes that perhaps level things out a little bit and I think that's actually a great segue there is is the the peace on protocol changes so you mentioned you know we we obviously have PBS today but

it isn't technically enshrined it's just widely adopted I think you know somewhere around the neighborhood of of 95% or so uh are are opting in to use Mev boost what the if we were going to enshrine it what would it need to look like uh to maybe satisfy some like fix some of the problems that we've just discussed over the last 20 or so minutes um well it's so there's this is a very active area of research and very much part of the um ethereum road map um there are you know a bunch of of of work in specification on what's known as epbs or enshrine PBS um but that's not a Panacea you know there was originally the idea was that enshrine PBS would

eliminate the need for these uh relays these trusted uh uh intermediaries it turns out that that doesn't seem to be the case that there will still need to be relays even in an epbs World um you know one of the interesting factors of all of this which is pretty fascinating to me is you have this network of builders you have this network of validators Builders are are generally pretty well-resourced entities they have you know big amounts of compute big amounts of spend on cloud services they may or may not have uh a lot of economic resources to fund their trading operations and they are trying to get the attention of a little teeny tiny validator right which could be one of you guys with a Raspberry Pi under your

desk right or could be part of a staking pool and if if you just get exposed to each other right right you know you get hammered into the ground you know because these Builders are just going to hammer you with with bids right and and you could have uh denial of service attacks that try to prevent you from from seeing things and so you kind of need something in the middle to insulate you from all of that inbound Network traffic and you want to get some protection against people lying like I can I'm a builder and I say hey Dan I got to block this worth 100 million eth you're like oh I'll take that block and they go oh just kidding I don't really have it right conversely I need protection from you I have no idea who

you are you're just some random note on the network there's you just stand it up and you can look at my block and you can say oh that's a great idea I'm just going to steal all the value in there I'm just going to switch you know the beneficiaries to me and you have this super valuable block and I'm just going to steal it all right so this is a trustless permissionless network and you need some way to have everybody interact without you know any one entity being overwhelmed right today there are these things called relays right under epbs you have a new me pool right the this idea of a mempool this sort of uh realtime area where transactions go in or or or bids go in to be um uh candidates and then you can as the

receiver you can dip into the men pool so you're not exposed to at all you're like I'm just going to pop into the men poool and see what's there right men pools are really useful constructs in this regard that they they help provide some separation and they help uh protect against an a of service attacks but me pools also don't have great observability like you know what's going on in the M Pool it's all ephemeral there's no official record you have Global Network effects and things like that so the current state of epbs research basically has a new M Pool being created called the bid pool where Builders will basically put bids in that validators can can receive they will be bonded meaning each Builder will basically um uh stake or or or lock up some eth that will basically guarantee

their bid is value is valid so um imagine I say I have a block that's worth 99 eth but it's not real it's it's invalid well I have bonded that right so even if I try to lie to the network you can then say as the validator hey this Builder put this in here and and they need to pay me out of their bond and poof you get your 99 eth and I've just lost 99 E so you can actually create some some insulation there but what happens when you say there might be a block that's a thousand e and not every Builder can afford to bond a TH eth or 10,000 eth or 100,000 eth so you actually have to have an upper bound on the bond to make it a Level Playing Field so everyone can participate and

yet when these really high valuable blocks happen what are you going to do because the bond it's bigger than the bond you're going to use a relay right and so under epbs at least the latest state of research the relays still around right they do a lot less work but they do all the high value work right so we worry about a Miss slot today with the average block being you know a fraction of an eth but imagine a Miss slot under epbs worth hundreds of eth it's going to be a problem and so there's there's no you know there's trade-offs here to be made and so um that research continues the the truth is at least according to the latest researches relays don't go away until we get to this destination called Mev burn

where the me actually gets burned and and gets distributed to all eth holders as opposed to today gets distributed to a validator but there's a lot of questions about is that something that will actually happen and and and concern so there's still a lot of questions around this notion of Mev burn so um you know this space is continues to evolve it's it's not um set in stone by any means um but you know the question is how many participants are there what are their incentives are there going to be more or less in the in the future because they do exert a lot of control over the network all right everyone let's take a moment to hear about metamask portfolio if you're like me and Sam managing your crypto assets across different wallets and networks can be so overwhelmingly complicated that's why

we're excited about metamask portfolio all you have to do is connect your metamask wallet to get a bird's eyee view of all your coins tokens and nfts in one place you can easily Buy sell swap bridge and state crypto assets at competitive rates all within the app and you get to choose for embedded list of providers there's no more jumping between dozens of sites and apps metam Mas portfolio lets you do more in web 3 your way giving you secure and convenient access to a wide range of features and services all within one place manage your portfolio your way with metamask portfolio peep the link in the description of today's episode to get started now I want to dive a little bit deeper into your personal opinions on me burn just because to me it sounds like there's serious problems with PBS

in its current state and the root cause of a lot of it is honestly this free market for me that's ultimately created by the users of the protocol so yeah just with that uh that little background I'd love to get your take on the me burn so okay big topic right um first off you know me is a fact of life you have an ordered transaction system you have me right so there's there's no wave your magic wand and the me goes away and and by the way like me exists all over the place SEO you know everyone knows you type in Google you get a search result being on the first page is better than being on the fifth page right you do all sorts of work to manipulate that that's that's fine right everybody understands you know when you buy a plane ticket you

get access to better seats or the more you pay the better seats you get that's it's another example of me it exists for concert tickets it exists for um stock trades and you know everything so first off no avoiding Meb second yes to your point Sam without a user conducting a transaction there is no Meb okay that that that is the roote and and we have said and we continue to believe that wallets are the Sleeping Giant in in this C category which is today most wallets are not very me aware to to to me blind they they don't really have an opinion here they don't take any precautions on behalf of the end user and they just sort of say you know up to you user to figure this stuff out and and it's not really practical for users

to become to be expected to become me experts the example I always give is imagine you go to the the grocery store and you go oh can't pay for your groceries with the Visa card on a Wednesday night if you have milk in your basket like what like oh everybody knows like that's just a really not a great settlement that if you're going to shop on a Wednesday night you got to use American Express or Mastercard you're like but no I just want to buy my groceries like no you got to pay attention to day of week time of day what's in your part what what grocery store you're using what the boxes and like what the last three digits of your card are like nobody wants that right but that's the state of users and me today there's all this crazy sophistication that users are expected

to have we envision a world and we're building infrastructure for wallets to make the wallets MV aware to help inform their users about what's going on help them make better choices right so by the way these are mechanisms to protect users from the adverse effects of me there's been a bunch of work in me recirculation and and we were big advocates for that that that basically whatever me results from a user transaction should get circulated back to the user um that really hasn't emerged as a big thing meaning that there are protocols out there that do that but the if you look at the transaction volume versus the reward the the the refund rate it's pretty low um it's mostly about protection um this notion of Mev burn is a pretty compelling one so this is

research really pioneered by Justin Drake who's is a super um uh um one of the top researchers in the EF and and his argument or the argument of Mev burn is you have this really lumpy reality today where you have these certain blocks that have these very high Meb Rewards and it sort of it's like a lottery where it gets randomly allocated to a specific validator right and then of course you have these staking pools so if you have a big staking pool you're you get disproportionate share of these these high valuable things and it just feels a little uh not equal right um by the way we already have a good example of this with the base fee with the with gas fees which is hey look if you burn

these fees then all eth holders benefit because the supply of eth goes down in proportion to the amount of gas with the base fee and and it doesn't matter who you are if you're an eth holder you're your the price is being sustained and going up right and so the idea of Mev burn is let's do the same thing with meev that rather than uh a a privileging the the proposer or staking pool with this me or or even privileging the validator class so maybe you hold eth but you're not validating right um you're not staking it instead just burn it right reduce the total supply of eth and and and and distribute the benefits to all eth holders right like I think

the logic here is really pretty great problem is is that the staking pools and the apy are totally dependent today on this meev and so basically if we were to implement Mev burn my understanding is it would massively reduce the yield on Stak eth which is bad right and now by the way you have you have hard Forks that would need to implement these things and you'd have staking pools that would say why would we implement this change that really adversely affects our business right and so now you say well is it required or is this opt in why would people opt in might you create fracturing of the network as people try to avoid burning the MAV and so again

I'm not as close to this one but these are proposals that I think are really compelling and well-intended ention but they have significant consequences that need to be thought through now in our world we say they are researching right which is code for still figuring it out right and and you know there's uh there's very clever people who are working hard on these problems to try to figure out things that that work well and I wouldn't say any of this stuff is broken I I would say that it it needs it's constantly evolving and we're constantly learning in production and you know as we learn more information we need to evolve it based on on what happening out there so you know that's the the interesting state of play uh on

today's ethereum is it fair to say that uh murn then is mostly centered around changing like the more the monetary policy side of ethereum than rather than like you know okay like I guess I'm I guess I'm struggling to see like I understand the smoothing of the the lottery idea but does that that again kind of plays into the more monetary policy side does it actually like change anything structurally with how me is dealt with within the uh ethereum proof of stake system um I mean so so the again I'm probably not the best person I'm not this is not what I do all day long but what I would say is uh me is already altering the the landscape is already affecting the monetary Supply and

monetary properties of it and and again like this is a fact of life this is not some sort of bug it's just the reality um and by the way the reason why this get so much attention in our world is because you can see it it's free you know it's it's out there and transparent where in all these other domains it's captive to a single provider so that it's it's not that there's more or less Meb on ethereum it's that it's the first environment where you can actually see and manipulate it my general impression is me does exert uh forces on on the monetary nature of the underlying asset of eth that so far that has not really been considered as part of the monetary policy it's kind of out of band right um and that these proposals are well let's

proactively deal with that let's bring it INB let's be intentional and deliberate about what happens with the me and its effect on the on the monetary aspects of it but again there there's no free lunch here there's consequences to whatever approach is taken um and there are winners and losers potentially along the way and so that's why this remains you know an area of conversation and and of contentious debate because it's there's no really clear right or wrong answer I will say you know I don't think it's in mistake that Justin Drake who's the progenitor of the ultrasound money thesis is also working on these problems because it basically goes back into the same sorts of theories ultrasound is also one of the leading relays Justin

and his team are are one of the leading relays as part of all this they publish data and things like that so it does really speak to how intertwined many of these issues are speaking of just how intertwined and small this industry really is it's like I I just pulled it up rated. Network just to check out like the past 30 days there's only you know four Builders Building 92 to 95% of blocks over the past 30 days so I mean that's a small enough group that I mean you could even text each other or sit down in a room and like that's I don't know that's a pretty big point of uh of weakness for ethereum I would say so I guess I don't even know exactly what my question is but it's like how do we get around this how like it it feels like

something structural needs to change in in what's going on here yeah I think that the reality is is these are so there's both a fairly small number of Builders who build most of the blocks and then there's also a very small number of relays who relay the blocks right who are in this trusted position and and in particular relays as relay operators so there are certain groups that operate more than one relay but they one entity behind them and so yeah at this layer there is a pretty high degree of centralization and and again you can say well there's four Builders but it doesn't really matter if there's four on average what matters is for the next block how many Builders can really compete for the next block and depending on offchain factors like asset volatility on binance there may be one

Builder right that that it actually turns out that for every time slice there's really one actor one entity who's favored again not the most decentralized thing um my view is is that the the current state of affairs basically is very um uh um reactive to the idea of rent taking or rent seeking of margin right and so what basically winds up happening is hey we're block native we're a software company we're trying to build infrastructure and software and make money at it right because we have we're Venture backed we have investors we're trying to pay our people like all this sort of jazz and and that's viewed as problematic right that there shouldn't be actors in the

middle who basically participate economically in all of this and so as a consequence of that because there's no economics in the infrastructure and software layer all the economics economics go to Traders right and and it turns out that trading particularly on ethereum is a very specialized skill there's not very many people who can do it well and you need fairly significant amounts of capital to do it effectively due to some of the realities of sex STX Arbitrage in particular right and so it turns out that yes while anyone can be a Trader the vast majority of profits go to one of a small number of actors and so you know Traders is going to trade this is phenomena and so my view is the to create a more balanced

Network a more decentralized Network we need to introduce more explicit economic incentives or we have the opportunity to do so that encourages participation right um uh there have been debates about how many relays do we want right and do we want code-based diversity at the relay level like we at block native operated our own relay code base we called it Dreamboat we thought this was a good thing because now there's multiple code bases so if there's a bug in one code base maybe the other one doesn't have that and the network can be more resilient we were told explicitly no that's bad that's that's that increases the the attack surface area and that you know in general we don't want that you're like wait a sec on the consensus clients I thought we all agreed that code-based diversity was a good thing but now in the relay it's a

bad like how are these two things true at the same time right and again you know we're operating our own codebase with no economic incentives behind it so you know our general view is at all layers of the network you want more participation not less you want more diversity not less that's code-based diversity that's Geographic diversity Etc and and but we're creating or we've created systems that don't favor that Matt I'm really curious as to why you've stuck around ethereum for so long I mean in its current state it seems you know you could make a serious argument that there's other options out there that are on par to some degree with the decentralization level of ethereum and it sounds like you're very in the camp of decentralization censorship resistance permissionless Etc so just

curious why ethereum is where you spend most of your time building it's a good question and and one that we ask ourselves too I mean we have been part of the ethereum ecosystem for a long time we believe in its ideals um we we work closely with the ethereum foundation and have received significant grants from them and we think that that it is The Proving Ground for all of this stuff that that ethereum is is not necessarily uh better or worse it's just further ahead it's it's it's a few chapters ahead in the book and by further ahead it's got more liquidity it's got more volume and it's got more experience and exposure um I think the lessons that can be learned in the ethereum ecosystem are highly relevant

to other ecosystems as well um and quite frankly we we are we're long you know believe we're long eth long EF long the ecosystem even when it's challenging even when it's frustrating even when we might have disagreements around it and and we feel like uh we got involved I personally got involved because you know I'm really excited to build New Foundations for the next economy and it felt like in 2017 and it feels like today the most likely candidate to be that Foundation is ethereum um it's not the only candidate but it feels like the front runner and uh you know we would like to we aspire to be a part of helping it get there and helping it be a better version of itself and not um

implicitly descend into being just yet another trading system right which by the way may be inevitable maybe the forces that are Unleashed here that we see you know RIT large in the traditional Fant Financial system are just inevitable like all systems end up that way because of the way the economic incentives just naturally work um I am still optimistic and idealistic that we can create um structures that that are truly Equitable that are truly a Level Playing Field um we're not e Maxis though uh we think that other ecos system should exist and and we are actively exploring you know adding support for certainly l2s on ethereum but also alternate l1s um we think the

more experimentation the better um and and we're widely supportive of of those ecosystems um so anyways we're we're we're long eth we're committed to the ethereum ecosystem we believe in eth but we're not exclusive to eth by any means yeah that that Viewpoint makes a ton of sense it's something we think about quite often as well and one thing you mentioned there was l2s which is kind of this whole other can of worms right like if let's say we perfectly solve me at the L1 okay well now we have you know seven or eight popular l2s that we need to go do the same thing all over again for how does that how does that work well but again you know meev is a fact of life so anywhere you have flow anywhere you have transactions have liquidity you're going to have me and so

um are is me going to emerge on l2s of course it will because we're already seeing flow there right but it's different because you might have centralized sequencers so now you have one actor in the middle who who say oh well we can solve it at that level you go it's going to be a lot of economic incentive to extract that right now you have centralization there you also have with l2s you have the uncertainty of settlement down to L1 so we have an an additional set of transaction States an additional set of finality and additional games that can be played um you have core upgrades to ethereum being made to facilitate L2 so the next major hard Fork is denb coming up end of year beginning of next year it includes EIP 4844 which is explicitly to to make life easier and transactions cheaper on l2s

and introducing this new transaction type called Data blobs um it's interesting it introduces a totally new class of transaction a totally new class of actor what's that going to mean what are the what are the opportunities to extract value from that so um this is why I say ethereum is just a few chapters ahead we're we're uncovering these issues uh sooner than anyone else because there's more liquidity there's more uh a need for scaling and it's more decentralized in many different ways if not at all ways so um you know this space is not going anywhere it's not like oh me solved lick moved on to the next one it's going to be a fact of life for a while and um you know it will continue to shift and move and and uh be a topic of conversation and you know by

the way you can say L2 you can say reaking so what does reaking do for meev how does that increase what is about L2 and reaking what about cross-chain bridges like it just gets exponentially more complex um to deal with but also you know interesting possibilities emerge along the way I can't remember I don't want to put words in Yuri's mouth but we talked to him a couple weeks ago maybe a month ago now and I want to say his thesis was me is a negative some game like we should really be going fifo at the Bas Lair and um basically exporting a lot of this stuff to l2s for them to deal with what do you think about that theory I'm I'm a big fan of or and he and I are are friends and and uh um I guess my view is fifo equals

latency game latency game equals centralizing right that that uh is that there already a lot of latency games there's already a lot of collocation games I'm not sure if there is I mean the whole idea of the Mev boost ecosystem of the bidding architecture is it's it's an attempt to minimize latency games because latency games fundamentally favor the the most sophisticated deepest Pockets at deepest pocketed actors and yet relays are a latency game right like there's all these strategies there's all this stuff and if you look at what the relays say they go we're the fastest right you should pay us because we're the fastest right we're the best one because we're the fastest so um uh I am I I think anything that that reduces down to

latency game is is centralizing um but again you know what is the best outcome I don't know um if I if I had a solution to the me conundrum I'd be in a different situation I'm in right now um my gut feel is meev is a fact of life I've already talked about this what we need is meev aware infrastructure to level the playing field the biggest issue facing the network today is the information asymmetries which are Rife through the through the entities with the most important actors users having the least information and having access to the least sophisticated infrastructure and and we block native are are very actively trying to solve that problem to span that Gap to basically bring users

up so they have access to equal information and they have access to massively improved tooling again not maybe by working directly with us but probably by working with one of our partners to to be uh insulated protected and participating in all of this and then ultimately that's where we're going to wind up where we're going to have me recirculation we're going to have mbv protection we're going to have auctions and ofas and things like that and and maybe maybe we get to to M burn eventually too but again that seems pretty far down the line um but that's my worldview awesome this has been a fantastic conversation Dan unless you have any other questions I'll kick it over to you Matt to tell people where they can learn more about block native yourself and any other shills you got for for the listeners sure I I

appreciate the opportunity to share our perspectives and and to bring the stuff out obviously it's complicated and nuanced I appreciate everybody listening in um you can find block native at block native.com or block native on x Twitter I don't know even what it's called anymore I'm Matt Cutler I'm at M Cutler you can see it on the screen um we're we're out there at many of the major events and so if if you're in the same ballp part I see around do b means come up say hi it's always fun to to talk to folks who are out there um and check out our tools we have the the best gas estimator in the ecosystem we have this uh transaction boost which is a private RPC aggregator to to basically give you private transactions great observability and and no compromise um and if you're a

builder if you're building an application and you want to connect wallets you know check out web3 onboard it's it's the best Library out there for doing this sort of stuff and it's inheriting all these properties that we talked about today um and uh if you're a wallet of course too we do a lot of deep work with the major wallets and we'd love to work with you out there as well so um we're a builder we support other builders and uh we want to just uh do more to uplevel the entire ecosystem but in particular um bance things out on behalf of users and LP providers so that's what we're all about I love it Matt that was awesome we'll be sure to include those links in the show notes to yourself as well as block native as a whole and and uh excited to it was great

to hear your thoughts today man and excited for the next chapter of block native as well so thanks a ton cheers my pleasure [Music] cheers