Math Show Series #019 – Talk about EIP1559 and MEV

Host Cici:

I’m Cici, the host of the Math Show tonight.

EIP1559 and MEV are really hot topic recently, Did you guys see any news about EIP1559 and MEV? Today we invited CEO of bloXroute — Uri Klarman to talk about EIP1559 and MEV in Math Show.

Uri Klarman:

I’m Dr. Uri Klarman, co-founder and CEO of bloXroute Labs, and co-creator of the EGL project.

Today we’ll be discussing 2 super interesting (and related) topics — EIP-1559 and MEV.

Along the way I will also tell you bit about the Ethereum Gas Limit (EGL, or “eagle” ) project and about bloXroute.

So let’s start by talking about EIP-1559, which just went live last week and everyone are talking about.

EIP (Ethereum Improvement Proposal)-1559 is a change to the fees in Ethereum. Up until now, any Tx paid a fee to the miners, and the miners would sell most to pay for their operation costs.

Now, under EIP-1559, the fee has two parts — a base fee (“basefee”) which everyone must pay, and another small amount (the “tip”). Only the tip is paid to the miners — the basefee is “burned”. Which means miners make less revenues, and have less ETH to sell, and there is less inflation /sell pressure for ETH, which in theory should be good for ETH’s price.

now that we got that covered — what does it mean for you, me, and Mathwallet users?

So, how is the basefee set?

It is designed to increase if blocks are over 50% full, and decrease if they are under 50% full. For example, imagine that the basefee is 10 gwei. There are many Tx that are willing to pay that much, so blocks become very full. Since blocks are over 50% full, basefee increases to 15, 20, 30, 50 etc, pricing out the lesser-value transactions which are not willing to pay so much. Because of that, blocks become less full, until only the high-value Tx are mined and fill 50% of the block, and the basefee stabilizes.

In reality we’re seeing this around 50 gwei.

Are we happy with these basefees? well… maybe

– If you’re holding ETH, you want as much ETH to burn, so you are happy with higher basefees.

– If you are a user you don’t want to pay this higher basefee.

But the interesting point, which leads us to the EGL project is “what affects the basefee?”

The “gas limit” is the parameter which decides how “big” ETH blocks are.The larger the blocks, the more transactions they can include, and the less transactions they need to exclude to keep blocks 50% full.

So, the larger blocks, the lower the basefee. Who decides the gas limit? Right now it is the miners, but we launched the EGL project Genesis this week, and Genesis will and and EGL will go live tomorrow

The EGL idea is simple:

1- during Genesis, anyone can stake ETH to claim EGLs.

2- anyone with EGLs can vote on the desired gas limit.

3- pools are incentivized to follow the EGL vote. The closer they follow, the more EGLs they get.

4- core decks are awarded EGLs to signal to the community what they think the gas limit should be.

If you’re interested, you can still participate, but the Genesis closes in exactly 24 hrs, over 20 core devs had signed up to participate, many of the major pools had agreed to the idea, and collected over 9,000 ETH so far.

and that’s it for 1559 — at least for now.

Now let’s talk about MEV and DeFi!

Everyone are talking lately about MEV, front running, backrunning, etc. But what do these terms mean?

While CEX (centralized exchanges) are very common, DeFi and decentralized exchanges (DEX) are becoming a very big deal. why? because they don’t require you to upload your ID, nobody controls them so they can’t be regulated, and don’t have any employees, allowing them to charge lower fees (and even these fees mostly go to liquidity providers, not to “the exchange”).

Now, when someone want to trade in a DEX, he sends a transactions trying (for example) to buy 10 ETH for $10K. Such a transaction will change the price in the DEX (ETH price will go up), while the price everywhere else remains the same.

This is an arbitrage (arb) opportunity — you could sell in the DEX and buy somewhere else, until the prices everywhere converge to the same price, which would be slightly higher than the price before the transaction took place.

There’s also “backrunning” — if I see such a target Tx, and I know the price of ETH will go up in the DEX (while it remains the same everywhere else) I want to sell ETH immediately after the target transaction. This backrunning will capture the arb opportunity, but won’t hurt the target transaction。

lastly — “sandwiching” is doing both frontrunning and backrunning at the same time — making a sandwich of (1) frontrunning Tx, (2) target Tx, and (3)backrunning Tx

Talking a bit about the services bloXroute provide here,

1) we provide “Private Transactions”, or “front-running protections”, which are never broadcasted to the mempool, so nobody can frontrun it. This is an enterprise-grade service, but we’re now offering it to all our customers.

2) we launched a BackRunMe service, where you can configure wallet to send your transaction to us, avoid frontrunners, and if there is any backrunning value in your transaction — you will receive 25% of it!

(the rest goes mostly to the miner and to the bot who did the backrunning — bloXroute get a lot less, only 5%)

3) the speed at which your transaction reaches the miners or validators is critical!

If it takes your transaction 1 sec just to reach them, then there’s a chance that a new block was already mined and the prices have changed by the time your transaction execute.

This is especially true in BSC, where blocks are mined every 3 seconds.

If you’re trying to time the market and sell the top (or buy the bottom) you want your trade to go thru at the price you see — not after a new block was mined and maybe already drastically changed all the prices.

Host Cici:

Before the start of the MathShow, we have collected a wide range of questions on Twitter. For some questions submitted by some community members, let’s invite Uri Klarman to answer .

1.Will the MEV situation change after 1559? increase or decrease?

Uri Klarman:

at a first glance, it should remain the same, since the arb and liquidation opportunities remain the same, and it still makes sense to “bribe” pools to include your Tx to capture such value.

however, there is one major change — a big chunk of the “bribe” now gets burned, and there’s nothing the bot or the pools can do about it!

it probably means 2 things:

1-that MEV bots and pools would earn less $, since some of the value will be burned.

2-that smaller opportunities might no longer be profitable to front/backrun, and therefore are “safer” under 1559.

but MEV is here to stay, it just might change its dynamics a bit — and I don’t see it significantly decreasing

Host Cici:

2. Is 1559 have any impact on these MEV-Geth production clients? Will the Gas auction model change?

Uri Klarman:

it definitely has an impact — pre-1559 MEV-geth would include Tx with 0 fees, and now post-1559 it has to burn about 50 gwei . And we’re already seeing the gas auction model changing!

we moved from bots gas — auctioning to flashbots, and now Eden is gaining traction, likely because of this change.

the principle remains the same — pay more fee to affect tx order, but the specifics change.

Host Cici:

3.Will 1559 have an impact on non-miner MEV solutions? (Such as Eden, KeeperDAO, CowSwap)

Uri Klarman:

All MEV solutions are miner-related.

Our friends at KeeperDAO are just limiting who can try and capture MEV, and have some of it distributed among the token holders.

Eden tries to affect miners, but using Eden staking and rewarding the Eden tokens. I don’t remember the CowSwap details, but it’s always a matter of “bribing” the miners.

I think the major change for all of them is that all of a sudden the fee cannot be directed to the mining pool — the basefee is burned, and doesn’t help to persuade the miner/pool to order the tx one way or another, which reduces the value searchers and miners capture.

Host Cici:

4.Nowadays, many public chain create their own evm chain. If they are all evm public chains, what is the significance of these public chains?

Uri Klarman:

there’s a big question here — “are we heading towards a mass-multichain world, or are we going to have just a few major chains?”

The general attitude changes every 1–2 years, swinging from “there are going to be MANY chains” to “just a few”.

I think it’s obvious at this point that ETH provides value and functionality that BTC doesn’t. it makes a lot of sense that other chains will add more value which can’t be done using ETH. Additionally, it seems regionality plays a major role — the chains and communities in the west are different from those in the east.

I think that the evm bridges are going to allow adding potential functionality which ETH and BTC don’t have, but I don’t think most of them will make sense in the long term. The EVM “bridges” are going to make sense when they lead from ETH to a chain that adds value. A bridge that leads nowehere isn’t really helpful.

Host Cici:

Thank you for sharing your opinions. Hope this audience could get something from your answer, we will see you in the next issue.