SEDA network and UMA protocol are building towards a fairer MEV/OEV future.
∼30,000 ETH is estimated to have been lost to MEV in the last month alone. What is MEV, and how does it lead to over 30,000 ETH lost in value in just one month? In the case of blockchain technology, maximal extractable value (MEV) represents an opportunity for people to extract value by manipulating blockchain systems. Surprisingly, MEV is not a new concept, and while recently becoming a more widely understood concept, it has been happening for many years within the blockchain industry. UMA Protocol & The SEDA Network are two projects building to capture OEV, a similar concept to MEV, to build a fairer, democratized future for Web3.
Blog Contents
- What is MEV, and what does MEV mean?
- Prominent Types of MEV.
- The rise of OEV.
- How SEDA captures and distributes OEV.
- How UMA is building for a fairer MEV future.
- Why MEV & OEV capture is essential.
What is MEV, and what does MEV mean?
Maximal Extrable Value (MEV) is the maximum value that can be extracted from a block production via transaction addition, removal, or reordering by blockbuilders. MEV occurs when block builders identify an opportunity to benefit from early access to new transactions and can arbitrarily manipulate their order to their advantage.
For example, imagine you are a block builder who can access incoming transactions in a blockchain mempool (Transaction waiting room). This access lets you see opportunities, including sizeable trades or liquidations. Block builders have the chance to add a transaction, assuming that the transaction does not impede the value of the block from the block proposer, before or after the transaction, to generate a value benefit for themselves.
The flow of MEV starts when a user submits a transaction to a node for broadcasting. Before a validator sees the transaction to add it to a block, it sits in the blockchain mempool waiting to be added. In the mempool with all the other transactions waiting, an actor known as searchers can begin looking for MEV opportunities; when searchers identify a chance, they can then ‘bribe’ the block builder to add their transaction in an advantageous position to benefit from price action when their identified transaction is added to the block.
The Most Common Types Of MEV Plays
Frontrunning
Front running in blockchain involves searchers using knowledge of pending transactions via access to a blockchain’s mempool to place their orders first for profit. For instance, seeing a large buy order, a searcher may buy the same cryptocurrency first by increasing the fee they are willing to pay the block builder ordering transactions. This improves their chances that a block builder places their transaction first. Then, as the block builder submits the block to the proposer and has it validated, the searcher benefits from their transaction settling first before the larger transaction of the same currency triggers a positive price movement.
Backrunning
Backrunning is the opposite of frontrunning, where a searcher wishes to have their transaction placed immediately after a specific order. To do so, they broadcast a transaction with a lower fee than the one from which they wish to benefit. A common example of backrunning is where a searcher aims to place an immediate sell order directly after a large buy order of the same asset.
Sandwiching
A sandwich attack in DeFi happens when a bad actor places orders before and after a big pending transaction on a DEX to profit. They buy the asset to hike the price and sell it after the large transaction to benefit from the price gap. These attacks can hit any transaction of any size, with their effectiveness hinging on the liquidity present; low liquidity means even small attacks can inflate prices significantly, while high liquidity demands more capital from attackers to influence prices and earn profits. However, it is important to note that sandwich attacks only work if the slippage dollar value exceeds the cost (fees set) for bundling a sandwich attack.
Note: MEV in the above scenarios is the value extracted by performing these attacks.
The rise of OEV
MEV, as described above, begins with block builders and searchers having pre-execution access to pending transactions. Similar to the maximal extractable value, there is a relatively new term called oracle extractable value (OEV). Similar to MEV, OEV opportunities can be spotted by searchers in the mempool. However, the key difference is that searchers seek price feed updates within the mempool instead of searching for transaction opportunities. Imagine a data feed updating the price of BTC on a blockchain. Before the price update is live on-chain, the feed update sits in the mempool where searchers can see the BTC price updates, offering an opportunity to submit transactions before the feed update.
How SEDA captures and distributes OEV
OEV & MEV are hot topics as the spotlight shines on the true value amount extracted yearly across Web3. As a modular data layer, SEDA presents a strong opportunity for searchers to leverage OEV for their benefit. However, SEDA is designing a bespoke OEV management process to launch later in the year to capture OEV before a searcher can manipulate transactions.
In essence, SEDA aims to give the right to bundle transactions containing data feed updates on the SEDA network to be auctioned off. Here, searches can bid against each other, with the highest bidder guaranteed that their transaction will come in the desired order after the data feed update. The bid by the searcher represents value that can then be redistributed to all network participants on SEDA. Network participants include data consumers, providers, node operators, and SEDA.
How UMA Protocol Is Building To Capture MEV With Oval
Oval is an MEV/OEV capture system built by UMA with support from Flashbots. This strategy for MEV capture allows DeFi protocols to collect OEV by wrapping an existing Oracle solution like Chainlink and forcing searchers to compete for the right to backrun incoming Oracle updates.
When an Oracle update hits the mempool that would create a liquidation, searchers submit bundles to Oval containing their back transaction and a bid for the right to claim that liquidation. Oval then triggers an order flow auction in Flashbots’ MEV-Share and awards liquidation rights to the searcher who bids the most.
Revenue captured through the OEV auctions is split between the parties that helped create the value: the protocol and the Oracle infrastructure.
Currently live on Ethereum, Oval by UMA has begun capturing value to redistribute back to DeFI protocols.
Why Does MEV & OEV Capture Matter For SEDA & UMA
Both SEDA and UMA’s primary focus is upholding the ethos of Web3 by democratizing access to MEV and OEV. In doing so, both SEDA and UMA can distribute the proceeds captured through their distinct mechanics. Both projects have been built to uphold the ethos of Web3, creating a decentralized and fairer future for all involved. Within the foundations of SEDA’s & UMA’s philosophy, capturing OEV has become extremely important. By capturing OEV, both projects mitigate the possibility for third parties to maliciously leverage OEV opportunities for their sole benefit.
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