Let’s talk about TEV (Trader Extractable Value)
If you’re new to the DeFi space like me you will find a lot of terms thrown about that you struggle to understand the meaning of and the impact of.
Well a term that may have gone under your radar is TEV (trader extractable value). Before reading this article I would advise you to read my article:
Now we’re both up to speed — let’s talk about TEV. TEV or Trader Extractable Value is a term coined by @Archer_DAO CEO @calebsheridan in these tweets. The tweet caused quite a stir in the community but what does it all actually mean?
Okay so here we go:
The idea is when you make a trade that affects the balance of the markets there is an opportunity to back run the trade instantly to rebalance the market and make profit.
Sounds like complete gobbledy gook to me — like what does backrunning even mean?
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Let’s look at and create a simple example:
- Suppose ETH is worth $1000 and USDC (a stable coin pegged against the dollar) is worth $1.
- Meaning if you swap 1 ETH you should get 1000 USDC — as the USDC is pegged to the dollar.
Okay makes sense so far? Well if you add in automated market makers that work by balancing pools such as UniSwap.
- The balancing pools work with ratios.
- So if the pool is balanced 1:1 every 1 token you put in you get one out.
In the above examples the pool should have 1 ETH for every 1000 USDC in it. Meaning each ETH is worth 1000 USDC.
So let’s take a balanced UniSwap Pool:
- There is 1000 ETH and 1,000,000 USDC. Every 1 ETH in this pool is worth 1000 USDC.
- Ratio is 1:1000
But what happens if a large trader puts in a 500 ETH swap and takes 500,000 USDC out of the pool? Suddenly the ratio switches:
- 1500 ETH : 500,000 USDC
- Suddenly the ratio in the pool has changed: 1 : 333
What does this mean?
- Well after the large trade goes through the ratio of the pool has changed — so you can get 1 ETH for 333 USDC instead of 1 for 1000 USDC.
- That’s a clean $667 profit on a 333 USDC swap using that pool.
This is a type of back running — taking advantage of a large trade and movement like the above by placing your trade behind a large trade that moves the market balance thus getting you an arbitrage opportunity on the token.
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Okay so TLDR: every-time someone makes a large trade an arbitrage opportunity opens up with that trade. Bots can insert their transactions behind the trade and cash in on that arbitrage opportunity.
Basically that is what TEV is — the arbitrage opportunity that you open up every-time you make a trade that moves the market. You (the trader) can extract more value out of your trade that go beyonds just executing and protecting the trade.
So why not benefit from that? Save gas on the TX / give it to charity / earn money back?
It’s your trade, it’s your opportunity that you have opened up — you should get paid for it!
That’s what gets me so excited about Archer DAO — they are saying — not only will they protect your trade from front running, they will also take the opportunity you have opened up but instead of a pesky rich bot owner making ridiculous profit — they will instead distribute that back to the ecosystem — right now Archer distributes 100% of this back to the traders!
Combine this with the fact you have zero cancellation costs, zero slippage — my word what an interesting idea and concept. The best thing is that — it exists — the problem is being solved! Your favourite platforms just need to integrate it.
Take away the company and just appreciate the concept for a second. A ton of trades get back-run — a lot of people are getting very rich from doing it — why not benefit the ecosystem rather than a select few?
Democratise TEV and MEV!