Looking at this space there is so much great stuff going on. However the key issue we face is that the people working on these problems are inherently in the rabbit hole of solving complex technical problems and when we sit and listen to someone explain it — for me at least — it comes across as confusing technical bullsh*t.
So this is one idiot to another explaining why the f*ck you should care about MEV. I am going to gloss over the technical intricacy of what people are building because — I will be honest — while I understand the logic of it — I would do a poor job of doing the technical solutions justice.
What the F*ck is MEV?
MEV is defined now as maximum extractable value. For the purpose of this article I am going to talk about how it fits into the blockchain rather than zooming out to the entire financial ecosystem.
To understand MEV first you have to understand in a simple way how the blockchain processes transactions — it looks something like this:
- User submits a transaction.
- Transaction waits in a public queue.
- Miner orders all waiting on transactions and executes them in an order they choose.
Looks pretty f-ing simple right? Well that is the beauty of the blockchain, it is an elegantly complex technical solution that makes it easy for idiots like me to make financial trades.
We care about the last step for MEV:
Miner orders all waiting on transactions and executes them in an order they choose.
Basically the miner can order transactions in a way that suits him — typically the miner will order transactions based on an auction. The more you pay for your transaction to go through the faster it will be put into the block and the higher priority your transaction posted.
Just understand — if your transaction is put as the first transaction in the block your transaction will be processed first. The miner can choose how to order the transactions in the block. Each time the miner mines a block they order the block to make the most money they can. THIS IS IMPORTANT AND THIS IS WHAT MEV IS.
Thought: Everyone hates miners but wouldn’t you do the same?!
Why the hell should you care about it?
Well look at step two.
Transactions wait in a public queue.
Let’s assume you want to swap $TOKEN for $ETH on SushiSwap.
“Sushiswap trades function through an automated market maker (AMM) which uses an _x*y=k _formula, where x represents the amount of one token in a liquidity pool, y is the amount of another asset, and k is a fixed constant. The value of both assets within Sushiswap AMMs is 50:50. Effectively, as one token within the AMM pair appreciates or depreciates, the other token will be bought or sold to make up the difference.”
The above is where I start to fall asleep. So let me simplify it:
If I know you want to swap your $TOKEN for $ETH and I manage to swap my $TOKEN FOR $ETH first I can make it so you receive less $ETH for your $TOKEN (effectively a worse price).
Basically from knowing what you are going to trade I can do it first and you end up getting f*cked with a worse price i.e you receive less $ETH I swap my $ETH back and I make a tidy profit of $TOKEN.
Put it like this in the real world: if we are at the pub and you let slip you were going to buy $1 billion GAME STOP shares like the true ape you are. I go on my phone to make the trade before you buy — as soon as you execute the trade the shares go through the roof because of the level of demand you are adding to the market. I sit there drinking my beer and sell my shares back because you just pumped the price for me. What you didn’t see was I bought the shares first and pushed the price up before you executed your buy order.
Surely this can’t happen right? Well it does all the bloody time. Remember EVERY transaction you make goes into a PUBLIC queue. Some very smart people have built bots to scan that public queue for opportunities to make money off you — when they find a transaction you are making they make the same transaction but at a higher gas bid so the miner orders their transaction before yours.
This is called front running.
Ever been bloody annoyed about the amount of slippage you received when trading a token?
Most likely a bot is taking some of your money on your trade and you didn’t even know it!
Every red man in this transaction queue is a bot exploiting a trade MEV.
How the hell do you solve it?
So you now know that you are most likely getting screwed every time you make a sizeable transaction relative to the liquidity available on a DEX (decentralised exchange). The problem you have is every time you submit a transaction it gets submitted to a public queue for all to see and take advantage of.
What you need is the ability to submit your transaction to a private queue so people can’t see what you’re unto and take advantage of it. Kind of like Drake entering the club via the back door rather than waiting in line to get mobbed.
Luckily this problem is being solved. A number of projects allow you to submit your transaction privately to a miner by paying him a small tip. This means it never ends up in a public queue (crypto calls this public queue the mempool). If you never enter a public queue no one can take advantage of what you are trading and screw you out of your hard earned cash.
Enter @ArcherDAO — this project allows you to submit all your transactions to a private queue that cannot get front runned. For me personally — when I first heard about this project I thought it was too good to be true.
- Zero cancellation costs
- Zero slippage
- Protects from front-running.
Having been in crypto a little while I am always wary of new projects promising what seems like the holy grail. So I approached with caution — better to get screwed by bots for a small amount than to lose my whole transaction right?
Well that was my thought until a few days ago where the one the only crypto god @VitalikButerin used it to swap around $40m worth of tokens:
If that isn’t trust from the founder of Ethereum I do not know what is?
And the best thing about this project is it is built to allow you to have it as an option on your favourite DEX. It’s not trying to compete in the already competitive DEX space — it’s here to add value to every user of ANY DEX.
Take a look at the Sushi Swap Concept:
So let’s do the TLDR as I am sure my rabbeting on has made you semi comatose:
- Bots taking MEV is likely a problem for a huge amount of retail traders
- Most retail don’t even know they are getting screwed with a lot of transactions
- Archer DAO protects your trades from getting exploited
- Ask your favourite DEX to integrate Archer DAO because you will save large sums of $$.
Thank you for reading. Please let me know if you enjoyed this writing style. I am trying to take a no bullsh*t approach to explaining complex DeFi issues and projects.