Valid Points: Yes, Front-Running Will Still Exist on Ethereum 2.0

Maximal extractable value (MEV) is quickly becoming a buzzword among Ethereum developers and traders alike, given the recent rise of decentralized finance (DeFi).

Congruently, the finish line for Ethereum 2.0’s consensus mechanism swap is within sight. Colloquially called “The Merge,” mining on Ethereum is likely to fall by the wayside within the next year or so in favor of staking. Doing so opens up a host of questions, particularly for those completing complex trades on Ethereum.

While GPU mining is likely to go away, MEV most likely won’t, according to a new report from research group Flashbots. Also called “miner” extractable value, MEV is crypto’s version of Wall Street front-running. Yes, that’s the same front-running strategy that brought a Massachusetts day trader to testify before Congress for his role in shorting big name hedge funds into the ground.

MEV, front-running and the race to be first

On a more technical level, MEV is all about transaction sequencing: who gets to be first in line to settle a transaction on-chain. Being first increases the odds of netting a profit on an arbitrage trade across various DeFi markets. And traders are willing to pay handsomely to be first in line by bidding up gas fees. Indeed, Flashbots data site shows some $40 million in MEV-based extracted value, when transaction fees are included.

As Flashbots states, under the current schematics Eth 1.x clients will still be in charge of ordering transactions, similarly to how miners order transactions using Eth 1.x software. The Beacon Chain will only finalize these transactions by attesting and validating them via its staking network. Flashbots does state that validators, who act as block proposers, will eventually be capable of extracting MEV from traders as the final arbiter of a transaction.

That simple explanation leaves out a lot of open questions, however. The Beacon Chain processes transactions over a period of time called an “epoch,” which is divided into slots for nestling transactions. Epochs run about 6.4 minutes long and block proposers are given their positions ahead of time.

Searchers – those who look for MEV opportunities – could have a longer time to find profitable trades, given the heads-up block proposers have compared to the current Ethpow blockchain. So, it's possible the race to outbid other traders becomes more crowded on Eth 2.0 than Ethpow.

Overall, MEV will work nearly the same as it does on Eth 2.0: The more technically inclined remain at an advantage over all others.

Pulse check: How Zelda, our Ethereum validator, is doing this week

If you’re new to “Valid Points” and the topic of Ethereum 2.0 in general, be sure to check out our 101 explainer on Eth 2.0 metrics to get up to speed about terminology used throughout this newsletter.

Zelda – CoinDesk’s very own Eth 2.0 validator node – continues to cook up attestations.

Per Beaconcha.in, Zelda is nearing 8,000 attestations of the Beacon Chain. One day these attestations will secure value on the Beacon Chain, but for now they merely signal agreement on a block being finalized with other validators.

Sadly, Zelda has not been chosen in the past week to propose a block. So far, our little validator has proposed only two blocks in return for 0.2354 ETH, worth $433 at time of writing.

Let’s do a little napkin math for CoinDesk to break even. At a current rate of proposing one block per 20 days, CoinDesk needs about 271 block propositions, or 5,437 days, to make back on our initial ether investment.

Of course, those numbers are bound to change as validators join the network – and that's assuming no malfeasance on Zelda’s part. This quick calculation also doesn’t include attestation rewards which Zelda is also reaping. As a reminder, all profits from Zelda will be donated to charity.

Validated takes

• Ethereum Blockspace: Who Gets What and Why (Research, Anicca Research)
• Staked Introduces Eth 2.0 Trust for Accredited Investors (Article, CoinDesk)
• The Most Important Scarce Resource is Legitimacy (Blog Post, Vitalik Buterin)
• Visa Settles USDC Transaction on Ethereum, Plans Rollout to Partners (Article, CoinDesk)
• Venture-Backed Ethereum Project Optimism Delays Launch (Article, CoinDesk)

Factoid of the week

Open comms

Feel free to reply any time and email research@coindesk.com with your thoughts, comments or queries about today’s newsletter. Between reads, chat with us on Twitter.

Valid Points incorporates information and data directly from CoinDesk’s own Eth 2.0 validator node in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site!

Will Foxley and I will be continuing the conversation on Ethereum 2.0 with Consensys’ Ben Edgington in a CoinDesk podcast series called “Mapping Out Eth 2.0.” New episodes air every Thursday. Listen and subscribe through the CoinDesk podcast feed on Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica, IHeartRadio or RSS.