Privacy is the ultimate shield against blockchain vultures

Opinion by Pavel Nikienkov, co-founder of Zano and a lifelong privacy advocate.

Ah, Satoshi Nakamoto – the enigmatic pioneer who gave us Bitcoin! But let’s talk about that missing privacy feature he left in his blockchain masterpiece. It’s like leaving your front door wide open while inviting burglars to feast on our financial data.

Privacy is not just a nice-to-have; it’s a must-have in any secure system, and the right to be forgotten is sacred. However, blockchain technology, with its transparent and immutable ledger, violates that principle. It’s like having a nosy neighbor who can’t help but peek into your windows every day.

Take a simple transaction on Uniswap, for example. You buy a token, but the price drops significantly after your order due to some sneaky front-running. I used to be pretty fast in school relay races, but these days, even my top speed won’t help against such predators!

What is MEV?

Maximal extractable value (MEV) – the digital pickpocketing of blockchain miners. They can manipulate transactions for their benefit, making a killing while the rest of us are left holding the bag.

But fear not! The last few years have seen some brilliant minds come up with ways to combat this nuisance. New transaction ordering protocols like Fair Sequencing Services (FSS) ensure transactions are ordered fairly, reducing opportunities for front-running or reordering by miners.

One example is Chainlink’s FSS, which uses decentralized oracles to maintain fair transaction ordering. Another is First-In-First-Out (FIFO), a simple yet effective method that processes transactions as they arrive at the blockchain.

MEV mitigation approach

The key lies in privacy protocols, although their primary function has never been MEV elimination. Privacy tech like Ring Confidential Transactions (RingCT) and stealth addresses hide vital transaction details, making it impossible for miners to target lucrative transactions.

With RingCT obfuscating the transaction amount, sender, and recipient, MEV extraction becomes a blind guessing game. And with stealth addresses generating unique, one-time addresses for each transaction, miners are left in the dark about who’s on the receiving end.

In essence, privacy tech turns blockchain into a digital Fort Knox, protecting our financial data while keeping those pesky miners at bay. And as more banks consider a digital version of their national currencies (94% according to a recent BIS survey!), it’s clear that privacy technology will play a crucial role in the future of finance.

So, next time you make a transaction on the blockchain, remember: Privacy tech not only protects your privacy but also serves as an effective MEV deterrent. It’s like having a guard dog that barks at pickpockets while keeping your secrets safe!

Opinion by Pavel Nikienkov, co-founder of Zano.

Satoshi Nakamoto is a genius, but when it comes to privacy, he left the door wide open. Now, the vultures are feasting. The original blockchain and its many descendants are transparent, immutable, and decentralized. That might sound like everything you ever wanted from a financial system, but you’re wrong.

As a crypto investor, I recognize the importance of privacy in any robust financial system. However, I’ve come to understand that there’s a paradox in blockchain technology when it comes to privacy. While maintaining my own privacy is crucial, laws also grant me the right to be forgotten. Unfortunately, blockchain technology seems to contradict this principle due to its inherent nature as an immutable, yet permanently public, data ledger. This means that every transaction I make, no matter how trivial, remains etched in the system for all to see, forever.

It’s possible that you find this unimportant since it just appears as a sequence of random characters and digits. Yet, let me clarify that these seemingly meaningless strings carry significant weight in real-world situations, particularly when dealing with transactions within the chain.

In this hypothetical scenario, you visit Uniswap to purchase a token, submit your order, carry out the transaction, but end up receiving fewer tokens than anticipated. Upon investigating the transaction history of that pair, you discover a big buy was made just prior to yours, which increased the price, followed by a substantial sell after your order was executed. Essentially, you’ve been ‘preempted’ or ‘anticipated’ in your trade, a practice commonly known as front-running, an experience that may not be unique to this occasion.

In more common terms, you could say: “Were you leading the pack in races at school? It’s as if you said, ‘No one can outrun me!’ To clarify, let’s define front-running as taking an early lead or making an early investment with the hope of benefiting from favorable market conditions.

What is MEV?

Maximal Extractable Value (MEV) is the highest profit a blockchain miner or validator can earn by strategically deciding which transactions to include, omit, or rearrange when creating a new block.

In simpler terms, blockchain systems function as unchangeable records maintained by a network without central authority, often referred to as “block producers” which can be either miners in proof-of-work systems or validators in proof-of-stake networks. These block producers gather pending transactions and compile them into blocks, which are then verified by the entire network before being added to the permanent record (the global ledger). While blockchain networks ensure that all transactions are legitimate and new sets of transactions are consistently generated, they do not guarantee the exact sequence in which transactions were submitted to the blockchain.

In any given block, there’s a restriction on the number of transactions it can hold. Consequently, block creators have the independence to choose which among the pending transactions in the holding area (mempool) they will include in their block. This freedom allows them to potentially engage in rent-seeking behavior by maximizing transaction value (MEV). For example, the total MEV extracted on Ethereum was approximately $78 million in early 2021, which escalated to $554 million by year’s end. Currently, the accumulated MEV on Ethereum surpasses $600 million.

Problems and solutions around MEV

Luckily, over the past couple of years, we’ve made significant strides in addressing the issue of Maximal Extractable Value (MEV). This progress can be categorized into two main areas:

One solution that takes the former approach is Fair Sequencing Services (FSS), which ensures that transactions are ordered relatively to reduce opportunities for front-running or reordering by miners and validators. One example is Chainlink’s Fair Sequencing Service, which uses decentralized oracles to maintain fair transaction ordering. Another such protocol is First-In-First-Out (FIFO), which processes transactions as they arrive at the mempool. This method offers a straightforward solution to maintain order integrity, minimizing the chance for miners to manipulate transaction sequences for MEV.

Recent: ‘Unlucky’ MEV bot takes out huge $12M loan just to make $20 in profit

One methodology shares a unified aim: it’s to design a more equitable and robust system for transaction sequencing, minimizing the chances of exploitation, and this goal is crucial in fostering the trust required for widespread adoption of decentralized environments.

MEV mitigation approach

As a crypto investor, I understand that block producers leverage transparent transaction data to potentially profit by manipulating those transactions. However, privacy protocols are instrumental in addressing this issue, even though their main purpose isn’t solely about eradicating Miner Extractable Value (MEV). Instead, they help ensure the security and anonymity of our transactions within the blockchain network.

Ring Confidential Transactions (RingCT) hide crucial transaction details such as the amount sent, sender, and recipient. This makes it difficult for miners to identify transactions that could be manipulated, rearranged, or exploited early (front-running). Since individual transaction details are concealed, Minimal Extractable Value (MEV) extraction becomes extremely challenging because miners lack visibility into potential profit opportunities from arbitrage or front-running.

Similarly, stealth addresses serve as another potent privacy mechanism to combat Miner Extractable Value (MEV). They create temporary, single-use addresses for every transaction, concealing the recipient’s identity. Since these addresses are untraceable, miners cannot zero in on high-value transactions, eliminating the motivation to prioritize or reorder them for self-benefit.

In simpler terms, MEV (Maximal Extractable Value) leverages the capability of miners and validators to access transaction information to rearrange or select transactions in a way that maximizes their profits. A privacy-focused design aims to restrict these entities from viewing sensitive details about specific transactions, making it extremely challenging for them to find transactions that could potentially lead to lucrative results.

The main purpose of privacy technology is to safeguard our privacy within the expanding digital landscape. As per a Bank for International Settlements (BIS) poll, an impressive 94% of the 86 banking institutions questioned were considering a digital form of their native currencies. This figure represents a rise from the 90% of 81 banks surveyed by BIS in 2021, which is an organization that oversees central banks globally.

Still, the second function that has been overlooked is that it also helps combat predatory MEV arbitrage practices in blockchain ecosystems by making your footprint on the blockchain invisible.

Pavel Nikienkov is a co-founder at Zano. He is an expert in launching privacy-focused software products and has worked as a project manager. He joined the blockchain privacy ecosystem over five years ago and has been an effective member ever since.

I, with my years of experience in the field, would like to clarify that this article serves as a source of general information only and should not be construed as legal or investment advice. The perspectives, insights, and opinions shared here are solely mine, based on my personal understanding and do not necessarily align with or represent the views and opinions of CryptoMoon. I urge readers to conduct their own research and consult qualified professionals for specific guidance in these areas.

2024-11-18 21:21

What is MEV?

MEV mitigation approach

What is MEV?

Problems and solutions around MEV

MEV mitigation approach

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