Inside the Economics of MEV | Matt Cutler

The Mev Supply Chain

In this section, the speakers introduce the topic of MEV and its supply chain. They discuss how the infrastructure required to support Ethereum is getting more complex by the day.

Introduction to Mev Supply Chain

• Rook has built a solution that automatically redirects MEV back to users' pockets.

• Matt Cutler of Block Native is an expert on the MEV supply chain.

• Block Native runs a relay in the MEV ecosystem.

• There was a major exploit on a relay implementation in the MEV Boost ecosystem last Monday.

Infrastructure Supporting Mev

• The speakers are joined by Matt Cutler, who walks listeners through the MEV supply chain diagram.

• The diagram shows individual actors responsible for different tasks in the supply chain.

• The speakers discuss how this supply chain is getting more complex by the day.

Economics of Searchers and Builders

• The speakers discuss how searchers and builders play important roles in the economics of MEV.

• Searchers compete with each other to find profitable transactions, while builders compete with each other to create blocks that include their transactions.

• Searchers pay miners for including their transactions in blocks, while builders earn block rewards and transaction fees.

Introduction to Ethereum Blockchain

The section introduces the concept of a user having something they want to do on the Ethereum blockchain and how they need to access their EOA via a wallet. It also explains how a Searcher sees transactions in the public mempool that have MEV associated with them.

User Accesses EOA via Wallet

• A user has something they want to do on the Ethereum blockchain.

• They need to access their EOA via a wallet.

Searcher Sees Transactions with MEV

• A Searcher sees transactions in the public mempool that have MEV associated with them.

• The Searcher picks up the transaction and creates one or more response transactions forming what's known as a bundle.

Proposer Builder Separation (PBS)

This section explains PBS, which separates the job of proposing blocks from actually building those blocks. It also describes how Builders build blocks for the blockchain and compete with each other to build the most profitable block possible.

PBS Explained

• Post merge there is this notion of PBS (Proposer Builder Separation).

• PBS separates the job of proposing blocks from actually building those blocks.

Builders Build Blocks for Blockchain

• Builders' job is to build blocks for the blockchain.

• Builders collect transactions from public mempool, private transactions, and Searcher bundles.

• Builders compete with each other to build the most profitable block possible.

Connective Tissue: Relays and Mev Boost

This section explains relays' role in connecting validators and builders. It also describes Mev boost, which connects validators to Mev boost relay network.

Relays Connect Validators and Builders

• Relays sit between validators and builders.

• They serve as a critical middleman role, absorbing large amounts of network traffic.

• Relays accept blocks from builders and validate them to ensure they are valid and can be accepted by the network.

Mev Boost Explained

• Mev boost is a small piece of software that connects validators to the Mev boost relay network.

• Over 99% of all validators have installed sidecar, an optional piece of software.

• Today, about 80% to 90% of all blocks come through Mev boost.

Impedances: Continuous Flow System vs. Discrete Flow System

This section explains how continuous flow systems on the left (public mempool) need to get matched up with discrete flow systems on the right (chain). It also describes how Builders build blocks continuously to match these two different impedances.

Matching Impedances

• The public mempool is a continuous flow system where anyone in the world can submit a transaction at any microsecond.

• The chain is a discrete system that clicks forward every 12 seconds in perfect synchrony.

• Builders build blocks continuously, always collecting the latest transaction information and trying to recalculate what's going on.

Relay's Role in Simplifying Network Challenges

• Relays massively simplify the network and compute challenges of validators because they don't absorb all this traffic or need all these Builders hammering it with all these blocks that it then needs to validate.

• All relays need to do is ask these relays.

Centralization of Ethereum Relays

In this section, the speaker discusses the centralization of relays in Ethereum and how validators can selectively enable one or more relays. The speaker also talks about the policies associated with different validators and how they filter out certain transactions.

Centralized Relays

• There are only six independent operators that operate multiple relays in Ethereum.

• The network is entirely dependent on these relays, which require 100% uptime, high degrees of network connectivity, and CPU to simulate blocks.

• There are no economic incentives for operating the relays, which carry real costs and risks but have zero economics.

Policies Associated with Validators

• Different validators have specific policies regarding censorship and compliance.

• Some US-based entities only take non-censored transactions while global entities only take censored ones.

• Client diversity is essential at the consensus layer level, but there are only two code bases for relays.

Flashbots Relay Function

In this section, the speaker talks about PBS's decision to separate the role of validator proposer and builders to avoid Mev dystopia. They discuss how relay functions allow builders to communicate with proposers in a trust-minimized way.

Separation of Roles

• PBS made a decision to separate roles to avoid Mev dystopia.

• Relay functions allow builders to communicate with proposers in a trust-minimized way.

Sustainability of Relays

• The economics of relays are not sustainable, and there is a significant risk associated with them.

• Encouraging more teams to participate as relays or adopt alternate code bases can create relay diversity.

Understanding the Role of the Relay

This section explains the role of the relay in proof of work and how it has changed in proof of stake.

The Role of the Relay in Proof of Work

• In proof of work, there was only one relay, which was connected directly to mining pools.

• The relay only sent individual transactions or bundles to the mining pool, which included the best ones using a local block building algorithm.

• Workers in the mining pool were not seeing all transactions, providing an implicit privacy mechanism.

Changes in Proof of Stake

• In proof of stake, validators are building their own blocks locally.

• There are now many different staking pools, making it difficult for the Mev relay to decide who to send transactions to.

• Two solutions were proposed: make Mev exclusively available to trusted validators or find a mechanism that encrypts transactions.

The Role of the Relay

• The relay takes bits from builders and shows only the block header to validators.

• After receiving a signature from validators, it can release or publish full blocks to the network.

Economic Value Provided by Relays

This section discusses how relays provide economic value to Ethereum's network.

Benefits Provided by Relays

• Mev boost blocks include about 22% more transactions per slot than vanilla blocks.

• Validator rewards are significantly higher through Mev boost blocks (about 272% greater).

• None of this value is currently shared with infrastructure operators.

Conclusion

This section concludes by summarizing key points made throughout the transcript.

Key Points Made Throughout Transcript

• In proof of work, there was only one relay connected directly to mining pools. In proof of stake, validators are building their own blocks locally.

• The relay takes bits from builders and shows only the block header to validators. After receiving a signature, it can release or publish full blocks to the network.

• Relays provide economic value to Ethereum's network through Mev boost blocks and higher validator rewards.

• None of this value is currently shared with infrastructure operators.

The Value of Relays in the MEV Supply Chain

In this section, the speakers discuss the value of relays in the MEV supply chain and how it is misunderstood. They also talk about how relays are not necessary for most participants in the MEV supply chain.

The Misunderstood Value of Relays

• Untrusted parties would be excluded from the MEV supply chain if relays didn't exist.

• Most parties do not need a relay as they trust each other.

• Only a few parties benefit from having a relay.

• Monetizing relays could degrade the already fragile market structure.

The Importance of Social Consensus

• Social consensus is important to ensure that everyone operates on an equal footing.

• Monetizing relays creates an incentive to circumvent them, which could lead to a breakdown in social consensus.

Increasing Participation and Sustainability in the Network

In this section, the speakers discuss their views on increasing participation and sustainability in the network. They also talk about incentives and game theory.

Increasing Participation

• The current market has few participants with no incentives to increase participation.

• More diversity and various actors are needed to increase participation.

• Private entities using venture capital money support the network, but this is not sustainable.

Incentives and Game Theory

• There is a trade-off between simple cheap paths for validators and staking pools versus eking out more profit.

• Mechanisms need to be explored to ensure sustainability and ideal operations.

Incentives and Centralization

The speaker discusses the potential for out-of-band incentives and reduced participation leading to centralization in the relay ecosystem. They also discuss the economics of monetizing successfully and how it relates to beta markets.

Relay Market Differentiation

• Relays need to differentiate themselves from other relays in a free market to upgrade their technology and win more customers.

• The service provided by relays is extremely fungible, so there needs to be a social convention on their ability to monetize.

• There is no economic advantage to operating different consensus layer clients as they all operate the same fungible service.

Timeline for In Protocol PBS

• The speaker believes that if in protocol PBS becomes the number one priority for Ethereum Polysium roadmap without any emergency timeline, it will take 18 months.

• If there is an emergency, such as math boost protocol starting to break down, then it can be accelerated much faster than a year.

Public Goods Funding

• The relay ecosystem today is a public good that provides tremendous value to the ecosystem.

• We need to talk about funding public goods rather than turning this into a market that can be monetized successfully.

Flashbots' Role in Relay Ecosystem

The speaker acknowledges Flashbots' role as champions and architects of an incredible system that helps move the entire network forward. However, they also discuss how being an operator in this role is not very gratifying.

Builder Differentiation

• No bullet points available for this section.

Building a More Equitable System

In this section, the speaker discusses the importance of building equity into the core of the Ethereum system and creating incentives for equitable recirculation. They also touch on the dangers of assuming infrastructure and how it can lead to negative incentives and centralization.

Equity in the Core

• The goal of Ethereum is to build a more equitable system.

• It's important to build equity into the core of the system.

• Incentives that route around equity are problematic.

Equitable Recirculation

• Early advocates for MEV recirculation back to users.

• Happy to see MEV take off as a topic.

• Want to get out in front of creating more equitable recirculation.

Dangers of Assuming Infrastructure

• Dangerous to assume infrastructure in its formative stages.

• Infrastructure implications need to be understood.

• Negative incentives and centralizing incentives will emerge without compelling incentives.

Creating Compelling Incentives

This section continues discussing how important it is to create compelling incentives for equitable recirculation. The speaker talks about how many relays are needed and how they can make the system more fragile. They also discuss prior states under proof-of-work and how they compare with current architecture.

Compelling Incentives for Equitable Recirculation

• Need compelling incentives for equitable recirculation.

• Starting to see some traction on these concepts.

Relays Make System Fragile

• Having many relays doesn't necessarily make the system more secure.

• Every relay makes the system more fragile because only one dishonest relay is needed for cheating or stealing Mev from participants.

Prior States Under Proof-of-work vs Current Architecture

• Prior state under proof-of-work had thousands of machines securing network but were aggregated into small number of mining pools.

• Mining pool operators determined block template and were widely perceived as overly centralizing and risky.

• Current architecture is a massive improvement over prior state, but there are still only a few entities determining what happens.

Operating a Relay

The speaker discusses the challenges of operating a relay and the need for each relay to stand on its own merits. They also mention the need to lobby validators and searchers, as well as the regulatory exposure that comes with operating a relay.

Challenges of Operating a Relay

• Each relay must stand on its own merits.

• Lobbying validators and searchers is necessary.

• Operating a relay requires real human capital and out-of-pocket expenses.

• Regulatory exposure is often present in many jurisdictions.

Rook Protocol

The speaker introduces Rook Protocol, which aims to drive value to users and applications by reducing MEV extraction from user pockets. They discuss how Rook Protocol works, including connecting to an open-source rep node, matching bundles and auctioning orders, returning discoverable MEV back to users, and more.

Introduction to Rook Protocol

• Aims to reduce MEV extraction from user pockets.

• Connects to an open-source rep node.

• Matches bundles and auctions orders in seconds with zero gas overhead.

• Returns discoverable MEV back to users.

Builders in the Ecosystem

The speaker discusses builders in the ecosystem, which transport valuable payloads containing MEV transactions from block builders to validators. They explain how this process works in good cases but also highlight a bug that caused issues with relays not checking whether certain parts of signatures were valid.

Builders in the Ecosystem

• Transport valuable payloads containing MEV transactions from block builders to validators.

• In good cases, relays show block headers to proposers who select the highest one before signing it upon receiving signatures. Relays then reveal block bodies before proposals publish full blocks while relays publish full blocks too.

• A bug in the relay implementation caused issues with relays not checking whether certain parts of signatures were valid.

The MEV Attack

In this section, the speaker discusses a malicious attack on the Ethereum network that exploited vulnerabilities in the searcher strategy and relay. The attack resulted in significant economic losses for several builders.

MEV Attack Details

• The attacker baited specific sandwich bots to make risky trades by parameterizing traits in low liquidity units of pools.

• They then exploited these trades to be re-sandwiched and drain multiple spots, resulting in around 20 million dollars in losses collectively for four builders.

• The relay released the block body without checking whether another block was being finalized, revealing information about the MEV transactions to the attacker's proposal.

• The parent root and state root fields necessary to propagate the header payload were zeroed out by a malicious validator operating on the network post-merge.

Trust Assumptions and Code Diversity

In this section, the speakers discuss how trust assumptions can lead to vulnerabilities when they are breached. They also consider how code diversity might help prevent such attacks.

Trust Assumptions Breach

• When trust assumptions are breached, there can be significant economic consequences. This is why trustless permission systems are preferred as they reduce the likelihood of such situations happening.

• High-level abstractions like Searchers' trust that their bundles are private can sometimes lead them not to be as careful as they should be because of their trust relationship with relays.

Code Diversity

• Increasing code diversity may not have helped prevent this particular attack since validators are free to choose which relay they get their payload from.

Flashbots Team and Information Sharing

In this section, the speaker discusses the proactive measures taken by the Flashbots team to alert relay operators of potential issues. The importance of information sharing among operators is also emphasized.

Flashbots Team's Role in Alerting Relay Operators

• The Flashbots team proactively alerts all relay operators about potential issues.

• This is done by issuing code upgrades that need to be implemented by the Dreamboat operators themselves.

Importance of Information Sharing Among Operators

• More eyes on a subject increase the likelihood of spotting gaps or vulnerabilities.

• Having multiple code bases can lead to errors or exploitation, making it better to have more eyes on a single code base.

• Debates exist between having multiple client implementations versus a single one for better security.

Introduction of Order Flow Auctions and Wallet Influence

In this section, the speaker talks about new forces that will start pulling on the supply chain, such as order flow auctions and growing wallet influence.

Order Flow Auctions and Supply Chain Dynamics

• Order flow auctions may change how supply chain dynamics work.

• A diagram is shown to illustrate how order flow auctions might interact with the Meb supply chain.

Growing Influence of Wallets

• No bullet points available.

Mev and Order Flow Auctions

In this section, the speakers discuss the problem of MEV (Miner Extractable Value) and how it affects users. They also talk about the introduction of order flow auctions as a solution to mitigate MEV.

Introduction to MEV

• Mike or any tool used is not aware nor does he consent because there's no mechanism for Mike to share his preference.

• Users are cut out of the network where other actors have explicit facilities to exert and specify their preferences.

• The root cause of MEV is due to four actors: transaction originators, Mike, Uniswap, Zapper, and the wallet Mike uses.

• Users are not aware that they are creating MEV when using certain exchanges.

Proposals to Mitigate MEV

• There are proposals such as Wallet Boost by Block Native and Mev Share by Flashbots that aim to recirculate MEV and cut folks in so they can participate in its value.

• Exposing transactions at the intent layer allows searchers to get access earlier in the cycle or exclusive access potentially.

• Bidding works by going back up the value chain from user to wallet, protocol, DAP etc.

Order Flow Auctions

• Autoflow auctions allow early visibility into transactions which enables bidders to push value up-chain.

• Historically wallets have been blind to this issue but now there is an explosion of infrastructure that is becoming more aware of MEV.

• Autoflow auctions provide a way for users themselves to internalize some of the costs associated with MEV.

Order Flow Auctions

In this section, the speakers discuss different ways of doing order flow auctions and how they can be achieved. They also talk about the design space and how it's going to be interesting in the next six months.

Different Approaches to Order Flow Auctions

• Transactions can be bundled together and sent to different block builders.

• There are many ways of doing order flow auctions, and there is a big design space that is going to be very interesting in the next six months.

• The speakers are collaborating on this stuff so that there is one set of standards for the ecosystem to apply.

Sources of MEV

• The total value of MEV could be reduced down to a handful of wallets and protocols.

• Some entities are moving to internalize MEV, which raises questions about centralizing forces.

Steel Supply Chain Analogy

• The speaker uses an analogy from his experience as a consultant specializing in steel supply chains.

• There is constant competition between actors exerting leverage over the supply chain, with different parts trying to pass commodity price risk across the value chain through contracts.

• Actors at the top of the value chain will suck some MEV away from searchers, builders, validators, and potentially relays if they end up charging.

Concentration in the Crypto Industry

In this section, the speaker discusses concentration in the crypto industry and how it is similar to concentration in other industries such as the PC industry. The speaker also talks about how smaller players are at a disadvantage and how users can protect themselves.

Concentration in the Crypto Industry

• Concentration in the crypto industry is similar to concentration in other industries such as the PC industry.

• Metamask and Uniswap have 80% market share in their respective markets.

• Smaller players are at a disadvantage and are at the mercy of major players.

• Smart users use deck segregators or rpc.flashbox.net to protect themselves.

Risks of Mev Dystopia

In this section, the speaker talks about risks associated with MEV dystopia and how traditional actors can get involved. The speaker also emphasizes that incentives need to be ecosystem-aligned.

Risks of Mev Dystopia

• There are real risks associated with MEV dystopia.

• Traditional actors can now get involved due to account abstraction in 4337.

• s Complexity ends up being a tax, which makes it difficult for non-sophisticated users to interact with the system.

• s Adequate incentives need to be ecosystem-aligned.

Conclusion

In this section, the speaker concludes by emphasizing the importance of considering incentives and mental models when dealing with complexity in the crypto industry.

Conclusion

• It is important to consider incentives and mental models when dealing with complexity in the crypto industry.

4337 Account Abstraction: Implications for MEV

In this section, Matt explains what account abstraction is and how it makes wallets and their transactions more expressive and programmable. He also introduces the concept of a bundler that acts as an EOA proxy to sign transactions on behalf of users.

Introduction to Account Abstraction

• Account abstraction opens up wallets and accounts to be more abstract, allowing users to do more with them.

• Users can express their smart contract wallet's intent using a 4337 wallet by creating pseudo-transactions called user Ops.

• A new actor known as a bundler acts as an EOA proxy, signing transactions on behalf of users.

The User Intent Layer

• The user intent layer is a pre-chain layer where users can express what they want their smart contract wallet to do.

• User Ops are submitted to the alt mempool, which contains these user intents.

• Bundlers take these user Ops, put them together into a bundle, sign it, and submit it either directly to the public mempool or privately to a builder.

Implications for Ethereum User Experience

• Account abstraction upgrades Ethereum's user experience without requiring a hard fork.

• It allows wallets to do all sorts of new and interesting things like social account recovery, gas sponsorship, multi-part transactions like an approve and swap at the same time.

MEV Implications

This section discusses the implications of account abstraction for MEV (miner extractable value).

Introduction of New Actors

• Account abstraction introduces a new set of actors known as bundlers.

• Builders may become bundlers, leading to supply chain integration.

Front Running

• There is a possibility that account abstraction may introduce more front running opportunities.

Understanding the Role of Builders in Esc437

In this section, the speaker discusses the role of builders in esc437 and how bundling can introduce more centralization. They also talk about the problem of exclusive order flow and how it can be exacerbated by user ops.

Bundling as an Additional Job for Builders

• All block builders will take on the role of being bundlers.

• Exclusive order flow is a problem that arises when a builder has access to more order flow than other builders, which allows them to make more valuable blocks and gain access to even more order flow.

• User ops can exacerbate exclusive order flow if they are not widely available to different builders.

• It is too early to tell how this market will evolve, but there is a high degree of interest in all things 4337.

The Economics of Being a Builder

• Becoming a bundler requires a high degree of specialization, including CPU, network, storage, and relationships.

• Builders who have marginal economics today can reuse their existing capabilities in this new area.

Data Availability Sampling

• The same pattern that exists with exclusive order flow will exist with data availability sampling in 4844.

• Mempools are ephemeral by definition, but Block Native archives everything for research purposes.

• More visibility into these games that are happening is better than less visibility.

Credit Card Issuers Driving Influx of New Users

• Credit card issuers can turn credit cards into ethereum wallets for 4337 transactions.

• This could drive a massive influx of new users who are not even aware they are using ethereum.

Account Abstraction and Visa

In this section, the speakers discuss how account abstraction can onboard more people to crypto and how Visa's history of embracing usability improvements can make the world of crypto more familiar to actors in traditional finance. They also ponder on the possibility of Visa opening up a new world of being able to buy things on-chain with credit cards.

The Potential of Account Abstraction

• Account abstraction solves foundational roadblocks that have kept many people out of crypto.

• It has the opportunity to onboard a whole lot of people into crypto.

• There is a lot to ponder about its possibilities.

Visa's History and Usability Improvements

• The history of Visa is worth digging into as it embraced usability improvements to streamline payment over and over again.

• Innovations in the ecosystem, such as using watches for payments, make the world more familiar to actors in traditional finance.

Hypothetical Scenario: Visa and Crypto Transactions

• If Visa opens up an entirely new world of buying things on-chain with credit cards, regulators may start getting involved in how MEV works.

• The increasing presence of regulation in crypto may impact everything discussed earlier.

• Credit card companies are already highly regulated entities, so they can help shape the regulatory environment.

The Potential of Coin Abstraction

In this section, the speakers discuss the potential of coin abstraction and its benefits beyond just payments.

Benefits of Coin Abstraction

• Coin abstraction is more than just paying for things; it also provides security through smart contract wallets.

• Smart contract wallets allow for a native way to recover keys and can even use a trusted centralized service to recover keys without stealing them.

• Coin abstraction has the potential to improve the user experience of crypto in ways that no other proposal has done before.

Mev is Unavoidable

In this section, the speakers discuss how MEV (Maximal Extractable Value) is unavoidable in web 3.0 and how it can be managed.

Managing MEV

• MEV is everywhere in web 3.0, but when controlled by private actors, it's acceptable.

• Preferential ordering and extracting value exist in many industries, but what's different about web 3.0 is that it's open and transparent.

• As we onboard new users and create new capabilities, MEV will continue to exist. The opportunity we have is to create incentives for all actors to make sure that the system we wind up with is both decentralized, not prone to regulatory capture, and as equitable as possible.

Introduction

In this section, Adam Cutler introduces himself and his company, Block Native. He also invites people to follow him on Twitter and engage with him at Ethereum events.

• Adam Cutler introduces himself and his company, Block Native.

• He invites people to follow him on Twitter and engage with him at Ethereum events.

Episode 2 Recap

In this section, Haasuu recaps the second episode of the podcast and shares his thoughts on the conversation with Matt. They discuss relays, monetization in the video market, and the concept section.

• Haasuu recaps the second episode of the podcast.

• He shares his thoughts on the conversation with Matt.

• They discuss relays and monetization in the video market.

• They talk about the concept section.

Relay Monetization Debate

In this section, Haasuu and Matt debate relay monetization. They discuss whether or not it is possible to monetize relays without defeating their purpose.

• Haasuu summarizes Matt's point that there are no economics to support off-chain entities that rely on relays.

• They discuss how having mandatory relays is better than having optional ones for latency reasons.

• The debate continues regarding how many relay implementations should exist for security purposes.

• Haasuu suggests an alternative way to monetize being a relayer without charging per transaction.

Conclusion

Overall, the podcast episode covers a range of topics related to relays and their monetization. Haasuu and Matt provide different perspectives on the issue, highlighting its complexity and nuance. The timestamps provided allow for easy navigation through the transcript.

Monetizing Relayers

In this section, the speakers discuss different ways to monetize relayers and whether it is possible to find an alternative to charging for transactions.

Is there another way to monetize relayers?

• The speakers discuss whether there is another way to monetize relayers besides charging for transactions.

• Highly rational actors in the market make it difficult to package fees in a different way.

• Builders are not making any trade-offs, and most parties in the supply chain are highly rational. It doesn't matter how you package a fee; it will always be felt by these actors because they only care about price.

Arguments against taking a fee at the relay level

• One of the founders of Flashbots argues against taking a fee at the relay level because he doesn't want to enshrine the relay as a commercial role. The relay market should eventually be replaced by an in protocol solution, and becoming dependent on someone with commercial interests could lead to problems when they disappear.

Public Goods

In this section, the speakers discuss public goods and their thoughts on them.

Thoughts on public goods

• The speakers discuss their thoughts on public goods in general.

• There is no such thing as a public good according to some libertarian or ultra-liberal views. Everything that should exist should be privately owned or managed by individuals or corporations rather than being publicly owned or managed by governments or other entities that represent society as a whole.

The Role of Government in Ethereum

In this section, the speaker discusses their high-level mental model for government and how it applies to Ethereum. They also talk about the importance of public goods funding and the role of for-profit companies in the MEV space.

Three Functions of Government

• The speaker believes that government should do three things: create a foundation for orderly markets, fund public goods, and put a price on negative externalities.

Role of Ethereum Foundation

• The closest thing to government in Ethereum is the Ethereum Foundation.

• Other players like Bitcoin Consensus also do a lot of public goods work.

• Flashbots does a lot of work in the MEV supply chain specifically.

Public Goods Funding

• There is an expectation in crypto that if you make money, you have a responsibility to give back to the ecosystem through public goods funding.

• For-profit companies are necessary in the MEV space because there is so much profit involved.

• Crowdfunding or relying on donations is not sustainable because there are overwhelming financial incentives involved.

Resiliency and Fairness

• One way to interpret some design philosophies of Ethereum as an economic system is resiliency and fairness.

• Efficiency when taken to its logical extreme can lead to breakdowns and downsides to the system.

• Once people start demanding more resiliency and transparency fairness, crypto may win out over more efficient systems.

Account Abstraction and Wallets

In this section, the speakers discuss account abstraction and wallets in general. They explore the innovations around account abstractions, which abstract away a lot of the complexity of managing private keys and allow for gasless transactions. The speakers also discuss smart contract wallets and their benefits.

Innovations around Account Abstractions

• Account abstractions have two main innovations: they abstract away the complexity of managing private keys and allow for gasless transactions.

• Gasless transactions mean that users don't have to pay gas for every little transaction they want to do, making it easier to interact with apps on Ethereum.

• Smart contract wallets provide better security properties than EOAs (Externally Owned Accounts), but are more costly to use on Ethereum layer one.

• Infrastructure is being built around EOS, which expects users to have an EOA. However, building on top of NUAs provides backward compatibility while giving the security properties of a smart contract wallet.

Mev Supply Chain

• Account abstraction adds a new portion to the MEV supply chain and introduces two new sets of actors: bundlers and paymasters.

• The additional layer of complexity introduced by account abstraction may be worth exploring as a theme for future episodes.

• Pseudo-transactions can be crafted into full transactions, which could expand the range of preference expression that users can have.

Overall, this section explores how account abstraction simplifies managing private keys and enables gasless transactions. It also discusses how smart contract wallets provide better security properties than EOAs but are more costly to use on Ethereum layer one. Finally, it touches upon how account abstraction adds a new portion to the MEV supply chain and introduces two new sets of actors.

Mev in a Modular World

In this section, the speakers discuss the implications of MEV (Maximal Extractable Value) in a world of modular scaling of L2s and potentially L3s. They introduce Suave as a potential solution to this challenge.

Introduction to Suave

• Suave is at the heart of solving the MEV challenge.

• Robert Miller, Head of Product at Flashbots, is driving the implementation of Suave.

• John Charbonneau, a prolific writer and researcher in the MEV space, has also thought deeply about MEV in the modular stack.

Implications for Layer 1 Economics

• The speakers discuss what will happen to block building and how Suave works in relation to layer one economics.

• They express excitement for exploring how sequencing will work in Layer Two and what this means for future stacks.

Overall, this section provides an introduction to Suave as a potential solution to the challenges posed by MEV in a world of modular scaling. The speakers highlight key players involved with its implementation and discuss its implications for layer one economics.