Picture the scene: you’re sitting at the card table and every hand you’re dealt is terrible. But the cards never get better; the dealer has full view of the deck and determines the order of the cards before they are played. The dealer always wins.
The following opinion article was written by Da Hongfei, a prominent figure in the blockchain and cryptocurrency industry. He is co-founder of Neo, a blockchain platform for building decentralized applications. He further strengthened his role by founding and leading OnChain as CEO.
This may sound like a purely hypothetical scenario. But this exact sequence of events plays out every day in the blockchain industry under the guise of a strategy employed by miners and validators known as Maximum Extractable Value (MEV). MEV can take many forms, but essentially the term refers to the process of including, rescheduling, or excluding transactions in blocks mined for financial gain. Essentially, the ability to preview and reorder transactions is at the heart of MEV.
While not all forms of MEV are necessarily harmful (and can sometimes even result in price parity between crypto exchanges), so-called “toxic MEV” deliberately exploits users and poses an existential threat to the blockchain industry. Toxic MEV also proves to be hugely profitable for those miners and validators who overstep their responsibilities and use their oversight to gain additional profits at the expense of the broader community. While it is difficult to determine exactly how much has been lost to toxic MEV, recent figures suggest that more than $1 billion has been extracted from Ethereum alone, underscoring the sheer scale of the problem.
Skip the line
In a sense, MEV represents the philosophical battle between centralization and decentralization at the heart of the blockchain industry. It is well known that on-chain transactions are publicly searchable and visible once completed, but it is less known that miners and validators can view the same transactions before they are completed and enrolled in the block.
Therein lies the opportunity for manipulation: miners and validators have the authority and control to rearrange the order of these transactions in their favor, with the aim of securing additional profits beyond the standard rewards and gas fees for their work. And the fact that the number of users transacting on the blockchain radically exceeds the number of miners and validators securing it could lead to a further problem in the form of centralization concerns.
Just as MEV is a problem emerging from the blockchain ecosystem, the solution to combating MEV persistence is rooted in decentralized technology. By combining encrypted, so-called ‘enveloped’ transactions with a unique consensus mechanism known as Delegated Byzantine Fault Tolerance (dBFT), we can chart a path forward for the industry.
Shrouded transactions
Enveloped transactions remain encrypted until they are placed in a proposed block, largely hiding crucial metadata. Miners have no access or visibility to the information needed to rearrange transactions in a block in their favor, which provides the added benefit of ensuring censorship at the protocol level. Encryption hides important information so that malicious actors cannot read transactions until the transaction itself is executed, or until the lock is created, essentially negating transaction reordering.
The key to ‘sealing’ and ‘unlocking’ enveloped transactions is threshold decryption, powered by Distributed Key Generation (DKG) for setting secret keys. Once transactions are included and organized in a block, participating consensus nodes can then decrypt the transactions using the corresponding keys.
We can compare this inherently simple but very secure process with the transition from HTTP to HTTPS, which guarantees the secure exchange of information on the Internet. In HTTP, sharing information transparently meant that details could be intercepted and potentially changed, making both the information – and the recipient of that information – vulnerable. HTTPS protects both the information and the user through encryption and authentication and provides the network infrastructure for fair and orderly transactions.
dBFT
The second weapon in the war against toxic MEV is an innovative blockchain consensus mechanism known as dBFT. Developed and developed by Neo, dBFT eliminates toxic MEV from the start of the process, at the protocol level. In short, dBFT allows token holders to support a specific “accountant” or “delegate” through a vote. The role is open to anyone who meets a simple set of requirements, and these accountants use the Byzantine fault tolerance mechanism to build consensus and generate more blocks.
Under dBFT, consensus is only reached when two-thirds of delegates agree to validate a transaction and add it to a block. In the same vein, delegates can also see if block proposals are corrupt and choose to invalidate the block, eliminating the possibility of malicious behavior. The responsibility for validating the next block transaction is then passed to a new group of delegates. This requirement that block transactions be verified by a majority of delegates, while maintaining the network’s ability to reach consensus even if one or more of the delegates is corrupt, provides the ideal solution for global blockchain networks that need to be functional continue while fighting bad actors.
Where to from here?
We’re at a pivotal point in the blockchain revolution, where the rest of the world is finally starting to take notice of what Web3 companies have been pushing for years. Our vision of a decentralized and transparent future lies ahead, but we must overcome the inherent obstacles to finish the race to the finish. Only by eliminating toxic MEV can DeFi become a truly level playing field, bringing regular retail users on par with the industry’s big players, meaning a fairer and more decentralized industry.
Ensuring transparency and fairness while maintaining security is of paramount importance to the blockchain industry, and this can only be achieved by utilizing the best user protection technologies. dBFT offers the ideal solution, providing a secure and decentralized mechanism through which stakeholders can use their voting rights to ensure maximum benefit for the community as a whole. Combined with wraparound transactions, the dBFT consensus will encourage secure community participation and peer engagement, ensuring that widespread community engagement will continue to drive this sector forward.
What do you think of Da Hongfei’s MEV solution? Share your thoughts and opinions on this topic in the comments below.