🤑 $32.5M, that's searchers' revenue of #MEV on #Ethereum in Jan and Feb of 2023. In the same MEV supply chain, builders' income reached $67.21M, out of which validators took the most: $62.58M. This research shows you how the value flows thru the whole stream.

📊 Here is the big picture illustrating the benefits flow for different parties, specifically builders and validators under the current PBS scheme. One liner: MEV Accounts for 51.6% of Builders' Revenue, and Validators Stand as Top Beneficiaries.
Let's dive deeper.  🕵️‍♀️

⚡️During the 2 months, EigenPhi identified 975,290 txs involving MEV payments. Our algorithm classified 64% of these transactions as originating from three types of MEV, which generated a profit of $7.3 million collectively and contributed $18.9 million toward MEV payments.

💰 The remaining 36% of txs, with undefined types, accounted for $15.8 million in MEV payments. These yet-to-be-strictly defined categories include Just-In-Time (JIT) transactions, statistical arbitrage, DEX-CEX arbitrages, and private orders, among others.

👷 Of these MEVs, $23.1 million is directly transferred to the builder's address through coinbase.transfer(), while the remaining $11.6 million is paid to the builder as priority fees.

 💸 MEV accounts for 51.6% of the builder's revenue, with the remaining 48.4% coming from priority fees paid by regular transactions.


🤯 Builder’s explicit revenue for first 2 months of 2023: only $4.4M. 93% of $67.3M was allocated to compensate validators, who received $62.6M.

💵 Considering only the MEV part and assuming that the builder transfers all regular transaction fees to the validator, it remains essential to allocate 88% of  MEV to validators to guarantee that the builder's block is successfully proposed.


Now you've got the bigger picture. And you might want to ask: who exactly are these builders and validators that have the biggest piece of the 🍰?  Our 2nd part of the analysis has the answer: the oligarchs.

The market competition between builders and validators exhibits an apparent oligopoly effect, with @LidoFinance claiming a 30% market share, and the top three contenders, being builders and validators at the same time,  securing about 50% of the total profits.

. Currently ranking first, @LidoFinance amassed $21M in profits in 2 months, claiming a 30% market share. Meanwhile, the runner-up, tagged as Coinbase by mevboost.pics, occupies 15% of the market share.

Lido's market share in terms of profits also aligns with its staking weight and the probability of proposing new blocks. @DuneAnalytics shows @LidoFinance has staked a total of 6,038,112 ETH with 189k validator nodes, accounting for 31.9%. https://dune.com/hildobby/eth2-staking

Our data exhibit that Lido's share of proposing blocks on their own or obtaining auctioned blocks from Relay is around 30%. Assuming 1 ETH equals 2,000 USD, the block's transaction fees and MEV revenue generate approximately 1% annualized return for Lido.

That's it! Wanna to find out more about the gains of Searchers, Builders, and Validators, please visit: https://eigenphi.substack.com/p/value-allocation-in-mev-supply-chain
And would love to have inputs from Giga Brains: @christine_dkim, @drakefjustin, @0x94305, @uriklarman, @sui414, @ellen, @jon_charb, @bertcmiller

Value Flow in Ethereum's MEV Supply Chain

Discover the latest insights on the DeFi! Introducing our column that will better guide you explore the fascinating world of MEV, and understand the risks and opportunities for liquidity in this dynamic space. Unlock the wisdom of DeFi with EigenPhi now 👇
https://eigenphi.io/mev/research

1️⃣ Following this article, let's dive into data analysis of the typical MEV bots' activities (Arbitrage, Sandwich, JIT) involving Uniswap V3, and share insights to better understand the long-term impact of MEV on AMMs. https://eigenphi.substack.com/p/mev-impact-on-uniswap

2️⃣ Why do we need a control system based on liquidity sensors and a feedback loop to mitigate the imminent risks? This report will give you the answer, with showing how AAVE's $1.6 million bad debt was created https://eigenphi.substack.com/p/aave-bad-debt-report

3️⃣ How far do MEV bots impact the Curve community and its users? Who would be most likely to be involved in MEV activities? How valuable could MEV data be to enhance the protocol design? Let's see How 10M revenue drain in 5 months on Curve by MEV https://eigenphi.substack.com/p/10m-revenue-drain-in-5-months-mev

4️⃣ Discover how an attacker exploited the liquid staking protocol Ankr and profited $5.656 million when 1 BNB worth $292. Learn the details of this attack and its consequences, including an emerged Helio arbitrageur who made 15.5M BUSD with only 10 BNB. https://eigenphi.substack.com/p/the-arbitrageur-who-beats-everyone

5️⃣ This must be one of the most systematic research on DeFi risk events with a neatly summed up theoretical framework - The Tokenomic Trilemma. It could be your useful tool to anticipate and diagnose DeFi protocols' flaws and risks.
https://eigenphi.substack.com/p/tokenomic-trilemma

6️⃣ And our breaking release in review of the annual MEV performance: MEV Outlook 2023. It will give you a thorough review of the breathtaking 2022 on MEV's top protocols, best bots, and much more that you can't afford to miss.
https://eigenphi.substack.com/p/mev-outlook-2023

EigenPhi's DeFi Research

@Maven11Capital shared their thoughts on Modular MEV, which is very inspiring, and manifests how MEV could potentially evolve in the next phase. https://maven11.substack.com/p/modular-mev-part-2-finality-actors

According to the paper, in a modular stack, the sequencers  act as both builders and proposers of blocks to the underlying layers they are connected to. The validators on the data availability layer are purely proposers and are unable to reorder any transactions.

EigenPhi has captured Block Builders' address, and discovered the top 2 capturing over half of MEV after the Merge. It's easy for builders to manipulate in a monolithic blockchains rather than modular ones.

The total MEV of these shared layers are in general (beyond fees) the total amount of inefficiencies in the system caused by non-coordination between actors in the supply chain (liquidations, arbitrage, front-running, sandwiching)

With a much less congested network, arbitrage opportunities on BSC were much more cost-effective than on ETH. As blockchains grow more efficient like the paper suggests, the difference will eventually converge.

On thing to be noticed, however, is that, despite the fact that MEV can happen on different chains, MEV searchers and bots are the most active during crisis. Yes, crises breed MEV for its drastic price volatility

For more valuable insights, join our Twitter Space and listen to what MEV experts have to share.
https://twitter.com/EigenPhi/status/1638563210872725510

If you enjoy our contents and are interested in digging more about MEV. We've got a whole video that entails things we believe are valuable to you
https://www.youtube.com/watch?v=Sb55mPLXctg&t=230s

The Future of MEV: Modular MEV

In the report released by @galaxyhq, @christine_dkim has led us go through the revamped MEV landscape of Ethereum post-Merge.
With referring to EigenPhi's data, Galaxy's report presents the top 10 most competitive MEV searchers on Ethereum in 2022.
https://www.galaxy.com/research/whitepapers/mev-the-rise-of-the-builders/

As argued in the report, the most profitable searchers on Ethereum are "the ones that are experts at monitoring and analyzing on-chain activity, particularly DeFi ones."
According to EigenPhi's data, only less than 30% of searchers may gain more than $10K in profits.

Galaxy's report also highlighted that it was the arbitrage that extracted the most amount of value in 2022.

In general, EigenPhi found that arbitrage has generated more than $145 million in revenue, accounting for 47.5% of the total.

Galaxy's report dissects the MEV supply chain and highlights the top block builders by # of blocks, with builder0x69 coming in first place 🥇.
EigenPhi's data also shows that builder0x69 was one of the oligarchies, gaining more than 30% of total builder income.

Don't wanna miss the first-hand insights and analysis from the research author @christine_dkim?
🔔 Mark your calendars for our Twitter Space on March 25th at 9 pm EST🕘 See you there!
You can also watch this video for all highlights about MEV in 2022: https://www.youtube.com/watch?v=Sb55mPLXctg

https://twitter.com/EigenPhi/status/1637836703946747907

You can also check EigenPhi's annual report of MEV in 2022:
https://eigenphi.substack.com/p/mev-outlook-2023
Or, download all the highlights in one pdf: https://drive.google.com/drive/folders/1F4MJSTCB0JxX23oXppcQ7c3hp9QUpwBJ

Ethereum MEV Landscape in 2022: The Top 10 MEV Searchers Revealed!

101 on InfinityPools (@InfPools): it has opened up a vast arena for DeFi masters to face off. The ingenious design around Uniswap V3's liquidity token also shows the proper perspective of treating it as an option, which must also be based on a deep understanding of liquidity.

@InfPools offers a novel approach to trading perpetual contracts that eliminates the need for third-party liquidators and price oracles. Additionally, it mitigates counterparty risk by enforcing market settlements.


In a nutshell, Uniswap V3's LPs can lend their concentrated liquidity tokens to perpetual traders for leverage. Since the concentrated liquidity token is already priced in advance, the amount of margin the trader needs to deposit is known upfront.

Even if the market price falls below this, the trader only needs to close the position at this price. Therefore, no bad debt will be created. Essentially, LPs provide an option to traders and come in to do underwriting to ensure that the leveraged position does not go insolvent.

The benefit to the LP is the opportunity to collect additional funding fees and swap fees from this protocol even when the market price slips out of range. Still, his requirement to balance the impermanent loss and fee revenue is exceptionally high.


The bottleneck is that the leveraged funds rely on real Uni V3 liquidity, and the scale is not necessarily large. The advantage is that this protocol to reduce liquidation risk may be attractive to open up the market for perpetual contracts for long-tail assets and fill the gap.


Improving understanding and insight into liquidity through data analysis is a goal that EigenPhi has been cultivating. We are excited to see the exploration of the nature of liquidity by such protocols and welcome further collaborative research between related parties and us.


More detail by @InfPool :https://infpools.medium.com/introducing-infinitypools-or-how-i-learned-to-stop-worrying-and-love-leverage-9b44fc8367b6

You can read the unrolled version of this thread here: https://typefully.com/EigenPhi/stLpSxR

Exploring InfinityPools for DeFi Trading

BonqDAO's Rekt, An Oracle Attack, Again. $1.2M was lost due to the manipulated oracle. Another example of trying and failing to conquer the Tokenomics Trilemma.
https://eigenphi.substack.com/p/bonqdaos-rekt-an-oracle-attack-again

Tellor, the oracle that this lending protocol, had a vulnerability in updating the price of WALBT, allowing the attacker to submit a fake price by staking just 10 TRB.


The new quote passed the checks of TellorFlex.sol, allowing the attacker to borrow 100M BEUR in this transaction (https://bit.ly/3Y4e8u6) with a tiny amount of WALBT pledged to BonqDAO.


You can find the detailed call trace from Blocksec: https://phalcon.blocksec.com/tx/polygon/0x31957ecc43774d19f54d9968e95c69c882468b46860f921668f2c55fadd51b19

Our partner @SlowMist_Team has a more detailed explanation: https://twitter.com/SlowMist_Team/status/1621087651158966274

EigenPhi has systematically studied several DeFi risk events, including the Ankr attack https://eigenphi.substack.com/p/the-arbitrageur-who-beats-everyone and Lodestar Finance attack, and proposed The Tokenomic Trilemma framework to explain the root cause of these attacks.
https://eigenphi.substack.com/p/tokenomic-trilemma


The Tokenomic Trilemma puts forward the thesis that a token is difficult to simultaneously achieve three conditions: free tradability, anchored price, and independent issuance.


To mitigate risks like BonqDAO, the industry needs to focus more on liquidity data. We propose that a feedback system based on real-time liquidity sensors is indeed helpful in achieving proactive risk management.

To read more about The Tokenomic Trilemma,  visit: https://eigenphi.substack.com/p/tokenomic-trilemma

BonqDAO's Rekt, An Oracle Attack, Again.

BonqDAO’s recent rekt is the newest exploit of a series of messes. Ankr($5M), Lodestar Finance($6.5M), Wormhole ($326M), Mango Markets ($115M bad debt), AAVE’s CRV Short saga ($1.6M bad debt), not to mention the UST-LUNA fiasco leading DeFi from summer to the freezing winter.

In total, hackers stole more than $3.2 billion from decentralized finance protocols in 2022.
These risk events have been cruising the world’s trust and confidence again and again.  https://www.dlnews.com/articles/defi/defi-hackers-stole-32bn-amid-surge-in-crypto-bridge-hacks-lazarus-group/

We need to measure the risks to minimize them.

To measure DeFi protocols’ risks, EigenPhi proposes a theoretical framework for anticipating and diagnosing DeFi protocols' flaws and risks: The Tokenomic Trilemma.


The trilemma’s key point is: for a crypto token,  it’s difficult simultaneously to achieve three conditions of free tradability, anchored price, and independent issuance.


Without acknowledging the Tokenomics Trilemma, DeFi protocols may not place enough value on liquidity data, resulting in an information gap disadvantage against searchers and attackers who are lurking all the time.

Why do Algorithmic Stablecoins always fail? Why have crypto bridges suffered losses of over $1.8 billion? The Tokenomics Trilemma is the hidden force.

A deep dive into the trilemma shows protocols the way out: to mitigate future risks; the industry needs to focus more on liquidity data. We propose that a feedback system based on real-time liquidity sensors is indeed helpful in achieving proactive risk management.


Here are 6 reasons why we need DeFi protocols to be more susceptive to liquidity movements.

1️⃣ The liquidity in DeFi is size-limited and volatile.
2️⃣ The most basic mint(), transfer(), burn(), and more complex business actions such as swap(), borrow(), repay(); these functions ultimately change the liquidity status and the network entropy of protocols.

3️⃣ Liquidity tokens and synthetic tokens are adopted to improve DeFi's capital efficiency and size limit issues.  Yet they elevate the entire leverage level of the system.

4️⃣ Some current protocol designs, including algorithmic stablecoins and cross-chain protocols, may be overconfident in challenging the trilemma. We need to be wary of any tokens that claim to be price anchored.

5️⃣The use of smart contracts positions Defi to do this because txs are entirely transparent in both issuance and trading stages, making liquidity calculation in DeFi possible. Simultaneously this also provides the database to design a proactive risk management model.

6️⃣ mint() creates new tokens and liquidity ⬆️. burn()  destroys the tokens and liquidity ⬇️. Swapping 2 or more tokens, corresponds to the price discovery. Finally, the lending process increases leverage. These are fundamental points at which we measure liquidity.

Whether threats come from manipulating price oracles or stealing private keys to directly withdraw funds, monitoring early liquidity anomalies data remains a much-needed risk control tool to assist in the discovery of attacks.

Wanna learn more? 👉 The Tokenomic Trilemma: A Theoretical Basis for Anticipating Protocols' Design Flaws https://eigenphi.io/report/the-tokenomic-trilemma

You can read the unrolled version of this thread here: https://typefully.com/EigenPhi/2bLI01B

Why do Algorithmic Stablecoins always fail? Why have crypto bridges suffered losses of over $1.8 billion?

@avi_eisen has got arrested. Audiences are still occupied by his attack on #AAVE that left $1.6M in bad debt. Yet few had noticed a Liquidation Strategy That Profited $1 Million when the $1.6M debt was created.

TL;DR: In brief, the liquidator (https://etherscan.io/address/0xc37704a457b1ee87eb657cae584a34961e86acac) liquidated a total of 9 million CRV and profited about $1 M. Most of the profit came from his exposed CRV position being in the same direction as the CRV price change.https://eigenphi.substack.com/p/a-liquidation-strategy-that-profited

There were 4 stages of the liquidator's actions.
1️⃣ Nov 19, when the CRV price was low, the user increased his CRV position.
2️⃣ After the CRV price increased, he used these CRV to liquidate 2 million CRV debts on AAVE, earning at least $459K in revenue.
Position chart👇

3️⃣ The liquidator started shorting CRV by depositing USDC and other tokens to AAVE and borrowing CRV to liquidate @avi_eisen.
4️⃣ He repaid the CRV’s debt and closed the short position.
His strategy during the third and fourth phases profited about $613K.


This graph shows that the liquidator has an accurate view of the CRV market move. Besides, he can proficiently change his position by seeking liquidation opportunities in the fluctuation of CRV price to maximize profit.

Why does this strategy’s profitability stand out? The revenues and risks brought by DEXs within the market microstructure can be reduced, and the profits and risks are placed in the price fluctuations of CRV in the longer term, as shown in this example.

We are taking a closer look at the contribution of each liquidation to the overall debt as the CRV price changes on November 22.

Specifically, for the liquidator 0xc377, here is the graph of the bad debt factor for each liquidation. Since the liquidators liquidate at a relatively high CRV price, this liquidator contributed an estimated 492793.6 CRV of bad debt based on the model.

For lending protocols like @AaveAave, how to attract liquidators or even use their own funds to liquidate in time is a topic worth discussing. But at the same time, building a model to minimize the impact on borrowers is a tradeoff worth considering.

For a more detailed analysis, please visit https://eigenphi.substack.com/p/a-liquidation-strategy-that-profited

You can read the unrolled version of this thread here: https://typefully.com/EigenPhi/mZuvMfG

A Liquidation Strategy That Profited $1 Million During the Creation of Aave's $1.6 Million Bad Debt.

Blaming individuals for the risks in @ankr may be easier, but systemic risks remain unmitigated. The security and robustness cannot be built on the assumption that no one within the system will make a mistake.
🧵EigenPhi has delved deeper into the event in an in-depth report.

https://twitter.com/zachxbt/status/1610315825080336384?s=20&t=x9tPqNaHfHNN7UxEjL3OCQ

Let's review the core process of the attack in the picture below.https://eigenphi.io/report/ankr-exploiter-report


Here are some 🥡s from our research: https://eigenphi.io/report/ankr-exploiter-report
FIRST OF ALL:  the security and robustness of the DeFi system cannot be based on the assumption that no one involved in the system can make a mistake.

TWO CAUTIONARY TALES for DeFi protocols:
1️⃣  Information monitoring bias: The actions of arbitrageur and other followers demonstrate that searchers perform better than protocols in gathering information and detecting trading opportunities or risks.

2️⃣  Oracle manipulation: For the lending platform, it would be unwise to evaluate a reward-bearing token on top of some ideal assumptions. So the relevant protocols should always be alert that there is no absolute anchoring relationship between the values of different tokens.

👉👉 ACTION ITEM
Protection against abnormal liquidity: Many protocols do not react promptly when extreme events occur in the market and DeFi system. This lack of response resulted in the drain of the Helio lending platform and some DEX pools suffering severe losses.


The Arbitrageur Who Beats Everyone Else in An Hour

1️⃣ Implications of #MEV have for #blockchain security and decentralization?
2️⃣ Empirical study on MEV auction-based solutions?
3️⃣ How does OFAC sanction impact blockchain properties?
Go read SoK: MEV Countermeasures: Theory and Practice
 by @0xFanZhang https://arxiv.org/pdf/2212.05111.pdf

Two tables you can't miss.
1️⃣ Comparison of specific systems/schemes to solve the problems caused by MEV in 4 categories.
2️⃣ Comparison of different approaches in 4 aspects: prevent loss, reduce inefficiency, reduce consensus risks, and reduce centralization.

This figure shows Private transaction flow in the MEV auction platform ecosystem (before Merge).

After the Merge, adding to MEV-Boost Dashboard by @nero_eth as of Nov 30, 2022, @0xFanZhang and his fellow researchers identified 14 more builders. The current MEV-Boost Dashboard has much more now, shown on the right side.(https://mevboost.pics/)

Finally, we are honored to provide MEV-label datasets for outstanding research like this. If you wanna do something familiar or explore further, as the paper suggested on AI/ML, Quant Trading and MEV, please feel free to reply. 🤝

You can read the unrolled version of this thread here: https://typefully.com/EigenPhi/hvEenWw