Tackling Miner Extractable Value with Caleb Sheridan, Core Developer of the Eden Network - Ep. 44

Bobby Ong [00:00:00]:
Welcome to the CoinGecko podcast. I'm your host, Bobby Ong. Each week, we will be interviewing someone from the blockchain industry to learn more about this fast moving cryptocurrency economy. And this is your first time listening then, thanks for coming. The CoinGecko podcast is produced each week to help you stay ahead of the curve. Show notes can be found at podcast.coingecko.com. Highly encourage you to join our newsletter where we send out top news in the crypto industry every Monday to Friday. Come back often and feel free to add the podcast to your favorite RSS feed or iTunes. You can also follow us on Twitter and Telegram at CoinGecko.

Ben [00:00:45]:
Hello everybody. My name is Ben and I will be your host for today's podcast. Today. I have a very special guest, his name is Caleb Sheridan. So now Caleb is actually a core developer of the Eden Network and he is currently doing a lot of things. And there's a lot of interesting topics that we're going to cover today, particularly on the future of ETH especially with ETH 2.0 and how Eden Network actually plays a huge role. Caleb actually first got into crypto through career at PokerStars was quite interesting where he led the economic incentive design, and extremely competitive environments. And now he's actually tackling one of the crypto's most competitive environments, which is actually miner extractable value otherwise known as MEV for all of those of you out there who hear this term, you know, you normally hear this term quite often. It can be be quite confusing. And that's why we have Caleb today to kind of shed the light on this area and how it's actually very important for the network as a whole. So welcome to the podcast, Caleb.

Caleb Sheridan [00:01:44]:
Thank you very much for having me, it's great to be here.

Ben [00:01:47]:
Yeah. Yeah. I kind of started an intro about you where I shared a little bit of where you were before. I guess before we get into the questions, the meat itself, could you share a little bit from how did you come to here from PokerStars?

Caleb Sheridan [00:02:00]:
Hah, yeah, absolutely. I was a poker player at some point, and I went to work for PokerStars and said kind of on the other side of the table. You know, as a poker player, I was dealing with zero sum games where, you know, somebody kind of wins and loses out of poker table. And you know, while working at PokerStars, I was looking at kind of the economy and how to balance economies and in those zero sum games. And, and so this, this is very, very similar in nature to a miner extractable value where a lot of bots are kind of fighting against each other to extract value from the Ethereum Network, and even if Ethereum Network users. So, you know, the, the parallels between the ecosystems are very strong. And I think that for, for me, and for everybody kind of who's come into crypto from the online poker world, this notion of digital cash is, is very familiar because we all would trust kind of these online casino sites with our deposits. And so the notion of a cryptocurrency or an online currency is, is a very familiar topic. And, you know, we can see the immediate applications of it right away. So that's kind of what originally attracted me into crypto. And, and into the MEV space in general, I think, you know, these kinds of competitive playing fields and these competitive areas within the crypto space is just very, very interesting.

Ben [00:03:14]:
Right. So actually you mentioned quite a lot of interesting terms, right? So we already mentioned MEV and miner network. You know, there's all this confusing terms, right? I think to provide some context to the audience, could you help set the scene for us? Explain how miners process transactions on Ethereum Network and how do Ethereum miners decide which transactions to process first?

Caleb Sheridan [00:03:36]:
Yeah, that's a great way to, to begin. You know, so today, right now, a lot of people may not know it, but when you submit a transaction to Ethereum, a miner has to choose to include it inside of their block. And of course, every transaction that's included in a block, it gets processed in the order that it's included in the block. And kind of, counter-intuitively, you know, it doesn't really have much to do necessarily the gas price that you pay or anything else in terms of where your transaction gets prioritized, but you know, you usually it's based on you know, if the miner can reorder the transaction in a certain way, you know, do they get some, some value? And in today's kind of ecosystem, right, and how the blocks are being formed today, there's very advanced reordering going on. And the Eden Network also does some reordering and apply some reordering rules. But we do it with a user focused in, in tons. And so if you submit a transaction on Ethereum today with very high gas, it will probably be picked up and inclusion of block. But, you know, deciding where in the block who gets included is kind of like random luck at the moment for a lot of users. Why it's important to be included kind of in the beginning of the block is that if you're trading on say Uniswap and you see market price, if you get included as the first transaction in a block, you have a higher chance of executing at the intended price and at that market price. Now if you get included later on in the block and somebody trades in that market before you, your transaction can actually fail, or it can fail to get the market price that you saw and you can get a different price. And normally you'll get a worse price. In the worst case scenario, your transaction fails, it costs a little bit of money and things like that. So it's very important to be kind of first in the block, you know, unfortunately there's no real reliable way to always be first in the block without just paying a ton of, a ton of money. And the Eden Network is definitely helping resolve that, but it's also protecting against so-called malicious, MEV. And I think that we have to get into the topic and define MEV a little bit more, but MEV is, any value that can be extracted by reordering transactions or censoring transactions or otherwise kind of handling transactions. And so the idea of behind you know, MEV and people taking any ideas is that if you send a transaction that can be ordered in a certain way to make money, then it will be ordered in this way to make money. And a lot of hacks get the headlines around the ecosystem, right? 50 million last year, 150 million loss there, but what's happening to traders is that this same, the same amounts of money are actually being lost by MEV and MEV extraction techniques. So the most common MEV extraction technique is, is a so-called sandwich attack. And in a sandwich attack, what happens is that somebody sees your transaction in the public mempool and the public transaction pool of Ethereum, and puts their own transaction ahead of it and another one of their own transactions behind it. And so let's say that you're on Uniswap making a trade into a token, what ends up happening in a sandwich attack is that somebody slightly increases the price on you by buying that token in front of you, you buy the token and then that same person sells the token behind you at the slightly increased price and makes a profit. So you as a trader get a worst price execution because of the MEV in this, in this circumstance. Hah, does that make sense?

Ben [00:06:59]:
Yeah. Yeah. I mean, it's very interesting, right? I think for a lot of people, they think that, oh, I up my gas, that's the end of it. But what's actually happening is that there is also a war in the block itself. Not just the different blocks but within the block. And I think MEV is another way of putting it, is essentially like how much value or profit can you extract out of processing each block? If that is correct?

Caleb Sheridan [00:07:23]:
Yeah, that's exactly right. And today the options for users to kind of have some agency over what happens to their transactions is possible. And the Eden Network has brought some agency back to users. So the Eden Network enforces block production rules and block ordering rules on, on its participating miners. So 40% of the hash rate has opted into the Eden Network and producing blocks by these rules. And essentially, you know, for, for the most users by staking Eden, those transactions go to the front of the block or closer to the top of the block. And so this really priority block space is now kind of attainable for users without really doing much extra. So we have a custom RPC that takes trades and places, the trades, you know, the top of the block for improved execution. So users in aggregate are getting better price execution, closer to the market prices that they see on the UIs, in Uniswap for example. And this worked with any DeFi product. It's not just you know one DEX that this works for, it's any DeFi product ever, any transaction ever. And so anywhere where priority is important, the Eden Network has a role for users. One of the outcomes of how Eden blocks are produced is that, it actually becomes very hard to sandwich attack trades. And so there's some level of MEV protection just by the nature of how these blocks are produced because we order transactions based on stake amount. And the stake amount is determined in the previous block. So that means in order for somebody to sandwich you, right, they would have to have two accounts, a certain amount staked to exactly sandwich you even if they knew about your transaction.

Ben [00:09:04]:
Yep. I completely get it. And, you know, you mentioned that this also applies to DeFi, but I assume it also applies to any protocol, right? Even for example, NFT mints, you know, those Artblock mints to get ahead of the queue.

Caleb Sheridan [00:09:15]:
That's exactly right. And we saw a huge amount of interest from NFT mintors who realized that the Eden Network gave them a significant advantage in NFT mints. And the rationale kind of behind this is that, you know, in an NFT mints, let's say that the mint goes on for over the course of 10 blocks, and these blocks are completely filled with people minting. While on the very last block, the sale will sell out and whoever is at the bottom of the block will miss out on the sale, and whoever's at the top of the block will get their transaction through, get mint the NFT. So NFT traders are using the Eden Network for the priority and the minting process. But even NFT projects are actually deploying their minting contracts through the Eden Network RPC. And the Eden Network RPC is a private RPC that takes transactions in and doesn't gossip the transaction. So it sends the transactions around Eden miners who are effectively economically bonded with their future revenue in the Eden Network. And if the miners misbehave, then there can be some slashing and punishments. And so the idea behind the private RPC is that these transactions can actually effectively be private. You know, they're not, not like in the sense that we're a privacy network are cryptographically private, but they're not gossip and they're not leaked around the ecosystem for people to pick up. So for an NFT project recently they used the unit RPC to do their minting contract in order to avoid a situation where people know a mint is about to come up and they buy all the tokens before anybody else has a chance to do it. So it created a very fair initial mint for this NFT. And it's a great, it's a great way of showing like how private transactions can even be used outside of the usual DeFi trading.

Ben [00:11:06]:
Yeah. Yeah. I mean, that's really cool. And I actually see a lot of like, you know, like you mentioned a lot of positives for this. Which brings me back to, you know, it's quite interesting because, is this the way of how we process Ethereum transactions, right? So it boils down to how the blocks are processed. Is this underlying infrastructure fixed? And do you think that this is the best way of how we process blocks or is there another kind of method that we can gravitate towards to?

Caleb Sheridan [00:11:31]:
Yeah. And from a technical standpoint, when miners are evaluating blocks there's a couple of things that are going on. They're receiving a lot of transactions from the transaction pool. They're receiving a lot of transactions and they're, they're needing to produce blocks. And every time that they produce a block, they go and they check the profit against the block that they had produced originally. So the block kind of starts out empty and then the minor fills it with transactions and checks like, is this more profitable for me or not? And then switches over to producing the new block. Now this actual computation for producing and switching blocks becomes relatively advanced and relatively complicated and expensive in a sense. And so with kind of a dish, more and more transaction, and block production more advanced block production techniques, this computation becomes very, very expensive. And in some cases it leads to an actually reduced hash rate for the miner. So on the Eden gaff client, we've taken a lot of steps in order to reduce this computational overhead. And what we've done with the Eden Network is create an economic kind of extraction technique for value that doesn't require this kind of computational overhead. So what we end up with are kind of happier miners and more profitable miners, in part because they can, they can choose a different you know, method for producing their blocks. And so at a technical level, you know, this is saving computation power on the individual minor and making a more efficient hash rate.

Ben [00:13:04]:
Well, yeah, I mean, that sounds really good right, for miners. And I think we know when we think about all of this there's always on the back of our minds Ethereum 2.0 is on the way. And actually a big part of Ethereum 2.0, is the switch from proof of work to proof of stake. Will this impact Eden at all? What about other parties? Like validators and users?

Caleb Sheridan [00:13:24]:
Yeah, we're really excited about ETH 2.0. And we've been working a lot on it and a lot of planning and execution going into it. So ETH 2.0 is going to be a substantial change. And the merge, you know, is, is scheduled for sometime in Q2 of next year is what we're expecting. And so we're going to be switching away from proof of work and going to proof of stake. When we originally wrote our whitepaper we use the term block producer in order to kind of distinguish the fact that yeah, in today's ecosystem that's miners, but in tomorrow's ecosystem, it will be validators who are producing blocks. What we expect is that MEV will continue to play an enormous role in ETH 2. So the public transaction pool is still there and users can still be affected and hurt and you know, essentially ripped off but by trading in the public pool. So we'll continue to offer our private transaction pool, and we'll continue to build blocks in the same way. In fact, in ETH 2, there's something called the execution engine. Which really just uses ETH 1 block production. It changes a consensus mechanism of course. But it still uses the same execution engine. And, and so a lot of our techniques for producing blocks, a lot of the Eden Network's use cases still remain valid and relevant in the ETH 2 world.

Ben [00:14:44]:
I think that's like good news. You know, there's no big overhaul or infrastructure wise for Eden which sounds like good news. But then, you know, there are some things that I want to discuss on this note, kind of a segway here, but critics have pointed out that proof of stake will disproportionately favor, larger validators, which could lead to censorship issues, right? Should we be concerned about this?

Caleb Sheridan [00:15:06]:
So, yeah, and I think that what it’s called it is the kingmaker effect. And what we've seen on other proof of stake networks is the kingmaker effect, which is that if a validator gets a disproportionately large share of the network, they can take a disproportionately large share of MEV, and then they, they keep growing, right? They become an even bigger portion of the network and things like that. The Ethereum foundation has made an enormous amount of time set in research getting away from this kind of issue because fundamentally what the kingmaker effect allows for is sensorship. Because if you own the entire network, you can actually stop maybe other traders from using the network or you can stop other people from using the network. And the Ethereum foundation is really aligned to censorship resistance. That's really the priority. And so MEV is like sometimes called like a threat, right, an existential threat for Ethereum. And I would say that, you know, this is why, because it leads to a kingmaker effect that leads to censorship. And so a lot of the decisions within how proof of stake and a lot of the proposals that are up right now are, are definitely designed to, to avoid censorship.

Ben [00:16:19]:
And do you believe that these concerns are valid within Eden's context? Because like you mentioned, Eden's active about 40% of the network.

Caleb Sheridan [00:16:27]:
Yeah. And I think that what we should say is that, you know, the Ethereum foundation is, is definitely focused on censorship resistance. The Eden Network is not focused on that. We're focused on users and users having the ability to trade in in smart ways. And so when we look at kind of what censorship resistance means, it means that there's a public transaction pool where users trades get kind of abused, right? 

Ben [00:16:54]:
Yep.

Caleb Sheridan [00:16:54]:
And it brings some downsides. So where, you know, Ethereum has banned, and it's correct. I think correctly focusing on censorship resistance, we're trying to give users the other side of that. And, and part of that is that is certainly that you know, in this model, we're not as focused on censorship resistance. We're more focused on the users who want a better transaction execution.

Ben [00:17:20]:
Yeah, I, I completely get it. And on that note, right? Because we've been talking a lot about censorship issues and like you mentioned, it's a very pressing issue, you know, a lot of other chains, L1 L2s, there's always questions about the trade-offs between scalability and censorship, right? And so, like you mentioned the Ethereum foundation is constantly discussing this issue. And there is actually an interesting topic recently on a proposal slash builder separation technique, otherwise known as PBS. Could you explain what PBS is and whether it is a viable solution to this censorship resistance issue?

Caleb Sheridan [00:17:56]:
Yeah, and, and right now this is, this is kind of one of the, one of the recent posts and one of the recent research posts that I was alluding to. I think it's one of the neatest pieces that I've, I've kind of read recently and had the pleasure of like going in depth on. The the split of proposer builder is essentially saying whichever validator is going to propose a block to the network can get it from a separate system or like a separate computer. And so this proposer builder split is kind of opening up the door for, for validators to take full blocks from, from different let's say like networks like the Eden Network. And, and so we could, we could build a full block and hand it off to a proposer and other people could do the same and we could even see a future where there's kind of a marketplace for doing this. And the reason that you would want us to kind of separate that as maybe you want to run validators on machines that, that, don't need very much computational power. Or maybe you want to run, you know, your ETH 2 validator on, on a Raspberry PI or something like that. In, in that case, you need to kind of offload where, where all the computation for forming these ideal blocks go. So the idea here is that you can separate that and then everybody can have access to, you know, the builders that they want to build their blocks. And the very, very interesting part about this is that there's a cryptographic guarantee that if, if a builder hands a block to a proposer, that proposer needs to mine it in exactly the way the builder built it. So this helps deal with MEV stealing, which is kind of an existential threat as well, where you know, networks like the Eden Network and other kind of MEV solutions, figure out some clever trade or users of the Eden Network, figure out some clever trade that's going to make a lot of money. And at the end, you know, the minor kind of just sensors that transaction and replaces it with their own. So it solves this problem in a really elegant way that's great for the Eden Network and great for Eden Network users. And so you know, this is kind of the exciting part about it. In order to make that kind of censorship resistance what's being proposed is the idea that, if a user is being censored, they can go directly to the validator, hand their transactions to the validator. And the validator says, here's my list of like censorship resistant transactions. You have to include this for me to even think about considering your block. And so that means that users who are being censored have this option to go to, you know, benevolent validators and the validators can give these criteria to the block builders to, to include in blocks. You know, this is where we're going, where it really elegant PR proposal builder, separation, really elegantly solves MEV stealing, really elegantly solves censorship. And it leaves a lot of room for advanced block production techniques.

Ben [00:20:48]:
From what I get it right? It sounds very interesting because it's basically a mediation system, right? So if I'm unhappy with the initial settlement, I take it to court and this case as a second arbiter or judge.

Both [00:21:01]:
Hahah.

Ben [00:21:01]:
Yeah. So you know, like you mentioned earlier, right thing kind of diverging here, again. Eden plays a big role and a lot of it is, to manage overhead costs for minors as well. Generally that translates to higher guest costs for everyone, right? And I think that's always been a big part of Ethereum. You know, recently there's also another proposal slash discussion going on by actually proposed by Vitalik otherwise known as EIP4488, which aims to reduce transaction costs for Ethereum roll-ups. Could you please share what your thoughts are on this and you know, what, what are the implications?

Caleb Sheridan [00:21:38]:
Yeah, this is a great question. This proposal in particular kind of, kind of sets the scene for what we're expecting, next year and maybe, maybe even in the following year, but in 2022 or 2023, we're going to start seeing roll-ups become the actual future. So it may be too soon today for roll-ups, but it's not very long until roll-ups are, are really viable. And what it kind of means is that, you can take your money from Ethereum and transfer it to a roll-up, do a lot of cheap trading on a roll-up and then come back to Ethereum or settle on Ethereum when you're kind of like done trading. And the idea is that you can go to a roll-up and then the roll-up is going to keep track of these chains and then roll it up into one kind of elegant summary like a receipt of all the trades that have happened over there and bring them back to Ethereum and post them on Ethereum. So what this means for the MEV space is that roll-ups are gonna have to play a really major role. And essentially imagine on the roll-up, maybe there were like a thousand trades and these 1000 trades are going to affect the balances of wherever these, these roll-ups kind of land. And so if this roll up kind of lands back into a, I dunno, like Uniswap LP position or changes balances, and some important contracts or accounts you can imagine that this is going to generate significant MEV because you have kind of the net result of all of these trades coming back and hitting the main chain where it will cause like some, some serious MEV. So we're looking at it from a, you know, and, and I'm definitely looking at it from that standpoint. But you know, ultimately like this so-called scaling problem of high gas prices and things like that, it does need to be solved. And so if if we can make roll-ups work you know, as a community and move some of this activity I think that it's, it's very good for Ethereum and very good for the growth of DeFi. At these gas prices I know that a lot of new users to crypto just kind of skip Ethereum and go straight to other chains. And so roll ups you know, provide a way of of kind of recapturing some of that, that new user growth.

Ben [00:23:41]:
So I guess the overall theme I've been getting for Eden's current state, and, you know, the progress of Ethereum as a whole, is that while many tell ETH 2.0 as the final solution is really is not right? I mean, it is there to prove scalability, but there are a lot of underlying issues that need to be addressed. And I guess this is where Eden comes in right? These protocols like Eden and proposals, like PBS who contribute to the overall success. Would you say this is an accurate assessment?

Caleb Sheridan[00:24:08]:
Yeah. The Ethereum Network is, is the sum of all of its pieces and all of its you know, development teams. And I think that everybody building on Ethereum is really important. And everybody who builds on material wants to improve it. And so we've looked at it from the standpoint of how do we improve trade execution. We took a very simple challenge. And how do we, you know, avoid this kind of attack on users with the sandwiching and things like that. And all of these are, are because things on Ethereum were working really well and were well adopted. But, but then it kind of opened up this like unexpected result. And so we're here kind of, you know, working on, on what happened to Ethereum because of, you know, successful builders. And you know hopefully we can have you know, continue to improve user experience. And have like a really meaningful proposition for users moving forward, even as, you know, Ethereum, the shape of Ethereum changes and things like that. I think it's just really, really important that users have many options for how to submit transactions, especially you know, having a single option for submitting transactions. Just to the public mempool has just not been great. And so the Eden Network kind of comes along and provides a lot more options for users.

Ben [00:25:23]:
I guess the final question for today to round up everything right, is what kind of advice or takeaways you would give to participants in the Ethereum Network? You know, to help shape it success for the future?

Caleb Sheridan [00:25:35]:
Yeah. I think that, you know, it's very easy, it's very easy to like lose money using Ethereum. You can lose it to hacks and other things. And so essentially everybody kind of says, you know, what do your own research you know, make sure that the protocols that you're interacting with are trustworthy and work as intended and things like that. And I think that the same thing is true for this fundamental thing of submitting transactions. I think, you know, my advice would be to do your own research and look into alternative ways to submit your transactions, to get better results. And if everybody on Ethereum did this or everybody on Ethereum, you know, used all of the options that are at their disposal, we would be seeing a lot less money going into the pockets of kind of harmful MEV bot operators. And I think that, the amounts of value that we're talking for users is very, very significant with very little behavioral change.

Ben [00:26:27]:
I think that's about it. Thank you so much Caleb, for joining us today. It was great to have you.

Caleb Sheridan [00:26:32]:
Thank you very much Ben. Yeah, it was great. Great to be here.

Bobby [00:26:35]:
All right. That wraps up the show. Thank you for listening to the CoinGecko podcast. If you like our show and want to know more, check out podcast.coingecko.com or please leave us a review on iTunes. If you have any feedback, do drop us an email at hello@coingecko.com. Join us for more next week. See ya!  

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