MEV in Cosmos - By Frens Validator

Disclaimer - This is part of our outside perspective series. Curious Cosmonaut Research is not the author we are simply highlighting some good threads and perspectives on the Cosmos ecosystem. Frens validator did not respond to the request on this document if you would like it removed, reach out on Twitter or please confirm your desire for your content to be listed.  We also, therefore, do not guarantee their accuracy.

Author: Frens Validator

Source: Twitter Thread

Date: November 23, 2022

MEV could lead to censorship and centralization on various Cosmos chains.

Here's why:

Yesterday we discussed what MEV is and the differences between “good” & “bad” MEV.

In the next two threads, we will focus on the interchain.

https://curious-cosmonaut-research.ghost.io/mev-explained/

But now let’s dive into MEV on Cosmos.

MEV is a relatively small market in the Cosmos ecosystem 🤷

So, why should we Cosmonauts care?

First of all, Cosmos’ DeFi ecosystem is super young compared to Ethereum!

It was born with Osmosis in late June 2021. And IBC was shipped in early 2021.

So, Cosmos’ DeFi ecosystem is effectively 1 ½ year old.

And TVL on Osmosis has increased rapidly in the meantime. From June 2021 from approximately $45 million to $1.83 billion - this was the peak in March 2021.

Now the TVL is at $196.11 M

As mentioned in yesterday's thread, more DeFi activity generally results in more MEV.

That said, we can expect more MEV revenue on Osmosis in the next bullrun when TVL could reach new ATHs 🚀

Cosmos’ architecture differs from Ethereum🏗️

Ethereum is one large chain and protocols get deployed on top of it.

But Cosmos is a network of many IBC-connected blockchains!

This means that you could take advantage of several arbitrage opportunities in the Cosmos that are taking place on different chains - via IBC.

E.g. an arbitrage opportunity between Diffusion on $EVMOS & JunoSwap on $JUNO.

The #MEV game will be played differently in Cosmos.

More and more chains are about to enable IBC. Including Ethereum!

So, more MEV activity will also come to Cosmos with the rapid expansion of IBC

If you are interested in learning about how IBC is coming to Ethereum, NEAR, and Polygon, check out an older thread of @jurimaibaum:

https://twitter.com/jurimaibaum/status/1587832488071729152

In a nutshell: just because MEV isn’t a big thing in Cosmos yet, it does not mean that this will never happen.

Most MEV gets generated on Ethereum due to its dApps with billions of TVL - aka Uniswap, MakerDAO, AAVE, and Co.

However, none of these dApps profits from the MEV that they indirectly generate - they can not capture it! The underlying chain captures it - in this case, Ethereum.

But when these protocols would be their own chain, they could capture the MEV they generate.

I.e., by sharing MEV revenue with their stakers in the form of a higher staking APR.

This could be a strong incentive for projects to follow the path that DYDX has pioneered!

Two projects are indeed working on distributing MEV revenue to stakers & validators - @meka_t3k  & @SkipProtocol

If you want to learn what the differences between Skip and Mekatek are, check out this thread:

https://twitter.com/jurimaibaum/status/1592190621707632641

Still, there are certain risks in terms of centralization and censorship

Let us start by talking about censorship: validators & miners build blocks and have the ability to decide HOW transactions are ordered within the block.

Thus, if a validator sees a profitable transaction of a user, he could just front-run him as he has the power to order transactions in the block as he likes.

This bears a risk in censorship in general - if validators of a chain do not want to include a transaction into a block (for whatever reason whatsoever) they could leave the transaction purposely out.

One approach to counterfeiting is “Proposer Builder Separation” (PBS). The idea is that validators don't build blocks anymore - instead, sophisticated block builders would fulfill this role. Validators would only pick up already finished blocks and add them to the chain.

But there are some problems with PBS: 1.) Centralizing forces would not get eliminated - instead, they would just be moved to another layer 2.) By introducing another layer, protocol designs would generally become more complicated

Finally, let's talk about centralization! If we would do nothing about opening the MEV market, the risk exists that only a few extract MEV revenue. They could have the power to give their fellow stakers a higher APR compared to other validators!

Obviously, this would be a clear incentive for other stakers to also only stake with these other few validators. The entire interchain could become more centralized. The horror scenario: a validator monopoly on all Cosmos chains!

We will wrap up this three-piece thread tomorrow by discussing how MEV will change the validator business - stay tuned!