Skip Protocol: Sovereign MEV

Introduction

Transparent and decentralized financial rails attempt to create more equitable systems than their centralized counterparts. Unfortunately, the transparency these decentralized systems offer allows for actors in privileged positions to extract value of the system by reordering, inserting, or censoring transactions in a block. This value extraction is known as Maximal Extractable Value (MEV).

MEV has been a subject of conversation for years, albeit without the term itself being coined. It wasn’t until the advent of DeFi on Ethereum where the Flash Boys 2.0* *research paper observed and quantified MEV. It outlined findings of arbitrage bots, called “searchers”, engaging in priority gas auctions (PGAs) where they competitively bid up transaction fees to receive priority ordering in the block. Furthermore, the paper argued that MEV could incentivize miners to fork a chain or rewrite a chain’s history to steal funds from a historical state. Not only is MEV an invisible tax that many on-chain users are unaware of, it worsens UX due to visibly high gas fees and is also a credible threat as a centralizing force for block building and validation.

With an understanding that MEV is an inherent property of these systems, many questions need to be answered.  How do you democratize, redistribute, and make transparent MEV activity and the revenue it generates? Additionally, since MEV transactions can have some beneficial properties in certain instances, what is the definition of “good” MEV and “bad” MEV? *Who *gets to decide these definitions and their outcomes? Is there such a thing as fair transaction ordering and credibly neutral incentive alignment for a base layer such as Ethereum that has a range of stakeholders each with different incentives and expectations?

While MEV on Ethereum and R&D organization Flashbots have taken the lion’s share of attention due to Ethereum’s dominance of onchain economic activity, Skip Protocol is attempting to build a host of MEV solutions that empower Cosmos ecosystem appchains and their communities to answer the questions asked above.

Ethereum’s MEV Value Chain

Before diving into Skip Protocol, a quick primer is needed on the MEV value chain related to Ethereum post-merge. For those that did not read our prior report on this subject, this section will briefly highlight much of the same concepts.