Podcast Summary
Ethereum's Economic Upgrade through MEV Burn Strengthens DeFi Ecosystem: ETH holders benefit from Ethereum's second business model, MEV burn, which strengthens the DeFi ecosystem by burning ETH based on demand and introducing an Ethereum oracle.
Ethereum's economic upgrade through MEV (Maximal Extractable Value) burn is a significant development that strengthens the decentralized finance (DeFi) ecosystem. This upgrade builds upon the mechanisms introduced in EIP 1559, such as Ethereum pricing itself based on demand and the introduction of an Ethereum oracle. MEV burn is seen as Ethereum's second business model, as it benefits various parties in the ecosystem, primarily ETH holders. Ethereum's decentralized nature and the emphasis on ETH as a decentralized asset are key themes in this development. The estimated amount of ETH that will be burned per year and the timeline for this upgrade were discussed in the episode. This episode builds upon previous Bankless content, particularly episodes about EIP 1559 and the blockchain supply chain. Understanding these foundational concepts is crucial for grasping the significance of MEV burn. This episode offers valuable insights into the economics of Ether and the continued improvement of the Ethereum protocol.
MEV Burn: Making Ethereum More Efficient and Fair: MEV burn is the destruction of value gained through arbitrage and transaction manipulation activities, which aims to make Ethereum network more efficient and fair for all users.
MEV (Minimum Extractable Value) burn is a concept in the Ethereum blockchain ecosystem that refers to the destruction of value gained through arbitrage and other transaction manipulation activities. This concept is closely related to Ethereum Improvement Proposal 1559 (EIP-1559), which aims to make gas fees more predictable and fair by incorporating a base fee that is burned and dynamic gas prices. Justin Drake, a researcher at the Ethereum Foundation, and Dom, another researcher at the Ethereum Foundation, explained on the Bankless podcast that MEV burn is the logical continuation of EIP-1559, as it addresses the issue of profit-seeking entities extracting value from transactions, which can distort market prices. The destruction of this extracted value through MEV burn is intended to make the Ethereum network more efficient and fair for all users.
Introducing mEV Burn in Ethereum's EIP 1559: EIP 1559's mEV Burn aims to redistribute Maximal Extractable Value (MEV) in Ethereum transactions, benefiting both the economic and security aspects of the Ethereum network.
Ethereum's Ethereum Improvement Proposal (EIP) 1559 introduced a new mechanism called mEV Burn, which aims to smooth out and redistribute Maximal Extractable Value (MEV) in Ethereum transactions. MEV, an emergent behavior in Ethereum, represents the value that can be extracted by participants from the economic system, in this case, Ethereum's blockchain. Previously, congestion fees, a form of MEV, went to the proposers, but now, they are being given to the system itself and redistributed to all ETH holders. This change not only has economic benefits but also security benefits, such as smoothing out MEV spikes, reducing volatility, and increasing Ethereum's overall security. By understanding the concept of MEV and its implications, we can appreciate how Ethereum is evolving to become a more robust and secure settlement layer for the Internet of Value.
Understanding and harnessing MEV in Ethereum: Ethereum's new awareness of MEV through mechanisms like MEV and EIP 1559 leads to more efficient burning and redistribution, improving network security and economic bandwidth.
The Ethereum network, through the use of mechanisms like MEV (Maximal Extractable Value), can now quantify and be aware of the value being extracted from its system, similar to how EIP 1559 introduced an on-chain oracle for gas fees. This new understanding allows for more efficient burning and redistribution of MEV, improving network security and economic bandwidth. The MEV landscape can be thought of as a complex system with various actors, including transaction bundlers, searchers, and bots, all competing for the top transaction slot in a block, which consumes a highly refined version of ether. This metaphorically represents the crude oil being refined into petroleum and further refined into MEV, providing a more sophisticated and valuable fuel for the Ethereum network. This newfound awareness and ability to harness MEV can lead to the removal of negative externalities and potential chain stability issues.
Addressing Instability in Ethereum Block Production with MEV Burning: MEV burning helps reduce negative externalities of MEV spikes, promotes chain stability, and ensures fairer distribution of rewards among miners.
MEV (Maximal Extractable Value) is a significant issue in Ethereum block production, leading to chain instability and negative externalities. MEV refers to the profit that miners can extract beyond the block reward. This can result in a spiky distribution of MEV, where some blocks contain large amounts while others contain very little. MEV spikes can cause chaos and instability in the network, leading to various attacks and incentivizing participants to come armed with "teeth and claws" to compete for the MEV. To address these issues, Ethereum is exploring MEV smoothing and burning. MEV is being tamed at the protocol level to promote a more stable and peaceful chain. By burning the MEV, the incentive for participants to engage in destructive behavior is removed, as there is no reward to fight over. This not only promotes chain stability but also ensures a fairer distribution of rewards among miners. The burning of MEV is a crucial step towards maintaining a stable and secure Ethereum network. It helps to reduce the negative externalities of MEV spikes and ensures that the rewards are more evenly distributed among miners. In essence, MEV burning is a way to bring peace to the Ethereum block production process.
MEV Smoothing: Dividing the Rewards Fairly Among Validators: MEV smoothing is a proposed solution to prevent unfair behavior in Ethereum's network by dividing rewards into smaller pieces and distributing them fairly among validators. It requires Ethereum to deploy proposer builder separation (PBS) first to have visibility into MEV and impose its view on proposers.
The Ethereum network's security depends on the economic weight of validators, and large rewards for mining a block aren't considered secure until sufficient economic weight is added to the chain. This phenomenon is known as MEV (Miner Extractable Value), and it can lead to chain instabilities. MEV smoothing is a proposed solution to this problem, which aims to divide the rewards into smaller pieces and distribute them fairly among validators. However, for the Ethereum protocol to implement this autonomously, it needs to be aware of the bids and have proposer builder separation (PBS) enshrined in the protocol. This means that the Ethereum network needs to deploy PBS first, and then it will have visibility into the MEV and be able to impose its view on the proposer to prevent unfair behavior. In simpler terms, MEV smoothing is like dividing a big piece of bread into smaller pieces for all the birds to eat fairly, rather than having a few big birds taking it all. This requires the Ethereum protocol to be aware of the bids and have a trustless and unconditional payment system between builders and proposers.
Ethereum's Proposal Builder Separation and Transaction Bundling Create a Pseudo Oracle System: Ethereum's proposal builder separation and transaction bundling prevent artificially high or low bids, ensure bid value reflects reality, and enforce contention pricing to maintain ether as the native currency for transactions, enhancing transparency and trustworthiness.
The Ethereum blockchain's proposal builder separation and transaction bundling process create a pseudo oracle system, which ultimately converges onto the actual block builder and proposer. This system ensures the correctness of the bid value, which reflects reality, by preventing artificially high or low bids through the use of attesters. Additionally, the Ethereum blockchain enforces a contention pricing mechanism, similar to EIP 1559, to prevent side contracts and ensure that ether remains the native currency of Ethereum for paying for transactions. Overall, these mechanisms enable economic activity to be known, quantified, and verified on the Ethereum blockchain, making it more transparent and trustworthy.
Ethereum's EIP 1559: Eliminating the Lottery System and Monetizing Miner Extractable Value: EIP 1559 upgrade introduces a mechanism to measure and monetize MEV, promoting network efficiency and fairness. It eliminates the lottery-like system, ensuring equal distribution of rewards and preventing most validators from becoming losers.
Ethereum's EIP 1559 upgrade introduces a mechanism to measure and monetize miner extractable value (MEV), making the network more efficient and fair. This change aims to eliminate the lottery-like system where validators compete for blocks, leading to economic security benefits. With smoothing, everyone gets a fair share, and there's no more fighting for block rewards. This not only ensures a more equal distribution of rewards but also prevents the situation where most validators become losers, as seen in Bitcoin mining. By allowing solo validators to enjoy a consistent average reward without being forced to join pools, Ethereum's network becomes more decentralized and economically sustainable.
Promoting decentralization and fairness in Ethereum's network through MEV smoothing: MEV smoothing reduces large rewards for validators and staking pools, allowing smaller ones to have a fairer chance at receiving rewards, maintaining network decentralization and preventing collusion.
MEV (Maximal Extractable Value) smoothing is a crucial concept for Ethereum's future, as it promotes decentralization and fairness in the network. MEV spikes, which can result in large rewards for validators or staking pools, can lead to centralization and potential risks, such as rug pooling. By smoothing out these spikes, smaller validators and staking pools can have a fairer chance at receiving rewards, keeping the network decentralized and resistant to collusion. This can be achieved through proposer-builder separation, PBS, and an oracle to identify and partition MEV. However, it raises the question of how to distribute these rewards fairly among different validators and staking pools, which is an ongoing discussion in the Ethereum community.
Debate over MEV value distribution in Ethereum: Validators control MEV in Ethereum but some argue it should be redistributed to all ETH holders in a fair manner.
The Ethereum community is debating whether the value generated through MEV (Maximal Extractable Value) should be given to validators or ETH holders. The current understanding is that validators, or proposers, have a monopoly over MEV because they control the content of each block. However, some argue that this value is actually generated by the Ethereum ecosystem and should be redistributed to all ETH holders in a credibly neutral way. This is similar to the shift from users paying gas fees directly to miners in Ethereum 1559, where the value should instead go to the Ethereum network itself. It's important to note that validators and proposers are essentially the same entity in this context. The debate revolves around the fair distribution of value in the Ethereum network.
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Staying informed and taking advantage of opportunities in the crypto world, such as unclaimed airdrops, is important and made easier with tools like Earnify. Meanwhile, educational platforms like Metamask Learn help demystify crypto concepts in a user-friendly way. In the Ethereum network, the economic activity generated from transactions is seen as belonging to everyone and no one, and the choice is made to burn MEV (Maximal Extractable Value) to distribute its benefits to the entire network. So, whether it's claiming airdrops or understanding crypto concepts, staying informed and engaged is key in the ever-evolving crypto landscape. Don't miss out on potential rewards or knowledge – use tools like Earnify and learn on platforms like Metamask Learn.
Maximizing value participation for all Ethereum holders: MEV burn in Ethereum redistributes value to all ether holders, improving economic efficiency, increasing economic bandwidth, and enhancing the network's sustainability.
MEV (Maximal Extractable Value) burn in Ethereum can be seen as a way to maximally enable the widest participation in the Ethereum network, particularly for ether holders. This process, which involves burning MEV instead of distributing it to stakers, effectively redistributes value to all ether holders, increasing their potential benefit from the network. Additionally, MEV burn can lead to improved economic efficiency, increased economic bandwidth, and greater economic sustainability for Ethereum. By burning MEV, Ethereum can run more smoothly, with less fuel required for its consensus engine, and can better allocate ETH as collateral for applications. This redistribution of value aligns with Ethereum's philosophical goal of maximally enabling all participants, including the most marginal ones.
Understanding Ethereum's Economics through Apple's Business Model: Ethereum's primary business model involves selling blocks and charging a premium due to high demand, while its secondary model, MEV, acts as an 'App Store tax', providing additional revenue and efficiency. This unique business model helps determine the fair market value of ETH and reduces net supply.
Ethereum's economics can be understood through the lens of Apple's business model. Ethereum, like Apple, sells a valuable product - blocks - and can charge a premium for it due to high demand. However, Ethereum also has a secondary business model: MEV (Miners Extractable Value) and contention. This secondary model acts as an "App Store tax," providing additional revenue and efficiency. MEV burn results in less issuance, saving approximately 200,000 ETH per year, and the net supply decrease from MEV burn and issuance savings would roughly triple the current rate. This understanding of Ethereum's economics helps us grasp the fair market value of ETH and the benefits of its unique business model.
EIP 1559's Impact on Ether Stakers: EIP 1559 may not harm Ether stakers as it increases Ether's scarcity and value, maintaining individual stakers' yields, and potentially saving on issuance costs. Staking service providers may benefit from Ether price increase.
The Ethereum Improvement Proposal (EIP) 1559, which includes MEV (Minimum Value Extractable) burn, may not be detrimental to Ether stakers as it may seem. In an efficient market, staking rewards tend to the cost of money, and the opportunity cost of Ether is the biggest cost for stakers. The burn of Ether increases its scarcity and fuels its value, leading to higher returns for stakers from a USD denominated standpoint. Additionally, fewer validators mean less issuance, resulting in savings on issuance. Although the total amount of Ether staked may decrease, individual stakers' yields remain the same. For staking service providers, the increase in Ether price may more than compensate for the loss of staking rewards. Overall, the impact of EIP 1559 on Ether stakers may not be as negative as initially thought.
New Ethereum business model could significantly reduce Ethereum supply: Approx. 120,000 ETH burned since merge to PoS, potential annual burn of 450,000 ETH with MEV burn, potentially making Ethereum more deflationary, but implications for debt assets and economic activity should be considered.
Ethereum's new business model, which includes MEV smoothing and MEV burn in addition to EIP 1559, has the potential to significantly reduce the Ethereum supply. Since the merge to proof of stake last September 2022, approximately 120,000 ETH have been burned. If MEV burn had been in place since then, the estimated annual burn could have been around 450,000 ETH, nearly 3 times the issuance reduction. This would have resulted in a much faster decrease in Ethereum's supply, potentially making it more deflationary. However, it's important to note that deflation eventually ends and Ethereum's supply will likely reach an equilibrium, likely between 50 million and 100 million ETH, over the next century. Additionally, Ethereum functions as both a currency and a debt asset. While it's desirable for debt assets to decrease in value over time, making it easier to repay loans, it's also important to consider the implications of a more deflationary Ethereum on various use cases and economic activity.
Ethereum as Collateral Asset and Economic Bandwidth for DeFi: Ethereum's value as a collateral asset increases over time, reducing default risk and making it an attractive option. Economic activity using ETH as collateral expands Ethereum's economic bandwidth and creates a monetary premium, enabling growth of decentralized stablecoins.
Ethereum (ETH) functions as both a collateral asset and economic bandwidth for the decentralized finance (DeFi) ecosystem. As a collateral asset, ETH secures Ethereum as a settlement layer and provides economic bandwidth for creating decentralized stablecoins. The value of ETH as a collateral asset increases when it goes up over time, reducing the risk of default and making it an attractive collateral option. Additionally, the economic activity generated by using ETH as collateral to engage in DeFi increases the value of the collateral and expands the overall economic bandwidth of the Ethereum network. Ethereum's role as a deflationary asset is essential for the inflationary nature of stablecoins and the overall health of the Ethereum economy. The goal is to create a monetary premium for ETH, making it a special asset and enabling the growth of decentralized stablecoins to reach trillions of dollars in value.
Ethereum's Security and Economic Bandwidth Drive its Success: Ethereum's security and economic bandwidth are crucial for the success of decentralized stablecoins and reaching a trillion-dollar market cap. Ethereum is the most secure blockchain, and layer 2 solutions optimize its use of high-value fuel for efficient transactions.
The success of Ethereum and its decentralized stablecoins in reaching a trillion-dollar market cap relies on its security and economic bandwidth. Ethereum is currently the most secure blockchain, and as economic activity increases, the security and scarcity of decentralized stablecoins strengthen. However, to reach this scale, Ethereum needs one trillion dollars of pristine collateral, making it crucial to establish ether as the go-to asset for the Internet. MEV (Maximal Extractable Value) and layer 2 solutions like 4844 interact by splitting the markets into execution and data. Execution remains on layer 1, while data is cheaper on layer 2. MEV can be captured at layer 2 through sequencers, but the most efficient method may involve base roll-ups, which bring MEV back to layer 1. Ethereum's economic engine is primarily powered by regular gasoline (layer 1), but the MEV supercharger (layer 2) optimizes the use of this high-value fuel, allowing for more efficient and profitable transactions.
Ethereum's MEV burn mechanism acts as tax optimization and reduces sell pressure: Ethereum's MEV burn mechanism optimizes gas fees and reduces sell pressure, similar to a company's share buyback strategy in the stock market.
Ethereum's MEV (Maximal Extractable Value) burn mechanism not only brings significant optimization benefits but also acts as a tax optimization, reducing sell pressure and resulting in lower forced sell pressure for stakers. This is comparable to a company's share buyback strategy in the stock market, which decreases the total supply and increases the price per share, ultimately leading to lower sell pressure due to lower capital gains tax compared to income tax. The Ethereum community's focus on continuous innovation and improvement, as expressed through the minimum viable issuance policy, has led to the discovery and implementation of various optimizations, including EIP 1559 and potential future improvements like capping the active validator set to maintain maximum viable scarcity. The implementation of these improvements may take several years due to the community's emphasis on careful consideration and thorough research.
Exploring Ethereum's Future: EIP 1559 and Beyond: Stay informed about Ethereum's future developments like EIP 1559 and EIP 4844, understanding their potential impact on digital money. Remember, all crypto investments come with risk.
The Ethereum network is continuously evolving with new proposals and improvements, such as EIP 1559 and potential future upgrades like EIP 4844. These developments may take time to be implemented but hold great potential for the future of digital money. During the discussion, references were made to various concepts like MEV and Ultrasound Money, which are explored in depth in previous Bankless episodes. It's important to remember that all crypto investments come with risk, and none of the information shared constitutes financial advice. Stay informed and join the Bankless community as we continue to explore the frontier of digital money. The discussion also touched on the similarities between traditional industries like oil and birds and the digital world of Ethereum. The idea of scarcity, value, and the importance of understanding the underlying systems was a common thread throughout the conversation. Overall, the episode highlighted the importance of staying informed and engaged in the ever-evolving world of Ethereum and digital money.
