How Ethereum Miners Could Exploit Network And How To Fix It

Soon

  • MEV refers to how Ethereum miners classify user transactions to maximize their income.
  • search for MEV could lead to blockchain reorganizations, thus destabilizing the consensus.
  • Vitalik Buterin believes that the theoretical threat will dissipate soon.

Miners are the often unacknowledged heroes of the Ethereum blockchain. y process user transactions, add blocks to the chain, and help keep the entire business running by competing to solve cryptographic puzzles.

Although they are rewarded with 2 ETH (around $ 4,000 at current prices) plus transaction fees for any block they manage to mine, they can often rack up more.

catch: to do that, they have to play with their transactions.

Welcome to the world of MEV, also known as Mining Value or Maximum Mining Value. It refers to how much Ethereum miners can earn, not simply by processing user transactions and adding blocks to the chain, but by choosing what goes into each block and in what order.

miners have a lot of power in this regard. As Charlie Noyes, a partner at cryptocurrency investment firm Paradigm, wrote in a blog post in February, miners can “arbitrarily include, exclude, or reorder transactions within the blocks they produce.”

Why should they care what transactions enter? Take advantage of arbitrage opportunities on trading platforms such as Uniswap. This is because time is dependent on Ethereum and the decentralized finance (DeFi) applications that use it. network is constantly crawled by bots looking to buy low on one platform and sell high on another before prices converge.

When trying to arbitrate between protocols, you want to make sure your transaction goes over the network right now. But DeFi, the booming industry built on Ethereum that allows people to borrow, earn interest, or trade assets without intermediaries, often clogs Ethereum. blockchain, making you wait for the transactions to be final. This is a great risk for urgent exchanges. If you are a block behind, someone may have already taken advantage of the arbitrage opportunity.

You can avoid this by intentionally overpaying the transaction fee (knowing that you will earn a lot from the transaction itself to make up the difference). Since the miners, or actually the software they run, have a say in which block of transactions they enter, they will pick the ones that pay the most and pocket the money.

And that sweet Take care. Arbitrage bots, which are often run by traders rather than miners, can help balance prices in the markets, resulting in what Noyes calls a “benign MEV transaction.”

It becomes problematic when those bots “recognize the user’s operation before it is executed and ‘interpose’ their transaction between a separate buy and sell order,” Noyes wrote. That is, the bots can see that the exchange will give someone a lot of money, so they are quick to do it themselves. user gets screwed.

Such arbitrage bots are particularly problematic when operated by the miners themselves, as they create a conflict of interest.

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Noyes painted it in haunting terms. “MEV is not just a curiosity,” he wrote. “se little financial games create incentive waves, a tortuous chain of cause and effect that must be followed to see contagion.”

One thing this could lead to, Noyes wrote, is a consensus disruption, making it too tempting for miners to try to mess with blocks that have already been created while looking for arbitrage opportunities, although he noted in February that this it wasn’t happening yet. .

As Saneel Sreeni of Dragonfly Research wrote this week, it remains largely hypothetical: “MEV profits are becoming an increasingly important part of the economic rewards of miners, making the threat of attacks [accumulating computing power in an attempt to remine old blocks] and rearrange more likely. It also means that, in theory, it should be possible to bribe the miners to reorganize the chain ‘.

Reorganizations, or reorganizations, occur when there are competing chains on the blockchain due to the blocks being mined at approximately the same time. Sometimes miners can build on top of another block before realizing that there is also a parallel block. In such cases, the software clients will essentially go back and decide which of these strings is the string. Reorganizations of Ethereum down to about a block deep are quite common. And as Noyes’ colleague Georgios Konstantopoulos and Ethereum creator Vitalik Buterin wrote this week in a paper examining a hypothetical attack on DeFi protocols via reorganizations, two- to five-block reorganizations are also not that rare or harmful.

re has been a lot of discussion in recent weeks about the possibility of miners running custom software that takes bribes to reorganize the chain. @Gakonst and I explain how this will become more difficult after the proof-of-stake merger: https: // t.co/ghwikceVBr

– vitalik.eth (@VitalikButerin) July 20, 2021

But reorganizations have several negative effects on the network, Konstantopoulos and Buterin said: y add costs to running nodes (the hardware that runs the blockchain), cause the user to wait longer for transactions to be confirmed, and carry out attacks. on the most likely network.

All three men agree that there is a potential problem with miners playing a game that sees them not extending the longest chain but supporting competing chains to catch MEV.

Konstantopoulos and Buterin refer to reorganized mining as ‘rational myopic’. Doing so works in the short term, but threatens to reduce trust in the network in the long term, thereby devaluing your ETH. Which is not to say that it cannot happen.

However, they believe that Ethereum’s plan moves away from a proof-of-work system, in which miners create new blocks, to test the stakes, where validators deposit their ETH for the right to create new blocks. , Solve this problem.

This is because, with almost 200,000 validators already participating in Ethereum 2.0, the network is much more distributed. When combined with the pseudo-random selection of several thousand validators to attest to each block, there is little opportunity for selfish actors to focus their resources. “Single-block reorganizations are also extremely difficult, because an attacker who controls only a few validators has no way of beating the honest majority of thousands of guarantors,” Buterin and Konstantopoulos wrote.

In the Ethereum PoS implementation, miners no longer perform any proof of work, so they need a different solution:

Leader Lottery – leader is still chosen at random, but using a compromise disclosure scheme to generate a safe randomness called RANDAO

– Hasu (@hasufl) July 21, 2021

solution, they said, is for Ethereum to move forward with the merger and work on it in the fastest, but safest way, on it.

Hasu, a pseudonymous researcher who wrote on this issue, said figuring out that while merging with ETH2 will make such reorganizations substantially more difficult, it won’t have much of an effect on the MEV problem.

When asked if he will fix MEV, Hasu said: “Only in the very limited sense that short-term reorganizations get more difficult, but we still don’t see them on Ethereum today.”

That is, MEV will remain a thing even if the miners no longer exist. As Hasu noted, “At ETH [proof of stake], the block makers of the next 12 minutes know each other in advance and can work together better than miners to mine multi-block MEVs.”

Hasu suggested that it probably won’t be a big concern because it’s mostly a theoretical problem. But if chain reorganizations start to take place, don’t blame the miners.

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