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dYdX v4 social mitigation for MEV proposal

DIP 3 - Launch a Social Mitigation Strategy for MEV

Simple Summary

Launch a social strategy for mitigating MEV on behalf of active validators by appointing a grants funded committee and agreeing on the intent to take action against bad actors.

Abstract

With the launch of full trading on dYdX v4, we expect trading activity to pick up significantly. With that increase in volume comes an opportunity for validators to profit from MEV. Since there is no in-protocol solution for preventing MEV at this time, the protocol is at risk of validators deploying MEV strategies that can pose a significant threat to the trading experience of dYdX users.

We propose that the community adopt a governance-enforced social slashing model to disincentivize MEV activity. In this model, the community can take retroactive action against validators engaged in malicious MEV.

Using the dashboard built by Skip, the community can look for orderbook discrepancy among active validators as an indication of malicious behavior. The dollar value of discrepancy found is measured and assigned to the proposing validator on the dashboard. As these accumulate over the time, the community can identify offenders with above average discrepancy. Similarly, spikes in discrepancy may indicate valuable one-off MEV opportunities being captured by validators. A completely honest validator set should display little to no divergence on the dashboard.

The community as a whole may not be able to catch malicious actors efficiently given coordination constraints. Instead, we propose assigning that responsibility to a committee made up of qualified community members. This committee will be responsible for proactively investigating and reviewing the discrepancy data and recommending actions based on their findings.

Relevant Links

Motivation

Through the in-memory orderbook design, validators will have an opportunity to reorder or censor trades before proposing a new block to extract profits. These actions wouldn’t break anything in the consensus process; other validators would only see the final orderbooks and order fills. In other words, there is nothing within the protocol to prevent validators from engaging in order manipulation as a form of MEV. Given dYdX facilitates billions of dollars of trades, we can assume that validators stand to gain a lot of money from doing this, and users lose a lot on the other side.

As an appchain, dYdX does have the ability to take a more proactive out-of-protocol stance toward mitigating MEV. The community can be opinionated on which behaviors to incentivize (and disincentivize), all enforced through on-chain governance.

We believe that leveraging Skip's dashboard and appointing an active committee to review the data will give the community a good chance of actively mitigating MEV. Validators will be at risk of social and economic risk for engaging in any malicious behavior. This credible threat clouds any profit opportunity, making them think twice before performing any MEV extraction.

Specification

The following will be approved through a grant issued by the dYdX Grants Program. Funding will be distributed from the program directly. Trustees from the program will agree on the funding amount through the standard grant approval process.

The MEV Slashing Committee

Members: 7 individuals

Term: 6 months

Budget: $84,000 ($2,000 / month Member)

Responsibilities:

  • Recurring review meetings to discuss MEV activity (starting with weekly)
  • Proactively reviewing discrepancy data for outliers and possible MEV activity
  • Making periodic recommendations for community action based on findings
  • Publishing reports on findings and overall network observations
  • By the end of term, the committee should bring forward a framework for standardizing certain actions based on discrepancy data. This framework will be voted on by the community through governance. This project will launch with the understanding that the committee’s exact scope of work will depend on mainnet activity. The exact workload could range from weekly meetings with no further requirements (e.g. there is no MEV activity observed), to a large amount of research, investigations, and governance activity (e.g. MEV is actively observed on mainnet). This uncertainty should not prevent us from moving forward – the downside risk of MEV activity is too large to leave unchecked. A lack of MEV activity found could also be the result of a successful strategy mitigating malicious actors from engaging in the first place.

Members

  • Thomas Cintra (Xenophon Labs)
  • Udit Vera (Timewave Labs)
  • Nitesh Nath (DFlow Protocol)
  • Michael Neuder (Ethereum Foundation)
  • Craig Le Riche / “0xCLR” (Considered Finance)
  • Robert Tiong (Rated Network)
  • Reverie Reserves, LLC (to be paid retroactively)

Test Cases and Implementation

This is a text proposal singaling intent to pursue a social strategy. No testing was needed.

Copyright

Copyright and related rights waived via CC0.

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