Blockdaemon Blog

What Cross-Domain MEV Means For Institutions

Engineering
Sep 13, 2023
By:
Rafael
Belchior
&
Blockchain Interoperability evolves with Cross-Domain MEV. Conor McMenamin's paper highlights its potential and risks, emphasizing its significance for institutions in the blockchain realm.

Blockchain Interoperability is a focal point for innovation. One burgeoning concept that promises to revolutionize cross-chain capabilities is Cross-Domain Maximum Extractable Value (MEV).

This blog dissects a survey paper titled "SoK: Cross-Domain MEV" by Conor McMenamin, providing an in-depth analysis and institutional perspective.

Why Institutions Need to Know About Cross-Domain MEV

Cross-domain MEV has great potential. The evolution of token bridges and interoperability mechanisms opens up new revenue streams for miners and validators.

However, it also carries potential risk, such as exploitable dependencies that sophisticated actors, possibly colluding validators across different blockchains, might seek to leverage. 

Because of this, it is essential that institutions understand the model and make themselves aware of the mechanisms to mitigate the risks associated with MEV.

The paper under discussion lays down a foundation for understanding the protocols required for building cross-domain boundary MEV. These solutions include bridge aggregators, new wallets, and validator software implementations. 

Key Point: Cross-domain MEV has potential for increased rewards, but introduces additional risk.  MEV introduces complexities that affect single blockchains.These complexities multiply when extended to multiple blockchains. 

A Background Refresher: What Is MEV?

Maximum Extractable Value, or MEV, is a mechanism which manipulates transaction orders to benefit an extractor, like a miner or validator.

More specifically, MEV is extracted by strategically ordering transactions to yield a positive outcome for the extractor. In addition, off-chain information—such as market sentiment gleaned from news headlines—can signal profitable transaction opportunities.

The Paper’s Main Contributions

1. Systematic Analysis: The paper categorizes different MEV types across various protocols, shedding light on where and how value can be extracted. 

2. Mitigating MEV: A detailed exposition on mechanisms that can democratize or reduce the negative externalities of MEV.

The paper is particularly insightful in detailing how MEV is extracted, providing institutions with vital knowledge for strategic decision-making.

While the paper is an invaluable resource, there are areas where it could offer more, namely:

  • The paper lacks practical algorithms for searchers and bundlers in the cross-domain scenario.
  • The terminology used is often confusing, with MEV and rollup terms frequently being used interchangeably.

The Crux of Cross-Domain MEV

One of the paper's standout points is its assertion that Cross-Domain MEV poses a significant risk to the decentralization of blockchains.

The value extraction process is nuanced and involves a sophisticated model spanning multiple blockchains, which could be a potential area of exploitation for institutions that have stakes in multiple chains. 

Moreover, timing is a critical factor in cross-domain MEV, especially given the latencies commonly associated with blockchain bridges. This brings us to the concept of multi-block MEV (MMEV), which suggests that transaction sequencing across multiple blocks can be more profitable but exponentially more complex.

The Implications of Cross-Domain MEV for Institutions

Cross-Domain MEV represents a frontier in blockchain interoperability and a challenge that institutions should not overlook. It presents challenges and opportunities.

Large operators could potentially leverage their capabilities to validate on multiple chains and maintain an extensive token inventory, thereby dominating the MEV market. This further underscores the importance of democratizing MEV, possibly by extending existing technologies like MEV-boost for cross-chain scenarios.

However, with potentially exploitable avenues in this complex mechanism, institutions must be well-equipped to understand and mitigate the associated risks.

As the paper argues, cross-domain MEV isn't merely an extension of existing MEV challenges but a multi-faceted issue that demands a thorough institutional strategy.

For institutions involved in blockchain and digital assets, understanding the nuances of Cross-Domain MEV is not just beneficial—it's imperative.

With the MEV landscape constantly evolving, maintaining an informed, adaptive strategy is crucial for long-term success. Interested in learning more? Book a call with Blockdaemon today. 

Written by Rafael Belchior. To read more, visit his Medium page here.

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