Chorus One is proud to introduce our new research effort, fueled by a grant from dYdX, that examines the implications of Maximum Extractable Value (MEV) within the context of dYdX v4 from a validator's perspective. This comprehensive analysis presents the first-ever exploration of mitigating negative MEV externalities in a fully decentralized, validator-driven order book. Additionally, it delves into the uncharted territory of cross-domain arbitrage involving a fully decentralized in-validator order book and other venues.
This paper, marking a significant milestone in exploring MEV dynamics, identifies factors that influence undesirable MEV extraction, and proposes concrete strategies to level the playing field in derivative trading by counteracting such behavior.
dYdX v4 signifies a transformative phase in the evolution of the dYdX protocol. It embraces a fully decentralized derivatives exchange built on a central limit order book (CLOB). Unlike previous iterations, which combined smart contracts with centralized services, v4 employs a decentralized off-chain order book and a high-performance matching engine. This architecture, powered by the CometBFT consensus and Cosmos SDK, strives to achieve scalability alongside decentralization while allowing community-driven protocol development.
This transition signifies a substantial shift, as v4 introduces the industry's first truly decentralized perpetual futures exchange. Validators will manage the order books, with meticulous steps taken to ensure fair and trustless trading through effective negative MEV mitigation.
Set against the backdrop of this pivotal upgrade, our paper serves a crucial purpose by shedding light on the complexities of mitigating bad MEV on dYdX v4, thus equipping the community with the resources needed to navigate the upcoming transition. By providing comprehensive insights, our analysis aids in anticipating the impact of MEV on the new chain and trading experience, as well as the wider Cosmos ecosystem, ultimately fostering informed decision-making.
Our analysis uncovers pivotal insights that reverberate across the ecosystem:
Finally, our research extends beyond insights to practical solutions for mitigating validator-driven MEV risks. We propose that such MEV might manifest through partnerships between trading firms and market makers, favoring those with established advantages. We underscore the risks associated with harmful MEV, including asymmetric risk for delegators. Even in optimistic scenarios, potential revenue from partnerships may not fully offset these risks. To address this, we suggest a combination of measures including potential penalties and flexible unbonding periods for re-delegation to ethical actors, aiming to effectively manage validator-driven MEV risks.
At Chorus One, we leverage a sophisticated and ethical set of MEV strategies to optimize our validators' performance and continuously monitor progress. Backed by in-house experts and extensive research, we deploy various infrastructural solutions such as relay optimization, latency games, and investing in robust machines to improve our MEV performance. Learn more about Chorus One's winning MEV strategies by reading our recent blog.
For a comprehensive exploration of our research on MEV implications within dYdX v4, we invite you to read the full research paper here.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.