dYdX v4 and MEV

tldr;

dYdX v4 open-source chain software’s fully decentralized and performant in-memory orderbook could lead to MEV extraction; this is being proactively addressed
Unlike general purpose smart contract environments, the Cosmos infrastructure enables us to build unique MEV solutions that align a validator’s incentives with a user’s incentives. We are actively working on researching and building these solutions, and plan to allocate significant resources towards doing so going forwards.
MEV behavior could be detrimental to the product experience.

v4 and MEV

The dYdX v4 chain open-source software (“dYdX Chain”) is designed to offer users the best trading experience with zero gas fees, low latency, high throughput (similar to a centralized exchange) and deep liquidity. To get there, the dYdX Chain uses an in-memory orderbook where only filled orders are committed to consensus (i.e., off-chain). This could lead to MEV extraction through both novel and well-established vectors, which we are addressing right from the start. We plan to release more specific posts detailing what we are building to address MEV soon.

What is MEV?

MEV refers to profits that validators can earn by reordering or censoring transactions to their advantage. This can have a negative impact on end users as it can adversely affect pricing. When designing dYdX v4, we explored different strategies used in the crypto ecosystem to reduce the MEV risk and protect potential end users.

Ethereum vs App-chains

In the Ethereum ecosystem, a neutral approach is taken towards MEV, and a Proposer-Builder Separation (PBS) approach is used to auction off the block space. PBS mitigates the centralization risks of MEV by requiring searchers to redistribute their MEV profits to participants within the PBS supply chain. However, in PBS, MEV still hurts average users. In contrast, the Cosmos ecosystem, particularly Osmosis, has taken a more opinionated stance towards MEV and aims to mitigate any harmful MEV and capture any benign MEV it generates. For more background, we recommend reading this document by Reverie. This is an example of additional vectors app-chains can take towards addressing MEV. We are actively researching both existing and novel mitigations that are uniquely enabled by dYdX being a sovereign open-source chain software.

Our Choice to Prioritize User Experience

Our goal at dYdX is to offer the best product experience on the dYdX v4 chain software. The decision to use the Cosmos infrastructure enables us to create a fully decentralized exchange while also maintaining high performance. The Cosmos Infrastructure also allows us to build unique MEV solutions into the dYdX v4 chain software. It enables flexibility in orchestrating how blocks are constructed and what MEV looks like on the chain, and all of this can be built into the protocol code itself. We believe that this a better approach as it properly aligns the incentives of a validator and the end user through an on-chain solution. This differs from general-purpose smart contract environments where validators are neutral towards the needs of application users. Our approach could prevent validators from profiting at a user's expense. Such behavior is detrimental to both the protocol and community. As part of this effort, we have been working closely with MEV experts such as Skip Protocol and ChorusOne to develop MEV mitigation strategies for the dYdX v4 chain software. We plan to release more details on this in the coming months leading up to the mainnet open-source software release.

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone. Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.