Macauley Peterson

Ethereum co-founder Vitalik Buterin advised the developer community to guard against overburdening the networks’ social consensus — the ultimate arbiter of what the Ethereum network canonically is.



Staked ether, so crucial to network security, is <a href="https://blockworks.co/podcast/empire/ce2b0780-b63d-11ed-a733-37c39b297731">poised</a> to become an important collateral asset in DeFi, through the use of liquid staking tokens (LSTs), such as Lido’s stETH and Rocketpool’s rETH. But it’s also expected to become useful in other contexts, thanks to bleeding edge tech, such as the restaking primitive from <a href="https://blockworks.co/tag/eigenlayer">Eigenlayer</a>, which will allow staked ETH to serve a dual function.



In his first <a href="https://vitalik.ca/general/2023/05/21/dont_overload.html">blog post</a> about Ethereum since March, Buterin extended the <a href="https://nakamoto.com/credible-neutrality/">credible neutrality</a> imperative to any attempt to leverage the Ethereum validator set — including, but not limited to restaking — warning against efforts to &#8220;recruit Ethereum social consensus for [an] application&#8217;s own purposes.”&nbsp;



In the form of a cautionary thought experiment using Harry Potter characters, Buterin outlined certain risks that could arise if proposals to rehypothecate staked ether are not carefully thought through.



Re-using validators’ stake can be done safely, he argues, so long as the social consensus isn’t relied upon as a backstop.



“If [&#8230;] you have the intent to rope in the broader Ethereum ecosystem social consensus to fork or reorg to solve your problems, this is high-risk, and I argue that we should strongly resist all attempts to create such expectations,” Buterin wrote.



As an example of a “high-risk” gamble, Buterin pictured a layer-2 created by “Hermione” that grows to become the dominant scaling solution. The fictional Ethereum wizard claims that her layer-2 is thus the most secure, “because if there is a bug that causes funds to be stolen, the losses will be so large that the community will have no choice but to fork to recover the users&#8217; funds.”



Arbitrum One currently has $5.77 billion in total value locked (TVL) <a href="https://l2beat.com/scaling/projects/arbitrum">according to</a> L2Beat, more than triple the size of the next largest scaling solution, Optimism.



Right now, there is no indication that a catastrophic bug in Arbitrum would prompt calls for Ethereum mainnet operators to take action. But since Arbitrum’s developer, Offchain Labs, also owns Prysmatic Labs — the company behind the second-largest Prysm consensus client — it’s not an absurd proposition, either.



Buterin doesn’t want a repeat of <a href="https://en.wikipedia.org/wiki/The_DAO_(organization)">The Dao</a>, or <a href="https://www.parity.io/blog/a-postmortem-on-the-parity-multi-sig-library-self-destruct/">the Parity bug</a>, both of which challenged Ethereum’s social consensus at a time when the network was much smaller.



In the former case, the network forked, leaving behind Ethereum Classic (<a href="https://blockworks.co/price/etc">ETC</a>), which continues to operate at a $2.5 billion market cap to this day. In the latter, the network did not fork, and 513,774 ether were locked forever. That was a painful choice, but it set a precedent for the future: Ethereum transactions are immutable, what Buterin refers to in his post as the blockchain&#8217;s “purity.”



“A blockchain’s ‘purity’ in the sense of it being a purely mathematical construct that attempts to come to consensus only on purely mathematical things, is a huge advantage,” he wrote.



He urged avoidance of “perverse too-big-to-fail mechanics,” to “preserve the chain&#8217;s minimalism, support uses of re-staking that do not look like slippery slopes to extending the role of Ethereum consensus, and help developers find alternate strategies to achieve their security goals.”



Eigenlayer co-founder Sreeram Kannan, was quick to agree, in <a href="https://twitter.com/sreeramkannan/status/1660388939369431042">a Twitter thread</a>:



“a) don’t build complex financial primitives on restaking — they can spiral out&nbsp;



b) don’t rely on Ethereum to fork for application layer errors — this is a super important principle



c) do not use subjective slashing — as it is subject to tyranny of the dishonest majority.”



There are “<a href="https://twitter.com/sreeramkannan/status/1595863276101177344">three underlying trust models</a> underpinning Eigenlayer,” according to Kannan. These are economic trust, decentralization trust and ETH validator commitments, and each with their own potential use cases.



But it remains to be seen which, if any, will be embraced by Ethereum validators.



Blockworks Research analyst <a href="https://twitter.com/purplepill3m">Ren Yu Kong</a> is skeptical that there will be a wide variety of restaking applications that will pass muster with Ethereum validators.



&#8220;I believe that there won&#8217;t be many projects out there that are worth a validator to restake with given the additional risks incurred for a small marginal return, and now Vitalik has highlighted an important additional ‘social consensus’ risk,&#8221; he said.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

credible neutrality

Don’t Overuse Social Consensus, Vitalik Warns

Darren Kleine

Imagine heading to a casino and sitting down for a game of blackjack. The card game works as usual, with an important exception: one other player at the table gets to look at everybody’s cards before deciding what they should do.



Would you play?



It’s pretty obvious that the all-seeing player would have an enormous advantage against the rest of the table. Chances are, nobody would want to play under these conditions.&nbsp;



Not only should a game involving other people’s money be fair, or ‘neutral’ in nature, it must also exhibit observable credibility. Without credibility, even if the game is fair, no one would be willing to participate. This issue of <a href="https://inevitableeth.com/home/concepts/credible-neutrality">credible neutrality</a> and MEV poses a unique challenge for blockchain protocols.



MEV, or “<a href="https://blockworks.co/tag/mev">maximum extractable value</a>,” is the constant effort by participants in a <a href="https://blockworks.co/tag/blockchain">blockchain</a> protocol to exploit the system in ways that gather value at the expense of users. It often involves certain actors seeking out the intentions of users and taking advantage of that knowledge to extract value, much like the omniscient blackjack player.



Over the past few years, developers in the <a href="https://blockworks.co/tag/ethereum">Ethereum</a> ecosystem have been considering methods to ensure credible neutrality, as explained by Vitalik Buterin <a href="https://nakamoto.com/credible-neutrality/">in 2020</a>, throughout the transactional process.



It’s no easy task. <a href="https://blockworks.co/tag/flashbots">Flashbots</a> researcher Quintus Kilbourn and Ethereum Foundation researcher Barnabe Monnot spoke to Blockworks on the <a href="https://www.youtube.com/watch?v=4t7qbv4Wzn4">Bell Curve podcast</a> about this issue. They explored the challenges of achieving credible neutrality through the separation of tasks that would otherwise enable unauthorized sneak peaks at transaction activity.



The simplest method to ensure credible neutrality is for transactions to be blindly processed as they arrive from users. The key problem that arises with this approach is spam. Users will simply fire as many transactions into the system as they can to hopefully, with some luck, be prioritized. It’s extremely inefficient and can <a href="https://blockworks.co/news/solana-spam-problem">seriously bog down a network</a>.&nbsp;



The other possibility is to use an auction system of some sort to bid for transaction priority. This is where things get quite a bit more complicated. What kind of auction, where it happens, and who sees what at which point in the process, determines the neutrality of the bidding and whether it’s credible.&nbsp;



Kilbourn suggests a “more general auction layer that can be programmed to facilitate more specific kinds of auctions” could be a useful approach.&nbsp;



“You allow people to compete and propose different kinds of mechanisms,” he says, “but still capture the specificity of different kinds of auction needs.”



Different utilities require different sorts of auctions, Kilbourn says. “The kind of auction which is best for DEX trades looks a bit different from the auction that works well for NFTs,” for example.&nbsp;



Monnot wonders if such auction mechanisms should be baked into the protocol or remain independent. “Should the protocol then be involved? My perspective is that when it does, we are kind of locking in a certain type of allocation mechanism and perhaps we don&#8217;t want to do that.”&nbsp;



“Perhaps we want to preserve the optionality of innovation in terms of the auctions or even the market structures might change over time. So we want to give ourselves as much room to be agile and to let the market kind of figure out the best mechanisms for that.”



<h2 class="wp-block-heading">SUAVE</h2>



A broader solution to the problem of credible neutrality for any blockchain is being built into Flashbots’ <a href="https://writings.flashbots.net/the-future-of-mev-is-suave/">SUAVE</a>, the “Single Unifying Auction for Value Expression.” By breaking down the block-building process, SUAVE “allows crypto to stay decentralized,” according to Flashbots.&nbsp;



SUAVE is designed to allow “users to transact with the best execution, while reducing the economic centralization pressure on each domain,” by separating blockchain tasks that would normally encourage MEV exploitation.



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG9793790587" width="100%"></iframe>







But it’s very difficult to anticipate how MEV will evolve in the future, Kilbourn says.&nbsp;



“If you want to be really realistic about it, there are a couple of ways that things can go from here.”



“There&#8217;s maybe some worst case route <a href="https://blockworks.co/news/rollups-speed-or-decentralization">where things centralize</a>, but just enough so that there&#8217;s no real reaction from the community,” he says. “You still have a high degree of centralization, but it&#8217;s minimally acceptable.”



“That&#8217;s really the world we&#8217;re trying to avoid.”



“We want to facilitate collaboration between the different users who need to end up in a block,” Kilbourn says. 



The goal then, Kilbourn says, is “to provide [users] the tools to share their trade, share their information without being <a href="https://blockworks.co/news/validator-frontruns-mev-bots">front run</a> or screwed over, but also give them the power to really express, ‘Hey, give me the best possible trade at this point in the block.’”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Bell Curve

Building Credible Neutrality in the MEV Battleground

Bessie Liu

Concerns around possible censorship of Ethereum transactions was prevalent in the weeks leading up to and after the Merge, but the latest data shows that this upward trend may be reversing.



The Merge introduced changes to the process of block building alongside the transition from proof-of-work to proof-of-stake, that introduced some risk of centralization, particular with respect to MEV — or maximum extractable value.



Tracking site <a href="https://www.mevwatch.info/" target="_blank" rel="noreferrer noopener">MEV Watch</a> reveals that the percentage of censored blocks has dropped from its all-time high of 79% to roughly 70% over the past month. Anything less than about 99%, means Ethereum remains censorship free.



MEV refers to the maximum amount of income that can be earned by validators from the automated process of re-ordering transactions for inclusion in a block.



If MEV in a block exceeds standard <a href="https://www.blockworksresearch.com/glossary#block-reward" target="_blank" rel="noreferrer noopener">block rewards</a>, validators may choose to re-organize a block to capture the income generated by MEV for themselves. 



In order to prevent malicious MEV practices, validators choose to use MEV-Boost relays which allow them to request blocks from a network of builders.



But after the US Treasury’s Office of Foreign Assets Control (OFAC) <a href="https://blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel" target="_blank" rel="noreferrer noopener">sanctioned crypto privacy service Tornado Cash</a>, popular MEV-Boost realy provider Flashbots — which is based in the US — decided to remain OFAC-compliant, meaning it would ignore any transactions which were restricted by OFAC.



That alone is not enough to censor Ethereum, although it can delay some transactions, Uri Klarman, CEO of relay provider bloXroute Labs previously told Blockworks.



“If I had an OFAC-restricted transaction, it [would] take more time for my transaction to be included, but eventually a validator, which isn’t ignoring [OFAC transactions] would include it,” Klarman said.&nbsp;



Nevertheless, the concern within the Ethereum community is that if the proportion of censored blocks were to become too high, <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">it could threaten</a> a fundamental ethos of Ethereum — credible neutrality — as well as a desirable feature of most public blockchain networks: censorship resistance.



Coming up with technical solutions to preserve these values is a major goal of the Ethereum community.



<h3 class="wp-block-heading">Developing SUAVE</h3>



Ethereum developers have also launched a new project to combat censorship.



Dubbed SUAVE, short for “Single Unifying Auctions for Value Expression,” the project aims to decentralize block building itself.



SUAVE was <a href="https://blockworks.co/news/ethereum-is-not-under-attack-understanding-mev-boost-relays" target="_blank" rel="noreferrer noopener">first teased </a>at Devcon, the Ethereum foundation’s annual conference, where Philip Daian, a Flashbots steward, said its latest technology would “make TradFi look embarrassing.” The project&#8217;s latest vision was unveiled in a <a href="https://writings.flashbots.net/the-future-of-mev-is-suave/">blog post</a> on Nov. 22. 



At a high level, SUAVE will be a new blockchain that acts as a plug-and-play <a href="https://www.blockworksresearch.com/glossary#mempool" target="_blank" rel="noreferrer noopener">mempool</a> and decentralized block builder for other blockchains. 



“SUAVE goes beyond sequencing for a single blockchain. We designed SUAVE to be the mempool and block builder for all blockchains,” Hasu, pseudonymous strategy lead at Flashbots <a href="https://twitter.com/hasufl/status/1595492568157937665" target="_blank" rel="noreferrer noopener">tweeted</a>.  



Through building a decentralized sequencing layer, the Flashbots team wants to “give domains control over their own validation guarantees and ensure smaller domains stay decentralized.”



Domains <a href="https://twitter.com/natanb55/status/1469103889056256005" target="_blank" rel="noreferrer noopener">means</a> any combination of layer-1 or layer-2 blockchains, but also side-chains, shards, and even centralized exchanges.



Flashbots does not intend to participate in the marketplace beyond bootstrapping, the company noted.&nbsp;



“We consider this strategy the most aligned with our mission and the health of the entire ecosystem,” the company said.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>