🦹‍♀️ Wintermute DeFi Operations Hacked for $160M

Hello Defiers! Here’s what we’re covering today:

News

• Wintermute DeFi Operations Hacked for $160M
• OpenSea To Support Arbitrum NFTs

Crypto Regulation

• U.S. Legislation Would Ban Algo Stablecoins for Two Years: Report
• Balina Decries ‘Bad Precedent’ After SEC Sues Influencer

👀 Defiant Premium Story for Paid Subscribers (📜Scroll to the end!)

• Little Understood Trading Stratagem Quietly Siphons Money from Ethereum Users

Podcast

🎙 Listen to the Exclusive Interview with Robert Lauko

Video

• Tutorial: Earn During The Bear

DeFi Explainers

• What Is Maker?

Elsewhere

• DAOs are not corporations: where decentralization in autonomous organizations matters: Vitalik Buterin

Trending in The Defiant

• ‘Massive Dumping’ by Ethereum Miners Punishes ETH
• Gensler Rattles DeFi With Suggestion PoS Coins are Securities
• New PoW Ethereum Fork Plunges 75% Amid Flurry of Problems

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Exploits

🦹‍♀️ Wintermute DeFi Operations Hacked for $160M

CEO Evgeny Gaevoy Says Firm Remains Solvent

By Aleksandar Gilbert

TARGETED Crypto market maker Wintermute has lost $160M in a hack that targeted its DeFi operations early Tuesday. “If you have a [market maker] agreement with Wintermute, your funds are safe,” CEO Evgeny Gaevoy said on Twitter. “There will be a disruption in our services today and potentially for [the] next few days and will get back to normal after.”

👉READ THE FULL STORY IN THE DEFIANT.IO👈

Crypto Regulation

😳 U.S. Legislation Would Ban Algo Stablecoins for Two Years: Report

Terra Collapse Prompts Congress to Crack Down on Dollar-Pegged Token Issuers

By Samuel Haig

Influential members of the U.S. Congress appear to be working on legislation that would temporarily ban certain types of algorithmic stablecoins, according to a Sept. 21 report from Bloomberg News.

👉READ THE FULL STORY IN THE DEFIANT.IO👈

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Crypto Regulation

🏛 Balina Decries ‘Bad Precedent’ After SEC Sues Influencer

Agency Claims Jurisdiction Over Ethereum Transactions With U.S. Nodes

By Aleksandar Gilbert

LAWSUIT Anyone who doubted the U.S. Securities and Exchange Commission isn’t serious about expanding its scope across crypto might want to check out a lawsuit the agency filed this week.

👉READ THE FULL STORY IN THE DEFIANT.IO👈

NFTs + Layer 2s

🌊 OpenSea To Support Arbitrum NFTs

Leading NFT Marketplace To Launch Layer 2 Deployment On Sept. 21

By Owen Fernau

OpenSea is expanding to its first Layer 2 rollup.

The leading NFT marketplace plans to launch on Arbitrum on Sept. 21.

The launch would wed two projects which are leaders in their respective categories — Arbitrum is top among Ethereum scaling solutions known as Layer 2s with $2.5B of value locked in its smart contracts, according to L2BEAT.

👉READ THE FULL STORY IN THE DEFIANT.IO👈

Defiant Video

📺 Tutorial: Earn During The Bear

Podcast

🎙 Building The Forefront of Decentralization

Shoutout

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DeFi Beginners

🧐 What Is Maker?

A Step-by-Step Guide to One of DeFi Most Influential Lending Protocols

By Rahul Nambiampurath

SMART CONTRACTS Maker, a crypto lender, is one of the pioneers of decentralized finance (DeFi), Maker uses smart contracts on the Ethereum blockchain to make loans based on DAI, a stablecoin.

👉READ THE FULL STORY IN THE DEFIANT.IO👈

Elsewhere

• DAOs are not corporations: where decentralization in autonomous organizations matters: Vitalik ButerinRecently, there has been a lot of discourse around the idea that highly decentralized DAOs do not work, and DAO governance should start to more closely resemble that of traditional corporations in order to remain competitive.
• Draft stablecoin bill in Congress to require Fed, state regulator approval: The BlockDraft legislation to create a U.S. federal framework around stablecoins would temporarily ban the types of payment coins that are not backed by outside assets — similar to TerraUSD, an algorithmic stablecoin that collapsed earlier this year.
• Magic Eden CEO: ‘Very Natural’ to Expand From Solana to Ethereum NFTs: DecryptMagic Eden, the leading Solana NFT marketplace, continued its expansion to Ethereum today by rolling out support for a handful of major collections, including the Bored Ape Yacht Club, Pudgy Penguins, and Otherside. Additional projects will be added in the days ahead.

Trending in The Defiant

• ‘Massive Dumping’ by Ethereum Miners Punishes ETHEver since The Merge took place on Sept. 15 investors have looked on in dismay as Ether lost a fifth of its value over the next four days.
• Gensler Rattles DeFi With Suggestion PoS Coins are SecuritiesThe Merge may be complete, but the battle for legally defining Ethereum 2.0 is just beginning. Hours after Ethereum completed its historic transition to Proof of Stake technology, a top U.S. regulator said cryptocurrencies that use this approach should probably be defined as securities.
• New PoW Ethereum Fork Plunges 75% Amid Flurry of ProblemsThe Merge may have launched without a hitch but ETHPoW, the Proof of Work fork of Ethereum aimed at die-hard miners, is off to a troubled start.

🧑‍💻 ✍️ Stories in The Defiant are written by Owen Fernau, Aleksandar Gilbert, Samuel Haig, and yyctrader, and edited by Edward Robinson, yyctrader and Camila Russo. Videos were produced by Robin Schmidt and Alp Gasimov. Podcast was led by Camila, edited by Alp.

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⛽️ Little Understood Trading Stratagem Quietly Siphons Money from Ethereum Users

MEV Bolsters Validator Rewards and Poised to Grow Post-Merge

By Samuel Haig

UNSEEN FORCE Most crypto users don’t even know it’s happening. It’s an unseen force, quietly and steadily siphoning money out of the marketplace and leaving unwitting Ethereum users none the wiser.

MEV It’s called Maximal Extractable Value, and it’s costing the average Ethereum user $1,200 over the last 21 months, according to data from Flashbots, a research project dedicated to solving the “MEV crisis.”

To read the full story subscribe to The Defiant newsletter.

But what is MEV, and why is it a crisis?

In a nutshell, MEV is an arcane stratagem used by bot operators and validators to capture the spread between transactions executed on decentralized blockchains. Using this crypto arbitrage, MEV players pocketed about $600M from Ethereum users since January 2021, according to Flashbots.

Total MEV extracted since Jan. 1, 2020. Source: Flashbots.

Despite MEV extracting hundreds of millions from unsuspecting Ethereum users, Flashbots promised that its MEV-Boost software would recycle a share of the profits captured through MEV back to ETH stakers.

Staking Rewards

Now that we are one week removed from The Merge, Ethereum’s historic transition to Proof of Stake consensus, data shows MEV is boosting staking rewards far higher than anticipated.

On Sep. 20, Hasu, a strategy lead at Flashbots, tweeted that validators using its MEV-Boost software are receiving an average block reward of 0.21 ETH. By contrast, validators who aren’t running the software are taking in 0.09 ETH on average, meaning MEV is bolstering validator rewards by 135%.

Figment, a staking service provider, estimated in July that MEV-Boost would bolster Ethereum validators’ rewards by between 25% and 50%.

Block Rate

On Sep. 19, Elias Simos of data provider Ratedweb, also shared that MEV-Boost blocks contain roughly 40% more transactions than other blocks. Simos added that no proposed MEV-Boost blocks have failed, compared to a 1.5% miss rate and 1.2% empty block rate from other proposers.

Bolstering windfalls for validators isn’t the only change in the Proof of Stake space — MEV is also creating a new group of players called block builders.

MEV on Ethereum used to be carried out by specialized bot operators working with miners under Proof of Work. Flashbots’ software used to allow profits to be shared between searchers and miners. MEV-Boost replaced miners with block proposers, and introduced block builders as a new type of validator.

Block Builders

The software separates validators that propose blocks from block builders. Builders are responsible for sequencing transactions, meaning they can identify opportunities for MEV extraction. The idea for ‘proposer-builder separation’ originated from Vitalik Buterin and the Ethereum Foundation last year, and there are ongoing discussions around building it into the core Ethereum protocol.

MEV-Boost requires that proposers request blocks from builders via Flashbots’ relayer. The relayer then sources the most profitable block from a network of builders while holding the block’s payload in escrow. When a validator signs for the block chosen by the relayer, the block is then pushed to the network and becomes visible.

Congestion

“Builders will likely monetize primarily through MEV,” tweeted Karim Helmy, formerly of Galaxy Digital and Coinmentrics. “Proposers will only choose builders’ blocks if their fees and MEV are competitive, and builders don’t get anything if their blocks aren’t chosen.”

The system protects the network against MEV-induced congestion. It does so by requiring that the validator to sign two different transactions should they attempt to propose a new block after viewing the payload, which would cause the validator’s stake to be slashed as a consequence.

MEV-Boost also offers enhanced profits for Ethereum stakers by allowing them to earn a share of MEV profits.

Accepted Blocks

But block building is getting centralized among a handful of entities following Ethereum’s transition to Proof of Stake. According to data from Mevboost.org, the top builder delivered 52% of accepted blocks, while the top five builders combined are responsible for 95% of blocks.

Further, Flashbots recently warned that the consolidation of block production into the hands of a few block builders could threaten to centralize Proof of Stake MEV. They warn that builders could be incentivized to pay large entities like wallets and decentralized exchanges for exclusive order flow (EOF), bypassing decentralized bidding and concentrating MEV profits for themselves.

“Uncontestable builders can keep most MEV value to themselves and have disproportionate control over the incentives of the network,” posted 0xQuinus, a Flashbots researcher.

But Stephane Gosselin, a Flashbots co-founder and the architect of MEV-Bosst, told The Defiant that paid orderflow is not yet a significant problem for Ethereum.

Major Issue

“Exclusive orderflow does not seem to be a major issue yet, but could become an issue in the future if decentralized orderflow systems are not developed,” he said, noting that Flashbots is already working on designs for decentralized alternatives.

Speaking at the Dappcon Berlin conference last week, Gosselin suggested that a new transaction type enabling a dutch auction for transaction inclusions called “fee escalators” could solve the threat of order book concentration.

The mechanism would allow the fees attached to users’ transactions to gradually increase until they become profitable for a block builder to include on-chain. This would provide “universal MEV protection for users” while also ensuring optimal fee pricing and execution speed, Gosselin argued on stage.

Orderflow

“Fee escalators can maintain the decentralization properties of the blockchain, while maximizing the value captured by the users and orderflow originators by minimizing the amount of MEV exposed,” he told The Defiant.

The majority of MEV profits are siphoned by targeting transactions executed on decentralized exchanges.

DEXes provide quotes to users based on the price that an asset was last traded in the most recently mined block. To ensure that their trades are executed despite the likely variance between the quote provided by DEXes and the price a given asset will trade at when the next block is mined, DEX traders select a slippage threshold — the allowable difference between the price quoted and the price at which a trade will be finalized.

Slippage

MEV bots and validators take advantage of this slippage threshold by reordering pending transactions or submitting their own transactions in a ‘sandwich attack’ to extract the maximum slippage as profit for themselves.

0x co-founder, Will Warren, describes MEV as “trading God mode” due to the amount of profits that can be extracted using MEV techniques.

In a recent appearance on The Defiant Podcast, Warren said that 0x-powered exchanges lost $27M lost to MEV in a single month earlier this year. 0x has since launched features designed to protect users against MEV.