MEV and the Dark Forest: Why We Need Privacy in Blockchain

Lurking in what is sometimes referred to as the “Dark Forest,” programmed predators seize value from unknowing victims as they attempt to perform blockchain transactions.

The concept of a “Dark Forest” originates from a novel written by Cixin Liu, describing a setting in which the discovery of someone’s location portends their inevitable doom at the hands of sophisticated predators. It is often compared to Ethereum’s hostile and murky block-building environment.

Hunting for victims in Ethereum’s public mempool, automated searchers prey on transaction orders as they are discovered in a practice called MEV, extracting value from their targets’ activities through frontruns and sandwich attacks.

In an interview with Blockworks on a recent Bell Curve podcast, Hasu, strategy lead at Flashbots, spoke with host Mike Ippolito about the necessity of building privacy mechanisms to protect users from MEV exploits.

The quest for privacy

“I would say there are three different camps in crypto, when it comes to privacy, that have very different motivations,” Hasu says. First on his list is the “ideologically-driven crowd,” motivated primarily by the principle of privacy as a human right.

Secondly, Hasu says, a more “academic camp” of curious, privacy-focused crypto researchers study zero knowledge, cryptography, and trusted execution environments in their quest for improving privacy.

“They are in it,” he says, “for the intellectual challenge.”

The third camp consists of mechanism and market structure designers, Hasu explains, who strive for privacy to build “credible mechanisms that work.” As strategy lead at Flashbots, Hasu identifies himself as one such builder.

Privacy, Hasu says, is “extremely important when you want to build a good market structure.” This is especially the case in the MEV supply chain, he says. “Privacy is very important because there’s a lot of informational value in the bids.”

“Just seeing the intent of a person, what they want to do,” he says, gives the searcher “a financial edge because you can frontrun them” and “do harm to them.”

Hasu believes that privacy is also crucial for successful collaboration in the building process. “We want validation and block production to be decentralized.”

Centralized actors who could monopolize the MEV supply chain would wield extraordinary power, he says. Instead, he advocates for a broader distribution of smaller searchers and block builders to collaborate in the block-building process.

“This collaboration doesn’t work without strong privacy because you always have to be very aware that others can steal your bundles and steal money from you.”

“Privacy is of fundamental importance for the MEV supply chain,” Hasu says, noting, “We couldn’t achieve our goals” without solving “the privacy puzzle.”

MEV-Share

Ippolito mentions the privacy innovations of Flashbots’ MEV-Share tool as an example, which enables users to “directly control which parts of their transaction they wish to share with searchers.”

Hasu explains that with MEV-Share, searchers are limited in their ability to see information about user orders, protecting the transactions from MEV exploitation.

“We reveal some amount of information, not enough to frontrun, but just enough to constrain the search space, so that searchers are not completely blind.”

The block builders in this system, Hasu explains, are in charge of “running this simulation and matching the orders.”

“For searchers, it’s a completely new paradigm,” he says. “Searching on private data is not what they’re used to, but we think it yields fundamentally better outcomes for users.”