Welcome to David's takes! A new format with David and RSA where we explore David's weekly articles in 30 minutes or less.

This week, we’re diving into one gigantic metaphor. Ethereum as a reserviour of liquidity. So sit back, relax, and enjoy "A Hitchhiker's Guide to Riding an MEV Bot".

Read David's article here: https://www.bankless.com/a-hitchhikers-guide-to-riding-an-mev-bot/

If you're looking for a more technical explanation check out our recent episode with Dan Robinson: https://youtu.be/h4gzZib0j48

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TIMESTAMPS
0:00 Intro
1:00 Why did David Write This?
6:17 A Reserviour of Liquidity
9:25 The Ships Metaphor
13:36 Offchain Signed Orders
17:17 Intents
22:07 Dutch Auctions
24:06 Impications Of This?
28:25 How This Impacts Bridges
30:30 What's Left To Unpack?
33:15 Closings And Disclaimers
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https://www.bankless.com/disclosures⁠

If you look at the original Xbox games, the graphics sucked.

And then if you looked at the late stage Xbox games, the graphics were like orders of magnitude better, but it was the same hardware.

of Ethereum layer improving what we can do with the hardware layer of Ethereum.

Hey, Bankless Nation, we've got a new show format for you.

It's a deep dive into a crypto rabbit hole that David and myself are exploring.

It's going to be our punchiest episode ever.

It's pretty ambitious if they were going to do this in 25 minutes or less.

Each of these episodes will focus on 1 specific theme.

On today's episode, we're talking about an article that David published recently in the Bankless Newsletter.

It's called, A Hitchhiker's Guide to Riding an MEV Bot.

a while we go down, collectively, the crypto world goes down the crypto rabbit hole, which we're all carving out.

We find something while we're digging in the crypto rabbit hole.

And what we have found recently is this, what the world of the MEV industry of crypto is calling intense.

And the idea here is that this brand new fertile field that we've just unlocked could be real big, real big.

And the why this is such a big deal and why I wrote a whole entire article about this is that an intent in theory inverts the relationship that the average Joe swapper on Ethereum, the average on-chain swapper, has with the MEV vertical.

Right now, there's an adversarial relationship with swappers and MEV.

MEV wants to eat up the value of all the swappers and the swappers wants that to not happen.

And then with Intents, we actually can make these people be on the same team and actually get them to collaborate and cooperate, which is part of the bull case of crypto is learning how to align incentives.

And so Intents is a mechanism for swapping that aligns incentives between swappers and MEV.

And that is the thing that we have potentially discovered while we are going down the crypto rabbit hole.

So we're going to begin exploring it in today's episode.

But first we disclose nothing big or specific in this episode.

UniswapX is a subject of today's episode.

Uniswap has previously been a sponsor on the Bankless podcast.

This is my time to remind you that we are long-term investors.

There's a link to all bankless disclosures in the show notes at all times.

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For all you DeFi swappers out there, this 1

Uniswap X has opened up a brand new landscape to play in, and it's the world of intents.

This is where those who employ the swapping ability get to team up with the evil MEV bot army, and they get to band together to discover the most efficient liquidity route through the Ethereum landscape.

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So thank you to all the sponsors that support Bankless and all the podcast editors, newsletter writers and operations managers who make the bankless organization the best that we can be.

And for all the listeners out there who listen to the mountains of content that we turn out each week, especially this 1 right here.

A hitchhiker's guide to writing an MEV bot.

I think it's the best way to explain some of this stuff.

And so I start this article with this metaphor of Ethereum as just 1 gigantic ocean of liquidity.

If there's 1 activity that we do on Ethereum, it's swapping tokens.

Like Ethereum, if you want to be ultra reductive and kind of make a jab at Ethereum, you'll just call it like 1 gigantic DEX.

It's like it's a marketplace for marketplaces.

But really Ethereum just is a place to swap tokens and assets.

The term ocean is kind of interesting too, because ocean implies some depth, right?

You can have more shallow parts of the ocean.

And that relates to this term called liquidity.

And we all know what liquidity is in crypto.

It is just the how deep market like order books are on an exchange or how much assets are in a Uniswap liquidity providing position.

There's this like fundamental relationship that, like at a very deep level that water and liquidity and assets and markets all have with each other.

It's because people way back when discovered that there's a relationship, a pattern between like actual water and the liquidity of market structures.

And so this is why I call Ethereum a reservoir of liquidity.

It holds a bunch of liquidity in Uniswap AMMs, in like, you know, God forbid, Ether Delta once upon a time.

0 X and actually the originator of off-chain order, 0x.

So like think of Curve as like a very big lake or maybe a Curve is an ocean.

We got Velodrome, which is a smaller, little tiny ocean on a layer 2, but really with you summate everything, Ethereum is like, you know, the earth with all of its oceans put together.

And in order to navigate across this landscape of Ethereum, if you view the Ethereum as a landscape, which you ought to, because like every single contract address or your Ethereum address is a destination and in order and then you also you Also have tokens inside of your addresses and each of those tokens have addresses little destinations all across this world and we need Sometimes to do our transacting we need to go from place A to place B, from token contract address A to token contract address B.

And this is what the activity of swapping is.

You're going, you have USCC in 1 contract address and you need to turn it into another token or Ether, which is at a different contract address so like we're putting this into metaphors we actually need to travel across ethereum's liquidity pools pools of liquidity and we actually need to do something we need to make a transaction to get that job done for us And this is like starting to set the scene for like what is this big metastructure of Ethereum.

But we have these liquidity pools with different assets all over Ethereum and then we have to go across these pools in order to get our jobs done.

And that's kind of where I start off this article with this metaphor.

And you are using so if you picture Ethereum as this ocean of liquidity, right?

In the rest of this article, this kind of resonated with me.

You use this metaphor of ships and you say this at the beginning.

As swappers on Ethereum, we're about to upgrade our ships, moving from gas guzzling clunkers that blast through the swells to sleek yachts Oh yachts that stealthily send you where you need to go without disturbing the waters You've got this image here and on the 1 side it says on chain decks trade And this looks like some sort of I don't know standard ship that is you know going through the ocean It's yeah, it's a tugboat or something.

It's like it's like a bulldozer going through the water just like pushing the water around it, just leaving a massive wake.

It's got this like messy, like a pipe that's just burning oil at the back.

It is just brute forcing its way through the water.

All right, and you're calling that the on-chain dextrade, which is now, that's where we live.

Yeah, I use Uniswap, that's an on-chain dextrade.

So you're saying that's like a big freaking tugboat.

then you've got this other side Juxtaposes you say off-chain signed order and I don't I have no idea what I'm looking at, but this looks like a stealth yacht It's making it's going through the ocean, but it's making very little waves, you know, very little movement, not much wake.

And you're calling that the off-chain signed order.

It looks like also that, you know, the scene is at night.

So something stealthy is implied here as well.

these images are actually made with mid journey just to aesthetically please really viewers Yes,

I could tell the second 1 was I didn't know the first 1.

Yeah, the first 1 definitely well Think about how big all those wakes are.

I think the prompt was like metal heavy tugboat with massive wake or

you pull up another tab and type in C shadow IX 529.

They have all the ship, this is a plane, this is a jet.

This is a stealth jet, 1 of the first stealth jets ever.

And the angles on this ship are meant to absorb radar and also not leave a wake.

And so they also were charged with building this Navy Sea Shadow ship, which is like kind of the same version, but as a ship.

And it's built in this way that is, A, it absorbs radar so you can't see it.

And B, also doesn't leave a wake because it's like It's great if it doesn't show up on radar, but if you could just see the wake of this ship that it leaves behind, the white churny waters behind it in its path, then all of your stealth technology goes to nothing if you just leave a wake.

So it's also built in this way to cut through the water so that you can't detect it as it goes from point A to point B.

And then on the other, and then that's supposed to be in contrast to like this tugboat, which is like, I don't give a F, just like get out of my way, liquidity.

I'm pushing you aside and I'm brute forcing my way.

And so these represent 2 different strategies for crossing Ethereum's waters.

And now remember, Ethereum doesn't do like, doesn't have an army.

And so you're allowed to do as much MEV as possible, which is why like, you know, in the normal world, we have like armies and militaries to protect us.

But in the Ethereum world, which doesn't have an army and anything is fair game.

We actually need to be more adversarial and how we choose to cross its liquidity oceans because there's no army to protect us.

And so we all need to develop strategies that are protective of our payloads which are our swaps.

These these metaphors these analogies are starting to stack up here.

Before we continue on that, we'll park this idea of 2 different ships, an on-chain dex trade, messy, huge wake, it's just pushing the water out of its way.

Off-chain signed order, stealthy, sleek, cutting through water, below radar, undetectable.

What is an off chain signed order and what does that have to do with what we were talking about in the intro, this word intense?

Yeah, so an off-chain signed order stands in contrast to an on-chain dex trade.

So an off-chain signed order, it's actually pretty similar to an on-chain dex trade except that you don't actually execute it as a transaction.

And because of that property, you can construct your transaction differently than if you had on like Uniswap or SushiSwap or Curve or anything that's an on-chain dex trade.

So with an on-chain DEX trade, you put in certain parameters that are like fixing variables in your transaction, because if you don't fix them, then the MEV bots come and eat them.

So with our tugboat, who's just like bulldozing through Ethereum's liquidity, it's a lot of things are hard-coded into them because if they're not, then the MEV monsters will get in and eat that transaction up.

And so like, what am I talking about here?

We are setting like, hey, we're only accepting 3% slippage.

And then, and we're also going to go through this route.

And so Uniswap actually as a product and so does SushiSwap and, you know, anything that has an order router, an order router, think of that as like loading up your ship your tugboat your slow heavy tugboat with like a predetermined Path through ethereum's liquidity pools to get from point a to point b and so you're saying this is my path and I'm only going to allow for 3% slippage to get there.

We're hard coding all these parameters in, in order to make sure that when we get across this path, that MEV monster's only ate like 3% of our transaction, or 2%, whatever we set our slippage to.

But these are parameters that we're all encoding into our transaction to protect us.

It's like adding panels to our ship, big metal panels to our ship.

And it actually, every single parameter that we hard code is also an additional gas cost.

And that's just what it takes for individuals to get across Ethereum if they are going to construct their own ship using an on-chain dex trade.

We need to get across somehow, so we gotta build our own ship, and that's what Uniswap and any order router does when they help us make a transaction that is an on-chain dex trade.

We are basically custom building our own ships.

An off-chain signed transaction is very, very...

And so all you're doing when you sign an off-chain Intent and off-chain just means that you're not actually going to execute this as a transaction You are going to with your private keys sign a transaction but not broadcast the transaction with an intent

Yeah, so like, you can take an Ethereum transaction that you would broadcast to the mempool, and then you can just sign it and not broadcast it to the mempool.

And that becomes an off-chain signed order.

So like an off-chain signed order is like a precursor to a transaction that's on-chain, but it does not become a transaction on-chain by you.

And so what do you do with this off-chain signed order is that you just state your intent.

I have 2, 000 USDC on the Ethereum layer 1.

I would like 1 Ether on the Ethereum layer 1.

Or I actually would like 1 Ether on Optimism or Arbitrum or ZK-Sync or whatever.

You just sign what you want and your minimum amount of desired tokens on the other side.

And so you're saying I've got 2, 000 USDC and I will accept no less than 1 Ether.

And anybody who can service this is free to take this transaction and execute it.

So that's why we call these intents, right?

So I intend to provide 2000 USDC in exchange for 1 ether.

And you kind of broadcast that you're not broadcasting that on chain.

You're broadcasting this to all of the MEV bots.

You're broadcasting it to the MEV stack, which is usually the thing that you're trying to hide from.

But instead, you just actually tell them what you want.

So you have MEV arbitrageurs, like liquidity pool balancers, sandwich attackers.

So if 2 different pools on Uniswap and SushiSwap are unbalanced, then they'll reorder it.

The entire spectrum of possible arbitrage opportunities are encoded into MEV bots on Ethereum, around Ethereum.

They're like this swarm of things around Ethereum that make sure that everything inside of Ethereum is maximally efficient.

It's like it's everything that is relevant to markets.

Whether these are like market makers or bots or some combination.

So you know it's anyone who is willing to make a profit on this exchange here.

And part of this stack is it's probably becoming very, very verticalized.

So market makers and MEV bots are probably collapsing into the same, same vertical, for example.

So this just turns into a vertical of like the efficiency checkers of Ethereum markets.

So like if anything is disturbed in Ethereum, then they will rebalance it.

And this is why we go back to this metaphor of liquidity and disturbing or, here's a word, dislocating pools.

Dislocating Ethereum's pools or liquidity is like when you take 2, 000 USDC out of the Uniswap pool and you put it into the Uniswap Ether pool, Like you're taking, you take water, scoop it up out of 1 pool and you dump it in another pool because you just made a trade.

Well all of a sudden you've dislocated Ethereum's pools.

And that is like signals to MEV boss like, Ooh, chaos, disturbances, I need to go consume that chaos and rebalance the pools because of that's what arbitrage is.

So this is why the tugboat that's like blasting its way through the waters of Ethereum, because it's just a super inefficient ship, it like attracts every single MEV bot under the sun because it's creating imbalances in its wake.

That's why you don't want to leave a wake because you attract MEV bots.

And so all of these custom built ships that we're making when we make a transaction on Uniswap or SushiSwap, we're just using, we're making like a one-time ship to get us from point A to point B, and it's like super messy and heavy and laden and gas inefficient because we have to layer on all these MEV protection mechanisms or else we'll get eaten.

They've rebalanced dislocated pools, And this is why there's this antagonistic relationship between on-chain DEX trades and MEV bots.

They want to absorb that chaos and turn it back into order.

Going back to that example, if you have 2, 000 USDC and you want 1 Ether for that.

So say you broadcast your intent to this bot network that you're saying to buy 1 Ether on Optimism using 2, 000 USDC.

You start your offer at 2, 010 USDC and ratchet the order increments downward to to 2000 USDC with this a million ships appear to inspect your offer all In a standoff with each other The order begins at 2010 USDC, but that's ludicrous.

ETH isn't worth a tenth of a penny more than

where in some other market that's trading

course and this process goes goes down until some You say some bot finds the price point at which it wants to fulfill this order, and then suddenly, pop, out of the swarm, a single ship emerges, darts forward, grabs the payload, and stuffs it inside of it and zips off to the horizon to fulfill the job.

What was the execution price in these made up numbers examples?

All the MEV bots update their price model for ETH, and now we have the market price of ETH.

So I'm glad that this like little scenario that I made up made sense to you because I actually effed up and got the numbers wrong.

And so I should have said like we start the price at $1, 990 and then it increments upwards until right until a bar actually fulfills that But like the idea

This is the Dutch auction this is the part that Uniswap X has brought to the Intense landscape is this idea of a Dutch auction.

It's like you start selling something and you start really high traditionally.

So like saying you're selling a widget for 10, 000 units and then you start incrementing down like 10, 000 units, 9, 000 units, 8, 000 units until someone buys it.

And the person that wants it the most that is going to pay the highest price is Going to buy it first and that's what the elegance of a Dutch auction So this is what we're doing This is what you know swap X is doing with its off-chain signed orders And so it creates an off-chain signed order that is also imbued with a Dutch auction in it.

And so swappers want the best price and using a Dutch auction, we can naturally find the MEV bot that is the best, most suited MEV bot for that 1 particular job that is better than all the other MEV bots for that 1 particular job to fulfill your order at the best possible price.

And the mechanism that allows for this is by not actually hard coding and entering this on-chain, but allowing this to be just broadcasted across the landscape of MEV bots and saying, hey, I have this desire for this thing to happen.

I will pay the minimum amount necessary according to the most efficient MEV bot that can execute this order to get this job done.

And so you invert the relationship between MEV trying to eat you and MEV being a service provider for you.

You've got this analogy of like Paul Etrades from Dune riding the sandworm here and you say instead of fighting MEV bot monsters, we ride them.

It's basically what you're doing is you're using all of these sandworms Essentially and you're using them for your own purposes When normally they just want to kind of eat you and steal your lunch instead you're kind of harnessing the power of these things to give you the best price on a trade.

And that's all Uniswap X is, essentially.

So what are the implications of this, David?

It seems like now we can start to fulfill these types of orders off-chain.

Does that have an impact on how much liquidity is actually on-chain?

Does that create kind of a stealth, non-Mempool-style transaction market?

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David's Takes: A Hitchhiker's Guide to Riding an MEV Bot