Episode 291. Aired on Sept 6, 2023
See full episode on https://zeroknowledge.fm/291-2/

On this week’s episode, Anna Rose (https://twitter.com/annarrose) and Tarun Chitra (https://twitter.com/tarunchitra) chat with Mallesh Pai (https://twitter.com/malleshpai), Associate Professor of Economics at Rice University (https://profiles.rice.edu/faculty/mallesh-pai). They explore mechanism design in an economic context and Mallesh’s work around MEV topics - specifically on censorship in an MEV context and within Special Mechanism Group (https://twitter.com/specialmech/status/1674482046826328065?s=20). 

The discussion takes the team back into the topic of MEV, revisiting the proposer builder separation concept and the impact that this may have on the efficiency and censorship resistance of these systems. 

---------------

Here’s some additional links for this episode:

* Episode 183: CowSwap & DAO Tech with Gnosis’s Martin Köppelmann (https://zeroknowledge.fm/183-2/) 
* Episode 216: A Dip into the Mempool & MEV with Project Blanc (https://zeroknowledge.fm/216-2/) 
* Episode 243: Dive Back into MEV with Alex Stokes and Chris Hager (https://zeroknowledge.fm/243-2/)
* Episode 249: Impact of Tornado Cash: a Builders Perspective (https://zeroknowledge.fm/249-2/)
* Episode 269: Auctions with Kshitij Kulkarni, Matheus V. X. Ferreira and Tarun (https://zeroknowledge.fm/269-2/)
* Vitalik’s Blog Post (https://blog.ethereum.org/2015/06/06/the-problem-of-censorship)
* Special Mechanism Group’s Thread on Censoring Eth (https://twitter.com/specialmech/status/1674482046826328065?s=20)
* Block relating to Thread (https://etherscan.io/block/17586529)
* Special Mechanism Group’s Research Papers (with explainers) (https://www.mechanism.org/#spec-series)

---------------

zkSummit 10 is happening in London on September 20, 2023! Apply to attend now at https://9lcje6jbgv1.typeform.com/zkSummit10. 

Check out the zkJobs Board for the latest jobs in ZK: https://jobsboard.zeroknowledge.fm/

---------------

Bonsai, RISC Zero’s (https://r0.link/ZKpodcast) most anticipated product, allows developers to prove huge programs off-chain, roll them into one succinct proof, and verify anywhere with low amounts of gas.

Visit https://r0.link/ZKpodcast to learn more and sign up today for the Bonsai waitlist.   

---------------

Anoma’s (https://anoma.net/) first fractal instance, Namada (https://namada.net/), is launching soon!

The MASP circuit's latest update enables shielded set rewards directly in the shielded set, a novel feature that funds privacy as a public good.

Follow Namada on twitter @namada for more information and join the community on Discord at discord.gg/namada.   

---------------

**If you like what we do:**
* Find all our links here! @ZeroKnowledge | Linktree (https://linktr.ee/zeroknowledge)  
* Subscribe to our podcast newsletter (https://zeroknowledge.substack.com) 
* Follow us on Twitter @zeroknowledgefm (https://twitter.com/zeroknowledgefm) 
* Join us on Telegram (https://zeroknowledge.fm/telegram) 
* Catch us on YouTube (https://zeroknowledge.fm/)

In this podcast, we will be exploring the latest in 0 knowledge research and the decentralized web, as well as new paradigms that promise to change the way we interact and transact online.

This week Tarun and I chat with Malesh Pai, Associate Professor of Economics at Rice University.

We explore mechanism design in economic context and his work around MEV topics, specifically his work on censorship in MEV.

This discussion brings us back to the MEV topic where we revisit the Proposer-Builder Separation Concept, PBS, and the impact that this may have on efficiency and censorship resistance of these systems.

But before we kick off, I just want to remind you to check out the ZK Jobs Board this month.

With the ZK Summit around the corner, it's happening on September 20th in London, many of our sponsors have put their jobs on the ZK Jobs Board.

If you're looking for a new job or opportunity in the field, be sure to check it out.

Also a quick note, we're going to be taking a few weeks off of the show so that the team and I can focus in on the ZK Summit, But expect another episode later this month.

Namata natively interoperates with fast finality chains via IBC and with Ethereum via a trustless two-way bridge.

For privacy, Namata deploys an upgraded version of the Multi-Asset Shielded Pool circuit, otherwise known as MASP, which allows all assets, fungible and non-fungible, to share a common shielded set.

This removes the size limits of the anonymity set and provides the best privacy guarantees possible for every user in the multichain.

The MASP Circuit's latest update enables shielded set rewards directly in the shielded set, a novel feature that funds privacy as a public good.

Follow Nomada on Twitter, at Nomada, to learn more and join their community on Discord, discord.gg forward slash Nomada.

Ever feel like developing 0 knowledge proofs is a daunting task?

Well, the team at Risk 0 is here to remind you that it doesn't have to be that way.

Their out-of-the-box tooling allows developers to access the magic of ZK proofs from any chain without needing to learn custom languages or build custom ZK circuits.

Banzai, RISC-Zero's most anticipated product, allows developers to prove huge programs off-chain, roll them into 1 succinct proof, and verify anywhere with low amounts of gas.

Visit rzero.link forward slash zkpodcast to learn more and to sign up for the Bonsai waitlist.

Today I want to welcome Malesh Pai, Associate Professor of Economics at Rice University and someone who's working on mechanism design at the special mechanism group.

Yeah, and today we're going to be doing kind of a return to the MEV topic.

I'm going to add links to, I think we've done at least 4 episodes that touch on MEV specifically, and we're going to add these in the show notes.

And yeah, I think what we wanted to talk about in this particular 1 was the work that Malesh has been doing around this field, and also maybe a little bit more of a focus on MEV and censorship.

But before we start that, Malesh, tell us a little bit about yourself.

And what exactly are you actually working on when it comes to this?

So I'm like you said, I'm an associate professor of economics at Rice.

And my day job or my training is in mechanism design.

And mechanism design is kind of the engineering wing of game theory.

So game theory looks at, tries to study strategic interactions, and tries to understand how participants will play.

Mechanism design is the engineering wing of that.

So instead of studying a specific strategic interaction, we ask, how can you design strategic interactions to get the right kind of outcome?

So auctions, and Tarun was on the show about that a few months back, is a specific example of a broader set of sort of tools that we have in the mechanism design toolkit.

Now, around the pandemic, so I've always had friends who've been talking my ears off about crypto.

I sort of understood it from the background, but I wasn't super into it.

Around the pandemic, I decided that there was only 1 way I was ever going to learn this, which was to teach a class on it.

And I decided to teach a sort of undergrad economics class, trying to put together, how do we think of crypto from like a game theory perspective and the really hard part of doing an undergrad class is you really have to understand it and you have to be able to break it down.

That got me started on my journey, and then sequence of unlikely coincidences later, I'm here now.

When you say mechanism design, I guess auctions is a form of mechanism design, but what else would fall under that category that we might be familiar with?

If you know anyone who's a doctor in your family, they got matched after their MDs to go to a hospital using a mechanism that doesn't use any money, but does take preferences from people, both the people, the doctors, and the hospitals, and tries to come up with a match that has good stability properties.

We need to select a president, a governor, a mayor.

Different countries, different cities do things different ways.

And all of these are examples of mechanisms that take people's preferences, shove them together, and try and come up with a good outcome.

As you said it, as you said mechanism design, what kind of popped into my head was like incentive design.

But I guess incentive is the type of design with money usually, or with some sort of benefit.

I mean, even even like stuff like voting is a form of incentive design, because you care about your mayor, or you care about your president.

I think things like auctions are just, the incentives are your money and your profit, but mechanisms can be much more broad.

I mean, 1 thing I will say is I remember going to, 1 of the main conferences in mechanism design, like last year, EC, which I think Malaysia was a chair of this year or virtual chair.

I was virtual chair yeah, I Remember going to the mechanisms without Money conversation and talks and honestly I find that everyone, who talks about mechanisms without money is Lying to themselves so that they can, say that there's no money used because you're still met rising something you're Still giving like numbers and weights and solving some optimization problem, which is not that different than number.

You just don't wanna call the numbers money.

You wanna call the number some other like embedding of preferences into some space.

But I find the phrase mechanisms without money a bit duplicitous in the sense that they're both solve, end up solving some optimization problem.

It's just that we explicitly mean money isn't changing hands,

you still might value the stuff in money.

think mechanisms without money just means money doesn't change hands.

On the other hand, in crypto, money or things that are worth money often does change hands.

You're an associate professor of economics.

Is mechanism design traditionally in economics?

It was sort of a part of operations research.

So game theory and mechanism design started off in applied math and operations research, then moved to economics through the 80s, 90s, 2000s.

And then in the 2000s, late 90s, 2000s, the computer scientists joined in.

And now we have sort of EC, the conference that Tarun refers to, is now 1 of the largest places.

And it's sort of, so we have a lot of people in computer science working on this.

We have a lot of people in economics still working on this.

And the operations researchers have joined back in.

So there's a bunch of people in OR also working on like mechanism design questions.

And it's because all 3 fields, like economists think a lot about incentives, computer scientists think a lot about, well, you can think about incentives, but you need a mechanism that's computable or that can be efficiently computed and run.

And operations researchers are thinking about, okay, if you're gonna use this mechanism for a kidney, for kidney exchanges or things like that, which is things that they've been used for, you want to think about the actual logistics of these markets and how they weigh in with the designs that you've sort of proposed.

You are part of this group called the Special Mechanism Group.

So this is outside of your academic work, I guess.

So I'm a senior mechanism designer at Special Mechanisms Group.

And what this is, is it's a MEV research, sort of research and tooling outfit.

So we want to push forward the research and the thought space that comes around MEV.

And Ideally, we'd like to be part of sort of helping to solve these questions or at least make them better.

1 question that maybe more listeners who've listened to prior episodes on MEV might ask is what is the difference between, say, a special mechanism group versus Flashbots versus Frontier?

You know, how would you, how do you characterize the things that are, you know, different in your view?

Well, these are questions that go above my pay grade.

Up and down the stack, we care about decentralization.

We care about not having sort of a monopoly on any 1 part.

These are competing firms that we respect, but broadly, we also need sort of a collection of solutions and some kind of competition in the thought space around what kinds of mechanisms are we going to propose?

What sort of solutions are we going to do at different parts of the stack?

So I guess in terms of like things that are happening outside my purview, there's differences like Flashbots is pushing privacy and Suave, Frontier has its new builder, F1B.

We have nothing to announce on that front.

But from the research angle, it's just 3 teams of smart people who are thinking as hard as they can, trying to come up with solutions.

And hopefully, some of them will work and work well.

And I guess, I mean, I don't know if this feeds into the topic of censorship, but it seems like the censorship phenomenon is partly due to 1 of these groups kind of like winning and then making choices about what could be or not included.

I have always found it kind of funny, like, the Flashbots whole mantra was like, we're going to democratize it.

And yet, if everyone uses only their system, then it's actually not as democratized.

It doesn't it like there is still a controlling body in a weird way, but when you add competition, it's almost like they had to request competition.

Like, they're competitive, and yet their whole sort of philosophy won't work unless there's other players like themselves, right?

I guess part of the problem is this trade-off between we want competition and we want sort of a diversity, but a lot of the solutions that we propose are two-sided markets.

And two-sided markets inherently, like I guess you were referring to like MevBoost, if all the validators are selling their blocks on MevBoost, then all the builders have an incentive to bid on MevBoost.

And if all the builders are bidding on MevBoost, then MevBoost blocks are worth a lot.

So validators have an incentive to be there.

It's really hard to break out of these cold start problems.

So credit to them for actively looking for competition and trying to say, we need more democratization in this part of the space too.

Yeah, I mean, I think there's Maybe a more different take is that there's probably many different solutions to designing marketplaces here for me V, but you have a cost of Actually trying them out.

It's sort of like The the classical sort of like exploration versus exploitation trade-off where it's like which is for listeners I've heard of that that's sort of this idea of like suppose I have a hundred coins, and I go into a casino and there are 50 slot machines Each of them has a different expected value.

Like 1 slot machine might be minus 1, 1 slot machine might be plus 5 if I keep putting coins in.

So how should I figure out which slot machine to go to?

You have to play to figure out the expected value.

If I play too much at 1, then I won't have searched and found possibly a better 1.

And it does feel like the mechanism design landscape of MEV has a bit of that where, Like in order to learn how the mechanism works, you have to go implement it, but then you've already like caused the market to change by doing it.

And the only thing I'll add to that analogy is, at least in, just to show you how troublesome this is, it's at least in sort of Tarun's casino analogy, the casinos were, you know, each of these slot machines were paying out the same, well, paying out a fixed amount, there's some unknown, but true sort of, you know, plus 5 EV minus 1 EV.

Here, the EV changes based on how many people are using it.

So, you know, the casino, if a lot of people, like a given slot machine, if a lot of people are using it, maybe it's EV goes positive, or maybe it suffers congestion and it's EV goes negative.

So we've got to work through that entire thing.

Since we're on the topic of MEV, a question I like to ask everyone given that the thing is dynamic as you're pointing out is what is your current definition of me V?

You know in fact 1 of my co-authors on a paper recently Guillermo Refused to use maximal extractable value and wanted us to go back to minor, because he was like, he was like, we were not achieving the maximum anyway.

So yeah, I think like, as as you know, any good topic of research, no 1 agrees on the definition of it.

I guess I have a more functional definition.

Like I've seen memes going around, or you know, the 1 with the sniper and then another sniper pointing at the sniper and stuff and it's like, is it all MEV?

And yeah, the last guy says, yes, it always has been.

I just have a simple functional view, which is for me, sort of currently the interesting part about MEV is that there's this 1 person, the proposer, who down the line gets to decide what order transactions hit the blockchain.

And that ability that, you know, sort of everything sort of stems from that original sin, which is, there's 1 person with this monopoly power, there are valuable things happening on the chain, so ordering, removing, inserting transactions, all of these things have value, they can extract some of that value.

And then the questions are, who gets to influence that value?

What happens to sort of the overall economic efficiency of the chain as a result of this?

What do you make of the sort of MEV blocking techniques that have been proposed?

Things like the threshold decryption, where that role gets sort of altered.

1, this could seem, I'm, you know, I'm still too much of a professor.

I hate, I hate making broad sweeping statements, which makes me a bad podcast guest.

it really makes you bad at making memes, not necessarily bad at being a podcast guest.

Oh, I make the memes and I pass them along to my colleagues who are happy to post them.

I guess I saw this 1 really good meme about threshold encryption, which is privacy-based solutions aren't actually, at least the way I understand them, they aren't giving you, they aren't giving sort of creating this level playing field of privacy, they're just choosing winners and losers who gets to see something first.

So when it comes to threshold encryption, if it's like n threshold encryption, once n minus 1 people have in some sort of basic implementation, If once n minus 1 people have decrypted, now the last person has a latency advantage, they can decrypt know what's happening, and maybe take other actions before they reveal it to the rest of the world.

So my broader take is sort of These encryption schemes expand the possibility space of a mechanism designer or an incentive designer, but they don't make incentive problems go away in and of themselves.

You just need to think more carefully about where they've been hidden.

But do you still think that those should like does that mean don't bother with those solutions or does it mean we're definitely like put them

We like I said, we need a diversity of thought and we have like, some of these things might play in interesting ways with everyone's incentives.

So we definitely need to push on every angle before we figure out which ones work and which ones don't, especially while there's, you know, energy and lots of smart people trying to move it forward.

I just, I dislike the people who seem to think that if we just threw enough encryption firepower at the problem all the other problems Go away off their own just because you muttered the right sequence of incantation

Someone who's written a lot of papers proving this type of stuff.

a lot of computer scientists who like I feel like somehow think like oh because I've encrypted something somehow no one's able to Statistically decrypt things it reminds me of like the the the philosophical split between cryptographers capital C who like live in the ivory tower, and lowercase C, cryptanalysts who like try to break cryptosystems like practically.

And it turns out like, hey, they actually find lots of ways that have nothing to do with like the number theoretic guarantees I have to do with like you wrote to the wrong place in memory or like you Sent the same message 5 times in a row so I can figure out that from this this sender Like there's like lots of little Stuff that I think goes into this there's also this fact that like Fundamentally and I guess I've said this 5000000 times on the show so I'll say it only once so not waste airtime Fundamentally finance if we take the following axiom 1 All cryptocurrency things are Mechanisms that have transfers at every step because there has to be some transfer right you're paying gas you're paying something to a protocol your Protocols paying you then you sort of like inherently are in finance Land you're not in like this like mechanisms without money land you're just fundamentally in finance and once you're in finance land Finance just only works in the following way there has to be some public data and some private data the private data can be empty But the public data is non empty.

There's an interest rate because why would you put your?

Resources into something you don't know Any public information about right and the moment you have this public data the public data always says something that's private data and you have to like be very careful about that partitioning and you can't just be like I just threw everything into encryption and somehow I ignored that fact.

it's funny that you pull it into finance right away because Like, do you not think that it's some sort of weird hybrid thing?

Because it is, yes, there are these sort of like finance-like things happening always under the hood, but they're used in different dimensions, much more computer science, like network, I don't know.

Like would you still put it in sort of like that traditional finance framing?

I mean, also, like even what we call traditional finance is a whole bunch of computers and algorithms and infrastructure.

It's just traditional finance is evolved or it's matured to the point where that infrastructure is, you know, it's moved into the background, it's become invisible, so that the average user or the average observer of that traditional finance doesn't see all the nuts and bolts.

Crypto is relatively new, those nuts and bolts are still there for everyone to see.

And that's why everyone's thinking about, when you do a transaction, you think about, okay, which chain, which pool, which swap, what transaction, what gas fee, all those things used to exist in traditional finance.

I used to have to think, or not me, but maybe my dad or my grandpa or whatever, had to think about, what broker should I call?

How competitive are their courts gonna be if they ever wanted to trade a stock?

My grandpa didn't trade stocks, but that's a different story.

Well, I think it is fundamentally still finance.

It's just different in that the decentralization aspect and the continuous time aspect in some ways

Change how the math looks like in the same way that you know if I perturbs kind of like an economic system By perturbing assumption in an economic system.

I can change the number of equilibria I can change how hard it is to get to an equilibrium and Cryptos clearly done that like in some ways the decentralization aspect changes the set of equilibria.

But inherently, you're still trying to figure out, you know, like, these financial properties, like, I think that's, in some ways, inherently, why all of the kind of like, let's just say the the fools Russian venture boom of 2021 into like NFT and gaming stuff led to like very bad games or very non usable social apps.

Because everyone thought like, hey, we're gonna like use this thing that's fundamentally about finance and do something very Non-financy with it and we're gonna just shove in the finance and hope that you know it works And it doesn't really it doesn't like work that way.

It's it's kind of like the cryptographers just like Pretending that like put throwing everything into a ZK shielded pool means like finest all the you know malicious effects go away.

It's this naivety that reminds me of like being a freshman in college.

Well I mean you just associated though like the NFT YOLO pile in to ZK which I think is...

1 is highbrow naivety, 1 is kind of like animal senses naivety.

you actually think then is there nothing, this is like sort of a question maybe to both of you but kind of a little more to Tarun, is there nothing new under the sun?

Is everything you're seeing sort of just a replica of these finance type principles?

And like is MEV, does MEV exist in traditional finance?

Like like the point is is like the assumption that there is Kind of like a single entity that controls that Sequencing and inclusion thing means like okay.

There's no point in looking at all the different types of equilibria or mechanisms.

Like in some ways, the fact that this is decentralized basically means that, you know, you have many different possible equilibria that can come out of this.

And you know, 1 way of, you know, a very crude way of measuring like how much the equilibrium of a system change is like What's the ratio in some sense of like the best case social welfare to the worst case social welfare like which?

Equilibria gives you gives everyone highest utility Which equilibrium gives everyone lowest utility on average and like how much what's the ratio between that like how much worse is it?

You know it's the the worst than the best or vice versa?

And in the case of the centralized person, it doesn't matter.

There's 1 equilibria, which is like whatever they chose to include or not include.

Some of those equilibria could be worse than the centralized equilibria.

Some of those equilibria could be better.

And the question is like, how do you constrain the mechanism So that that ratio is kind of well balanced.

And like, I think that's the part where like economists kind of poo poo crypto in some ways because like, they don't see that there's anything new.

But but like, fundamentally, I think that's really the thing is that like, you know, your choice of mechanism does change this welfare gap.

You know, the traditional finance welfare gap is just, there's no gap.

There's just the 1 thing that the venue operator chooses.

I'll add a couple of things to that, which is, 1, I mean, Is there anything new under the sun?

But we also see echoes of the same thing in the past.

So for instance, what we call MEV now, there's a version of that, well-documented version of that, that plays out in TRIAD 5, which is latency games.

So high-frequency hedge funds pay a lot of money to get their computers as close as possible to the exchanges' computers so that they can get orders in quicker and exploit some informational advantage.

It's, I mean, it's first come, first serve, but who gets to be first can be determined now by milliseconds.

So literally, they're like, okay, we first want a fiber optic cable that goes from Chicago to New York, so I can see the court on Chicago when I trade in New York.

And no, wait, actually, the fiber optic cable is too slow Let's use a microwave that bounces off the earth and then if that no wait, the microwave is too So let's use a fiber optic cable that goes through the middle of the earth.

so I would actually dispute and and maybe this is a bias because I used to work in that industry But I I would I would dispute that it's very similar to me V There's a couple couple reasons for that the first is the fact that you don't control the order types like the CME tells you like here's a limit order.

Here's a go fuck yourself market order and Then that's it right like you can't really program that much around that You can program a lot around like when you send orders, and how you know like how how you aggregate orders But you can't really create new orders and 1 of the interesting things about me V searchers Right is that they like write these throwaway contracts that like try to basically you could argue they're creating order types and destroying order types as needed.

Created security like objects and destroyed them.

And this creation and destruction thing on demand doesn't exist anywhere else.

And that actually changes the set of kind of out large scale outcomes quite a bit.

Sure, and let me just, maybe I should walk that back a little bit.

So, I mean, I think a lot of what makes the crypto MEV space interesting is there's just such a wide design space.

There's also a lot of flexibility, like it's not an ossified space where like, if I had a better market microstructure, and I wanted to propose it to the New York Stock Exchange, I don't know, like I could put together a consortium of like 50 famous professors with 8 Nobel Prizes and spent 5 years trying to lobby Congress and the New York Stock Exchange and still get nowhere.

Whereas here, it's literally like I call up a few searchers, I call up a special mechanisms group, I come up with a few ideas, we code up something, and it could be off—you know, up into the races, you know, after a weekend of coding.

So that's what sort of what makes it exciting.

There's definitely a lot more richness in this space.

But some of the ideas that sort of how trades happen respond to incentives.

So the idea that like, if there's a trade on a public mempool and it's front-runnable, someone will try to front-run it, someone will back-run it if it leaves an arbitrage open, those things versus some, HFT will do a statistical arbitrage between Chicago and New York.

I just feel like at some economic level, those 2 are conceptually similar, even if how they play out is kind of different in the mechanics.

Yeah, but I still will say, and maybe this is a good way to dovetail into your research the idea that you can create destroy add remove versus just like Here's an interface and like that's it you can't change it.

Yes the idea that the the users are also changing the types of structure that they're interacting with It's very different than normal finance like versus like tech where it is You know is built off user generated content so the the user sort of influences the network in some ways that just never really exists in finance to be honest It only exists in the sense that like okay like yeah The exchange has like a board and the board has a bunch of the market makers on it fine whatever okay fine they can influence that a little bit, but they can't really influence that much yeah, other than like fees and rebates and stuff and It's not like they could like wholesale be like hey We're gonna actually get rid of the order book and put an AMM Mm-hmm like something like that can't happen and this idea of user generated finance is what I think crypto offers.

But that's the thing that the Silicon Valley people don't get, is that it's not, that doesn't mean, user-generated finance doesn't mean Minecraft 2.0 is gonna come out of that.

It might look just very different and they're unwilling to believe that.

Yeah, I think that's what makes it exciting though.

Like, there's this sort of richness of stuff that you could do, whereas everything is ossified and tried-fi.

I hope I've memed user-generated finance into existence because I think that's like kind of something that's never, you know, that's something that people haven't, you know, really focused on.

See all Zero Knowledge transcripts on Youtube

Episode 291 - MEV, Mechanism Design & the Censorship Problem with Mallesh M Pai