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Introduction to Manifold Finance-mevETH and openMEV

2023-11-17 12:18 EDUCATION
Manifold Finance is a middleware DeFi protocol focused on improving connectivity between DeFi products through trade execution, on-chain protocol extensions, and other services. Two of their key offerings are mevETH and openMEV. This article explains their features, offerings, and what sets them apart from other protocols in the liquid staking space.

What is MEV?

https://chain.link/education-hub/maximal-extractable-value-mev

MEV stands for "Maximal Extractable Value". Some key points about MEV:

  • MEV allows miners to extract more value from each block beyond the standard block reward.
  • MEV profits are enabled by the ability of validators/miners to reorder transactions in blocks before mining.
  • Strategies like front-running, sandwiching, and arbitrage extract MEV at the expense of users

Size of the MEV Market

https://www.forbes.com/sites/jeffkauflin/2022/10/11/the-secretive-world-of-mev-where-crypto-bots-scalp-investors-for-big-profits/?sh=350dbd2a2d8d

The total MEV extracted from Ethereum since 2020 is estimated to be between $550 million and $650 million.

Adding other blockchains like BSC and Solana, total MEV exceeds $1 billion in profits.

https://explore.flashbots.net/

The image above is taken from the Flashbots dashboard.

Flashbots aim to create a permissionless, transparent, and fair ecosystem for MEV extraction while protecting users from frontrunning and other MEV-related issues

REV stands for "Realized Extractable Value". This refers to the actual value extracted from the Ethereum blockchain through MEV strategies and opportunities

We can see how, in the last 30 days, 22,136 ETH of REV was extracted and accrued to the relay service providers for facilitating MEV extraction

This begs the question, is it possible for the end-user to profit from these techniques?

What is mevETH?

mevETH is a liquid staking derivative for Ethereum that accrues rewards from staking and MEV. Some key things to know about mevETH:

  • Developed by Manifold Finance and launched initially with 25,000 ETH from Cream Finance
  • Non-custodial liquid staking receipt that offers high potential rewards through MEV
  • In addition to earning staking rewards, mevETH also acquires a portion of the MEV that Manifold Finance is able to extract through its services.
  • Non-rebasing design means the balance will not decrease, allowing easy integration with DeFi
  • MEV strategies include arbitraging peg between ETH and mevETH and creating custom validator blocks

MevETH Reward System

Existing Liquid Staking protocols provide staking rewards and the ability to restake liquid tokens to stack additional rewards

In the case of mevETH, combining three yield sources provides an innovative model to generate attractive returns compared to other liquid staking protocols.

mevETH rewards = Typical Staking Rewards (around 5-7% APY) + openMEV’s MEV extraction profits (around 5%+ APY) + Restaking for additional yield

What is openMEV?

OpenMEV is an open-source protocol that aims to provide a platform for communication between blockchain validators/miners and users to facilitate fair maximal extractable value (MEV) strategies

Key aspects:

  • Allows users to communicate preferred transaction ordering to miners to mitigate MEV attacks
  • Provides infrastructure for secure transaction routing and execution via SecureRPC
  • Aims to make MEV strategies more accessible, convenient, and secure
  • Captures MEV profits and distributes them back to users to offset losses from MEV attacks
  • Uses a batch auction-based matching engine to execute MEV orders
  • Provides SDKs for protocols to integrate OpenMEV and protect users from MEV extraction.
  • Part of a broader effort to create a transparent and fair MEV ecosystem, avoiding issues like miner centralization.

In summary, OpenMEV is a platform that facilitates communication channels between miners and users to enable fair MEV strategies while protecting users and returning some profits.

OpenMEV in Action

https://forum.sushi.com/t/sushiguardrouterv01-formal-proposal/10785
OpenMEV and SushiSwap partner to recapture MEV profits and distribute them back to traders and the protocol, providing benefits through rebates, incentives, and frontrunning protection.

Here’s how it works:

  • OpenMEV provides infrastructure that allows SushiSwap trades to be routed through validators that partner with OpenMEV.
  • The OpenMEV matching engine aggregates and batches SushiSwap trades enabled for "SushiGuard". This allows OpenMEV to optimize transaction ordering and extract MEV profits
  • These MEV profits, plus gas fees, are returned to eligible SushiSwap traders after their trades are executed. This rebate system allows traders to get paid to trade on SushiSwap
  • OpenMEV uses techniques like flash loans and back running to capitalize on arbitrage opportunities between SushiSwap and other DEXs
  • The on-chain "SushiGuard" router contract handles rebate payments and profit distribution. Profits go to the SushiSwap protocol treasury to fund incentives.
  • OpenMEV provides frontrunning protection and privacy for SushiSwap trades routed through its infrastructure.
The integration aims to maximize rewards for traders and the SushiSwap protocol while protecting users from predatory MEV extraction.

How mevETH and openMEV Generate MEV Yield

MevETH allows stakers like Alice to receive additional yield from MEV profits. openMEV generates these profits by extracting MEV from trades while protecting users like Bob. The two products generate and distribute MEV yields across the Ethereum ecosystem.

Here is a hypothetical workflow:

  1. Alice stakes 32 ETH to receive mevETH tokens from Manifold Finance.
  2. Bob swaps 10 ETH for USDC on SushiSwap using openMEV.
  3. openMEV detects Bob's trade is profitable for MEV extraction. It sandwiches Bob's trade between two transactions to profit from the price impact.
  4. openMEV routes the transactions through Manifold's SecureRPC to a validator.
  5. The validator includes the transaction bundle in a block, extracting MEV profits.
  6. The MEV profits are split between the validator and Manifold Finance.
  7. As an mevETH staker, Alice receives a portion of the MEV profits generated by Manifold Finance.
  8. Meanwhile, Bob had his transaction protected by openMEV and also received a rebate on his trading fees.

MevETH vs stETH and rETH

Lido (stETH) and Rocket Pool (rETH) are industry leaders in the liquid staking landscape. So how does mevETH compare against them?

Overview

  • mevETH is a new liquid staking derivative that provides additional yield through MEV strategies on top of staking rewards. It uses a non-rebasing token model.
  • stETH is the dominant liquid staking derivative from Lido with the highest market share. It uses a rebasing token that automatically increases in quantity to pay staking rewards.
  • rETH from Rocket Pool appreciates paying staking rewards. It is focused on decentralization.

Yield

  • mevETH offers the highest yield potential through MEV extraction, estimated at around 8-12% APY.
  • stETH and rETH offer more standard staking yields around 4-6% APY.
Risks

  • mevETH likely carries higher smart contracts and MEV-related risks as a newer derivative.
  • stETH and rETH have lower risks as established and battle-tested protocols.

Risk associated to mevETH and openMEV

Integration Risks: mevETH is integrated with Manifold's new MEV protocol. Any issues or vulnerabilities in this protocol could potentially impact mevETH

Market Risks: The value captured by OpenMEV is subject to the volatility of the crypto market. This could impact the returns users receive from MEV opportunities

Smart contract risk: As a new protocol, mevETH could have vulnerabilities in its code that could lead to exploits or loss of funds. Thorough audits are needed.

MEV reliance: mevETH's yield is highly dependent on MEV profits. Changes in the MEV landscape could impact returns.

Because of how closely mevETH, openMEV and the overall MEV Protocol are tied together, a vulnerability in the infrastructure of these projects could have a ripple effect affecting end users and stakers.

Executive Summary

Distributing MEV profits more evenly helps decentralize the Ethereum ecosystem. MEV liquid staking may improve yields, but on the other side, it may also impact centralization, instability, frontrunning, and ethical risks that need to be carefully evaluated. Approaches that distribute MEV profits more evenly and adhere to a decentralized network of nodes can mitigate some of these concerns and create new opportunities to generate additional yield for liquid staking protocols. mevETH and openMEV aim to reduce the centralization of profits from MEV techniques and create a healthier, more distributed network.