Sep 22, 2022 - Economy

Miner extractable value startup Skip raises $6.5 million

Illustration of a pair of scissors about to cut a velvet rope barrier.

Illustration: Aïda Amer/Axios

Infrastructure startup Skip, built to enable companies built in blockchain ecosystems to bid to move their transactions up in validators' queues, has raised $6.5 million from brand name crypto VCs.

Why it matters: Miner extractable value (MEV) arose as a theme in 2021. It was discovered as a way for traders to take advantage of blockchain transparency and steal others' savvy trades. Since then, it's developed into, at least in part, a way to improve the user experience of some aspects of using cryptocurrencies.

  • It's complicated.

What they're saying: “Skip’s goal is to give chains and their communities a toolkit that allows them to decide how MEV is extracted and where profits accrue," Barry Plunkett, Skip's co-founder, said in a statement.

  • It is starting with the Cosmos ecosystem, but the company plans to bring its offering to other blockchains with similar architectures.

Of note: Investor's in Skip's round include Bain Capital Crypto, Jump Crypto, Galaxy Digital, Robot Ventures and others.

Zooming out: Miner extractable value (now often called maximal extractable value, as well) is a very strange aspect of the cryptocurrency industry, one that only became topical in late 2020, when researchers found traders collaborating with Ethereum miners for malicious reasons.

How it works: In brief, there are three steps to any blockchain transaction:

  • Someone composes the transaction and offers miners a fee to pick it up.
  • That transaction gets broadcast to the internet (this is the crucial part).
  • And then the transaction actually gets finalized when it is added to Ethereum ledger after it's entered in a block that's encrypted into the blockchain.

This is how good trades would get "stolen" with miner extractable value (MEV). Avaricious traders would write software that would monitor transactions broadcast but not yet added to the blockchain.

  • They would then copy transactions that looked profitable, but broadcast it with a much higher fee offered to miners. That way, the copied transaction would get picked, making the one it copied now worthless.
  • Eventually, this model was formalized by miners as a private, elite market.

By the numbers: Flashbots has tracked $675 million in MEV on Ethereum.

Of note: Most of that would have been earned when Ethereum was a proof-of-work blockchain. Skip is working on Cosmos, an ecosystem that has been proof-of-stake from the start.

  • Despite the two different architectures, MEV still works much the same. It's a live auction for a given transaction's place in the queue.

Case in point: Decentralized exchanges (DEX), such as Uniswap and Pangolin, rely on arbitrageurs in the market. Prices on these exchanges, also known as automated market makers, are largely a function of the ratio of assets held by these exchanges.

  • When those ratios get out of line with the broader market, DEXes rely on arbitrageurs to return prices back in line with those posted elsewhere.
  • MEV, one can argue, gives arbitrageurs a way to get it back in line super fast, guaranteeing fair prices across the market.
  • Usually, this trading strategy nets a lot of tiny profits but occasionally, following a big trade or a lot of activity, it can be quite lucrative.

Liquidators closing loans gone bad in decentralized finance are also big users of MEV.

Flashback: MEV was first described by Phil Daian and others, in a famous paper called "Flashboys 2.0."

The bottom line: “In order to reduce exploits, protect users, and expedite critical actions, every decentralized network will need to thoughtfully craft how it prioritizes transactions,” said Kevin Zhang, venture partner with Bain Capital Crypto.

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