# A Snake in the Garden
*09/08/2021 - [Grug Capital](https://twitter.com/GrugCapital), [Jimmy](https://twitter.com/jimmyjames198), Shadowy super searcher*


## Introduction

The rise of on-chain financial infrastructure on Ethereum has led to an emergent property called [Miner Extractable Value](https://arxiv.org/abs/1904.05234) (MEV). Simply put, MEV refers to additional profit (aside from block rewards and transaction fees) a miner can make by auctioning off transaction ordering rights in the blocks they mine.

The default rules in standard Ethereum clients order transactions based on their gas price (ties being broken by time arrived) but MEV has led to more sophisticated custom clients and auction mechanisms.

### Auction

*"Flashbots Auction is a permissionless, transparent, and fair ecosystem for efficient MEV extraction and frontrunning protection which preserves the ideals of Ethereum. Flashbots Auction provides a private communication channel between Ethereum users and miners for efficiently communicating preferred transaction order within a block. Flashbots Auction consists of mev-geth, a patch on top of the go-ethereum client, along with the mev-relay, a transaction bundle relayer."* - [Source](https://github.com/flashbots/pm)

MEV Auctions often involve [searchers](https://docs.flashbots.net/flashbots-auction/searchers/quick-start/) submitting time sensitive transactions ("bundles"), such as cross DEX arbitrages/liquidations, to the miners directly in exchange for a bribe. These transactions are then prioritized and included at the top of the block if they do not fail. We’ve also seen this mechanism adopted by ordinary users to avoid getting frontrun/sandwiched on their trades as well as to bribe miners during popular NFT drops. Miners simulate the bundles they receive and order them in a way that generates the most profitable block. It is absolutely critical that they generate competitive and profitable blocks or they risk losing individual miner hashrate to pools with more sophisticated ordering (and thus more returns).

*"If we want any form of robust economic security, every validator must extract available MEV at around the same rate. Any validator that extracts MEV at a much higher rate than others is inherently concentrating economic rewards, and therefore influence in the system’s security. Any miner that extracts MEV at a higher rate is able to concentrate CPU control, and even more directly in proof-of-stake, stakers that are efficient concentrate staked capital."* - [Source](https://github.com/flashbots/pm)

While the flashbots auction mechanism has remained the status quo on the network for much of this year, Eden has proposed alternative rules and rewards for miners. In this post, we take a deep dive into their token, incentives and the impact that Eden has had on mining pools and individual miners.

Since the London fork went live, Archer DAO has pivoted from a DEX offering MEV protection to becoming the Eden Network, a MEV marketplace with a token utilized to secure "slots" at the top of the block & priority transaction features for "stakers". In what resembles a vampire attack to acquire network hashrate, Eden has incentivized miners to run their implementation of *mev-geth* ([go-ethereum](https://github.com/ethereum/go-ethereum) fork which allows users to express and pay for ordering preferences) by airdropping them millions of said token for mining Eden blocks.


Eden's main value proposition comes from its two flagship features, 1) giving users access to priority transactions via the Eden RPC (in exchange for staking 100 EDEN tokens) & 2) slot auctions in which prospective slot tenants bid with EDEN in a continous auction to reserve prority blockspace (namely, the first three slots in every eden block).

Slot tenants must outbid the previous slot owner by at least 10% and then pay a continous 3.3% fee on that bid everyday so that the total is always spent in approximately 30 days. Tenants may then use their alloted blockspace to send multiple transactions per block with a 1.5m gas per slot limit. Regular flashbots-style bundles are inserted in between slots and stakers (limited to 4m in gas/block). Miners who sign up for Eden are expected to mine Eden blocks (rules defined above) exclusively and the Eden team handles payouts/slashing accordingly (has discretion for now, with plans to make the process trustless).

Summary (on transaction ordering):

**Current blocks:** Flashbots-style bundles + public mempool transactions
**EDEN blocks:** Slot tenant transactions + Flashbots-style bundles + Staker transactions + public mempool transactions

While Eden promises to improve block producer earnings, protect users from MEV and "tokenize MEV", let's examine their performance since they've been live.

## Activity so far

> Total EDEN staked and unique stakers over time


Tracking Eden's economic data is non-trivial since unlike standard transactions and Flashbots bundles, the miner bribe isn't explicitly paid in ETH to the miner address during transaction inclusion. It is paid after the fact in EDEN tokens to a different address. One of the major concerns we intend to highlight is how this leads to pool operators *not* redistributing EDEN profits to their individual miners pro-rata. It is also much harder to reconcile with the security budget for the network blockspace, since rewards are not denominated in ETH.

Using a few custom scripts to interact with their contracts, we've put together the following data (for blocks 12965000 to 13149500, code will be opensourced after we clean it up soon).

> Miner coinbase address and the respective address whitelisted to claim EDEN rewards (since we're interested in tracking what they end up doing with the EDEN)


Eden claims to have >50% hashrate onboarded to their network, which we've confirmed by looking at the blocks mined in the aforementioned period.

> Hashrate of current miners on-boarded


However, it is important to note that **Eden miners having 50% hashrate does not mean that 50% of the network is reserved for Eden blocks**. This is because a miner can choose to mine flashbots blocks (or just regular blocks) in periods where they believe Eden blocks are less profitable (either automated to turn off Eden-Geth based on token price or with their own discretion). The most recent example of this happening can be observed [here](https://twitter.com/0x9116/status/1435661450475880450?s=20). While Eden's slashing should prevent this behavior, we've noticed 0 slashing events so far and can only assume they're not being enforced (given their discretion) or miners simply receive less payouts if they do so.

To make this distinction, we introduce a notion of "Eden compliant blocks", which refers to EDEN blocks that either have a slot tenant transaction at the top of the block or a staker transaction (where they only pay base fee and 0 priority fee) within. This helps us understand how many miners are mining exclusively Eden blocks and the net % of Eden on the network.

>Breakdown of Eden blocks by Eden miners, Non-eden blocks by Eden miners, and blocks by non-eden miners over time.


It is evident that despite the fact that Eden boasts of having more than 50% of total hashpower, the actual number of Eden blocks on the network are disproportionately lower (which some stakers might consider misleading).

>Of all blocks by EDEN miners, how many are strictly Eden compliant vs not


This divide might smoothen out if Eden manages to get their miners to only mine Eden blocks and the number of stakers increases, but as it stands only roughly 10% of EDEN miner blocks follow established rules (which brings the total network breakdown to ~5% Eden blocks vs ~95% Non-eden)

> Average EDEN/block based on claimed vs EDEN blocks so far


To take a closer look at what miners are doing with their claimed EDEN tokens, we track how much they received and how much they ended up selling to the EDEN-ETH SushiSwap pool (DEX with the most liquidity for that pair).

> Miner flows


Unsurprisingly, in most cases 100% of the EDEN claimed has been sold for ETH. While pools explicitly haven't announced how they intend to handle/redistribute EDEN rewards, we presume they at least intend to sell it for ETH and redistribute it to their pool miners (at least in theory, we strongly encourage EDEN to build tooling to track EDEN flows after payout to let individual miners know if they're being compensated too). The interesting cases here are pools with >100% sold, implying they've either received more EDEN in addition to the official payout or bought more EDEN with their own ETH.


Upon closer look our suspicions are confirmed with this [transaction](https://etherscan.io/tx/0xb653ea98f5c91dd7a80456dc295d9a43c577691df46d155ddab08ca9c9d890df) in which Babel pool's collecting address buys 70 ETH worth of EDEN and this [transaction](https://etherscan.io/tx/0x88b45d438865d35bc682409cf28fbcad9eaec317ce56dd1316f35c039baa0a25) by a unlabelled miner who buys 100 ETH worth of EDEN.

There are several important questions here:

* Are the pools redistributing the EDEN profits or are they pocketing it for themselves? If it's the latter, are they compensating their miners in more ETH for the opportunity cost (since they give up ETH fees from bundles/regular txpool in lieu of Eden transactions)?
* Are these additional buy side trades (ontop of receiving and just selling) on behalf of just the mining pool or individual miners?
* What is the degree of awareness among individual miners? Would they prefer receiving EDEN tokens? Would they prefer equivalent ETH by selling at every block or periodically?
* Should EDEN build more infrastructure to address these inconsistencies? especially in a way that makes it more transparent and easy to express preferences

Several individual miners have raised similar concerns, see this popular post on r/EthMining [*(Important) Gang of Thieves – How Mining Pools Are Stealing 100s of Millions from ETH Miners*](https://www.reddit.com/r/EtherMining/comments/pat2ts/important_gang_of_thieves_how_mining_pools_are/)

Now we look at activity on the Sushiswap EDEN-ETH pool to infer how many of the tokens are being sold for ETH and how many are sold for different tokens.


The variance in average ETH/block can be explained by a) Not all miners selling all the EDEN they receive for ETH b) EDEN-ETH price ratio and c) payouts. The 0 ETH made can be explained by pools selling EDEN for tokens other than ETH.

We filter the non-ETH transactions to find the following:

>Shady non EDEN<>ETH sales
>

Assuming the individual miners haven't received equivalent BBTC/WBTC/USDT in the cases above, we observe several pools, notably Sparkpool, withholding rewards from individual miners by not selling EDEN for ETH. This is concerning as this is an example of a notable pool failing to disperse deserved rewards to their miners, effectively stealing from them.

- Babel sold 648269.45 EDEN for 31.44157196 BTC and 62,499.555992 USDT
- 0x939c8 sold 1032227.92 EDEN for 58.59173895 BTC
- Sparkpool sold 1058164.79 EDEN for 69.79859792 BTC
- 0x068a3 sold 27676.6024 EDEN for 2.06738352 BTC

[Transactions](https://pastebin.com/raw/ffCujUeJ) if you want to copy the tx hashes and follow the trails on etherscan

Finally, Sparkpool also simply ends up transferring and holding a portion of the EDEN they receive: 99,990 EDEN [here](https://etherscan.io/tx/0x5528d4351ce3834c2fa162fb3ccf17e4010e2b21222181fa43422dc93419a51f) and 100 EDEN [here](https://etherscan.io/tx/0x88b4d6947e8906c42fecedf988d91fc178a4cd844d582b7b84688e93b954e7ce).

## Distorted Incentives

To highlight the distorted and broken incentives of Eden, we would like to give the stage to our shadowy super searcher colleague:

What is the "fair price" for Eden's slot 0? Certainly more than 30,000 EDEN if it is in the hands of a capable MEV extractor. Why, then, have other searchers not bid up the price of the slots? Isn't there an obvious block-space arbitrage to be made?

The answer is twofold -- the first reason is unique to the inefficiencies in the crypto markets, and may possibly disappear as the ecosystem matures. The second reason is an inherent flaw in the design of the network, and will remain a flaw without a major redesign of the protocol.

In an efficient market, it is true that searchers should pay the fair expected price for the profit they will extract from the top blockspace (minus the "risk-free" interest rate -- which in crypto is much larger than TradFi). But crypto markets are anything but efficient. And a lot of this inefficiency is due to the uncertainty around, well, everything. If I had to bound the MEV extractable in the next month, I could hardly give you an order of magnitude estimate due to changing market conditions, changing competition and changing prices. The fact that the Eden network is insistent on shoehorning a token into this value calculation makes it even more difficult, as any searcher would now have a (significant - compared to earnings) exposure to the price of the EDEN token. If the price of the token goes up, the daily burn rate is overpaying what you'd been willing to pay for the slot, and if it goes down, it becomes cheap for an adversary to outbid you, and all you get in return are your (now lower valued) tokens, so you're not even able to recoup your investment. Not only that, there is uncertainty about the hashpower of Eden, and if miners will keep mining, even if it is not profitable for them to do so. Which brings us to the inherent flaw in the protocol.

As has been obvious over the past 48h, mining Eden blocks can, on a block-by-block basis, be significantly less profitable than mining regular or flashbots blocks. (See: Sevens drop, where Eden blocks were ~ 180 ETH less profitable _each_ than non-Eden blocks). Rational miners are only willing to take this loss for so long before they realize something is going on, which leads us to custom node implementations like GreEden-geth, which greedily optimizes miner rewards. We saw Sparkpool mine with some variation of this in the past 48h, as they seemed to mine non-Eden blocks during this highly profitable period, even if they are in theory Eden block producers. When a larger percent of the network switches to implementations that profit switch between Eden and regular or MEV blocks (and note -- this is a when, not an if. Hiding one's tracks to not be slashed by the Eden team is trivial to do), the network will switch back to it's pre-Eden behavior during periods of high congestion, or when there are valuable bundles to be mined.

Searchers, as a result, are then impacted by adverse selection -- we'd be paying for the expected block value, but in return receiving priority access only on the low valued blocks. So the "fair price", knowing this adverse selection, together with all of the other uncertainty, is far worse than the true expected MEV extracted. In fact, in the best case scenario, the "fair price" is the price only for the low value blocks! Worthless! Understandably, why would any honest miner accept those bids?

Right now, the network is a house of cards. Eden is able to boast a high hashrate, as the slot tenants aren't very good, and the supplemental Eden airdrops miners are receiving are just that; supplemental income. They rely on retail pumping their bags to keep the prices high to provide miners the exit liquidity they need to make staying on the network profitable. But even during the expensive NFT drops we're seeing, and certainly if a competent MEV extractor were to purchase the slot, miners would suddenly have a _much_, _much_ more urgent reason to switch to a greedy GreEden-like block switching. The situation is therefore akin to [matching pennies](https://en.wikipedia.org/wiki/Matching_pennies), where ironically, what will ultimately destroy the network is it's adoption by users.

_____
Finally, It is also prone to capture via governance by economic actors with a large amount of capital available to allocate. This is in addition to the risk of Eden coercing miners into adopting a softfork by threatening to withhold reward distribution.

*"Avoiding capture: the system should avoid deliberately introducing, and maximally protect against the accidental entrenchment of, actors that gain a position of value extraction and control from the MEV marketplace.*

*For example, an MEV marketplace with a built-in token fails at this: the token holders become a value extractor, and furthermore governance tokens in general are risky. This risk may be tolerable for applications, but if a token-governed DAO is used to control base-layer transaction inclusion, a powerful economic actor who captures its governance could use that power to extract value, censor transactions, and even use the carrot of their monopoly on MEV revenue to push other miners into participating in hostile soft forks."* - [Robert Miller](https://medium.com/flashbots/on-the-design-of-mev-marketplaces-8829bf897858)

## A Walled Garden

The stated goals of the Eden Network are as follows:

- **Improve** earnings for block producers and increase consensus-level security
- **Protect** users from malicious MEV (frontrunning, sandwich attacks, etc.) and reduce the negative externalities MEV has on Ethereum
- **Tokenize** MEV, and democratize access to it using network token incentives

### Improve earnings


[Co-founder of f2pool](https://twitter.com/satofishi/status/1424769930780680192)

We think miners should have the choice to mine the most profitable block, rather than being pigeon-holed into a closed ecosystem. Miners can lose out on potential profits by being forced to mine Eden blocks vs mev-geth blocks. [Here](https://etherscan.io/txs?block=13056680) we see that the miner lost out on 10+ ETH due to Eden network rules & claimed close to zero priority fees. In this case, the largest participant in the block *nftmevking.eth* did not even need to become a slot tenant and simply staked some EDEN to secure his position on the block.


Since they made it clear that they will slash any miners who dare step outside of their walled ecosystem, we propose that pools run [greeden-geth](https://github.com/CodeForcer/greeden-geth/
) in order to switch between eden-geth, mev-geth, and vanilla geth blocks to earn the most rewards possible. It should not come across as a surprise that as service providers miners would want to opt to clients that make them the most money (while EDEN would want them to mine using eden-geth exclusively). [F2Pool](https://twitter.com/satofishi/status/1432219150680735746?s=20) has expressed interest in running this client.



While they could find ways to slash EDEN miners who mine non-eden blocks (i.e slot or staker txs are not in the expected order), this could easily be mitigated by this [PR](https://github.com/CodeForcer/greeden-geth/pull/2) which allows miners to have plausible deniability by removing all EDEN txs (since EDEN can't prove they received the transaction when they mined). This comes at the cost of stability and goes against EDEN's goal to "increase consensus-level security" (i.e anything that comes in the way of making the most profitable blocks leads to censorship)


### Protect

Eden claims to protect it's users from MEV by facilitating direct to miner transactions, in reality this is a simple direct to miner relay feature, for example [MEV Alpha Leak's RPC endpoint](https://github.com/mevalphaleak/BetaRPC-setup). In fact Sparkpool has been offering an RPC endpoint for private transactions through the [Taichi Network](https://taichi.network/) for quite some time now. Users can already access frontrunning protection without having exposure to or staking a token and this will only increase to be the case as more protocol wrappers (see [MistX](https://mistx.io/)) are built to send transactions as bundles.

What's worse is when you realize EDEN stakers could still be frontrun if someone sandwiches them using a bundle. This is because the tx order in EDEN blocks is as follows: slots, then bundles, and finally stakers txs.


The only novel thing Eden allows is for protocols to sponsor users. While this is innovative, it requires no token and is yet another example of Eden attempting to wall off features that should be permissionless.

> Breakdown of EDEN blocks: only slot txs, only staker txs, both


## Conclusion


How are Eden competitors like Flashbots likely to respond? Well, a token is unlikely as the core team has made it clear they are opposed due to the attached risks elaborated on above. What is likely is more competition to produce better blocks, some sort of bundle or private transaction segretation features that leads to the undercutting of Eden's value proposition (by offering Taichi network-style products for free?) all while aggregators like greeden-geth work on creating the most profitable blocks.

Relevant thread: [*"Eden's lead investor - @multicoincap - is lying about Flashbots and Eden."* - @bertcmiller](https://twitter.com/bertcmiller/status/1435686477359419395)

As highlighted previously, on a long enough time horizon, the point of slot auctions seems to be unclear and frontrunning protection alternatives already exist but there's no denying that pools have been sufficiently subsidized (essentially by retail speculators) to earn EDEN token rewards for mining EDEN blocks. The breakdown is as follows:

* 10M EDEN dispersed from Eden DAO treasury in the first month
- 8,100,000 EDEN tokens distributed via daily emissions to validators and liquidity providers
- 5,400,000 tokens allocated for validators
- 2,700,000 tokens allocated for liquidity providers
- 1,000,000 EDEN tokens airdropped to bots, validators, and users
- 900,000 tokens are returned to the treasury per emission schedule


Where does that leave us? Who are the winners? Who are the losers? Will there be a new protocol to vampire EDEN's vampire attack? Will miners simply flourish forever by aggregating bribes/incentives from various relays/networks (to simply mine the most profitable block)?

The winners are pretty clearly the Eden network team, VCs (notably Multicoin Capital, [Alameda](https://etherscan.io/address/0x0f4ee9631f4be0a63756515141281a3e2b293bbe), [Wintermute](https://etherscan.io/address/0x0000006daea1723962647b7e189d311d757fb793), etc who invested in the network), and mining pool operators. The mining pool operators receive an out of band payment they don’t have to share with their miners. The losers are retail who are desperate to invest in something with a MEV narrative (while pools unload ~100% of their tokens for ETH), the miners themselves who are not receiving their fair share of the hashpower they contribute and the ethereum network as a whole, as these rent-extracting tokens are created for no real reason other than to enrich their creators and the VCs eager to throw money anywhere they think may produce a return.

It is entirely possible Eden addresses our criticisms, improves their protocol to avoid the more obvious issues and eventually moves past the "bootstrapping protocols via token rewards" playbook. However, we hope this post highlights the desperate need for transparency and the importance of viewing blockspace as a valuable commodity in the context of MEV.