DeFi Project Spotlight: Archer DAO and Ethereum’s “Dark Forest”
Mining profits are tenuous and Archer DAO hopes to create a unique, yet profitable, new revenue stream for Ethereum miners to help ride out the thin months. In doing so, Archer tackles one of the most contentious subjects in crypto.
- Archer DAO is taking on one of the controversial Miner Extractable Value (MEV) phenomenon within Ethereum.
- MEV and the network’s “Dark Forest” of apex trading bots pose existential threats to the security of Ethereum.
- Unveiling MEV and distributing its bounties fairly and transparently may help mitigate these threats.
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Archer DAO is building a community of on-chain analysts to generate new revenue streams for Ethereum miners. Though nascent, the project has already gained attention within the DeFi community due to two mounting issues among miners: Sustainable revenues and MEV.
At current, miners rely on block rewards and gas fees to sustain their businesses. Though hefty, these rewards could change at a moment’s notice.
And despite the exorbitant fees during the DeFi summer, this revenue is far from regular.
Thus, miners live in a perpetual state of uncertainty.
Archer looks to address this issue. The team has described theirs as an essential service to the Ethereum ecosystem. This is because many potential Ethereum miners may not be interested in making a steep investment in the equipment needed due to the uncertainty of profits. Other long-time miners may even drop out because of this precarity.
Ultimately, without enough miners, the network risks grave centralization or worse, according to Archer.
To combat this, the project introduces a third avenue for profits to reduce miners’ operational risks. However, understanding this third avenue means unpacking the esoteric phenomenon of Miner Extractable Revenue (MEV).
What Is MEV?
MEV is an umbrella term for all economic incentives, such as block rewards and transaction fees that appear within the Ethereum ecosystem. It also includes more unconventional incentives that have become much clearer following the rise of DeFi.
One of the primary forms of unconventional MEV is that of front-running users on-chain.
Imagine user A wants to execute a simple token exchange using a popular decentralized platform like Uniswap. Now imagine that user A accidentally offers a significantly higher price for the swap due to a fat-finger error. Due to the transparency of Ethereum, any user scanning the market will see this error. These days, bots are usually the first to notice these discrepancies.
Bots will see user A’s error as a clear opportunity to enjoy an unforeseen bonus. This bot will then increase its gas fees to execute its order faster than user A can cancel the transaction.
The above is just one simple example of MEV and how miners are involved.
Users, often arbitrage bots, will send high fees to push their transactions to the front of the line whenever an arbitrage opportunity presents itself.
One must also understand that many arbitrage bots are constantly sleuthing the Ethereum blockchain for these opportunities. Thus, there are many more examples of MEV based on the sheer complexity that emerges among organic and non-organic market participants.
The non-organic market participants are, however, far more adept at seizing profits. In a recent post unpacking a specific MEV event, researchers Dan Robinson and Georgios Konstantopoulos described arbitrage bots as “apex predators” in the Ethereum mempool.
Indeed, MEV is one of the more complicated phenomena in crypto. And since the term was coined in 2017, it has also revealed several existential threats to blockchain security.
By introducing a third economic incentive to the mix, miners may forego traditional consensus-level security if this third incentive appears more profitable than standard block rewards or on-chain fees.
For instance, a miner can decide to reorder transactions if they think the profit is lucrative enough. In another example, a miner may have an alternative motive, such as preferred positioning in an upcoming ICO and place their orders ahead of others regardless of transaction fees. Miners might also do this to become the first to execute a liquidation for any overleveraged trader.
For more on the relationship between miners and liquidations, it is recommended to explore the work of B.Protocol, a decentralized liquidity backstop.
1/11 Okay, MEV is coming
MEV is a consequence of the fact that miners (pool operators) have the right to choose the tx order in a block.
They can be the first to:
– execute arbitrage
– get access to token offerings
– perform liquidation
Plus, they may not pay a fee for this. pic.twitter.com/fKCYnvXeME
— Igor Igamberdiev (@FrankResearcher) September 30, 2020
To make the threat that MEV poses to Ethereum more clear, it’s important to understand how so-called “time-bandit attacks” work. These kinds of attacks occur when a smart contract-based operation in the past is harvested for profit by a miner in the present. This would mean a miner would have to rearrange the block order in a blockchain. For average users, it could even mean that a confirmed transaction is later deleted.
This ability is also centralized in the hands of the mining community and large traders. Often, both parties work in tandem: Traders highlight opportunities, and miners execute. Only the most astute on-chain analysts would be able to observe these events happening in the wild.
Despite the various risks that MEV poses, it is a force of nature that cannot be stopped, only controlled and acknowledged.
Archer DAO is just one of a few attempts at formalizing this rather obscure economic behavior.
Archer DAO: Formalizing MEV
Flashbots is a research organization that is working closely on the incoming “MEV crisis.” Specifically, they hope to make MEV clear to the community and effectively “distribute [its] benefits.”
“MEV involves the entire Ethereum ecosystem, from miners, traders, DeFi developers, and, most importantly, Ethereum users. Our preliminary research shows MEV extraction currently disproportionately benefits traders and miners. As MEV extraction continues to grow in scale, we anticipate there will be a need for ~some~ value redistribution towards users and towards system stability.”
Archer DAO is one of the first attempts at this precise value redistribution. To better understand how this economic middleware operates, one must first unpack the different agents within the Archer ecosystem.
It includes miners, suppliers, and liquidity providers (LPs).
Miners’ roles are already clear in this equation, but following an introductory call with the Archer team, miners would integrate their software with Archer’s. Suppliers are on-chain analysts that monitor the Ethereum network for profitable opportunities.
There are currently a dozen suppliers, including a DEX arbitrage bot created by Archer, the newly-elected Stake Capital, and an initial batch of early token holders to jumpstart activity. These agents generate profits by sharing opportunities with other miners in the Archer ecosystem. For their efforts, they split the revenue with miners.
Finally, LPs exist to bankroll suppliers as they pursue and execute various on-chain strategies. LPs can earn yield by supplying the most-needed token for any specific strategy.
The network is bound together via a token called ARCH. Holders can use this token to vote on various proposals. So far, there have only been two proposals. One suggested the community adopt common guidelines, and the other asked to use treasury funds to execute a liquidity mining program. Both proposals passed with zero dissenting votes.
After voting on proposals, those who hold more than 10,000 ARCH tokens are invited to join private Discord channels. Only those with more than 20,000 tokens can make new proposals.
It is unclear the importance of this token within the miner, supplier, and LP interactions. None of these three agents need to hold ARCH to interact within the network. This may change, however.
Caleb Sheridan, a co-founder of Archer, shared two possible examples of future developments with Crypto Briefing:
“[First], suppliers are limited to carry out single-transaction strategies which are profitable. In the future, we would like to allow Suppliers to take some carry risk over multiple transactions. We are considering how we can supported bonding assets, including ARCH to manage this risk and open up new strategies. [Second], we have more LP demand to stake assets for an ROI than our suppliers can utilize. Voting Power (staked ARCH) is likely to play a big role in who can LP.”
It should be noted that Archer has only just emerged, and the team is wisely moving from centralization to decentralization. It isn’t easy to imagine the full spectrum of how a governance token will be used at such an early stage.
Archer Team and Community
Sheridan and his co-founder, Chris Piatt, also created a blockchain data firm called Blocklytics. This background in on-chain analysis is also the reason behind Archer’s creation, according to Sheridan.
He explained that:
“We were cheering along Uniswap’s growth. At some point earlier this year, it became obvious there is a lot of value there and the game theory says it should go to block producers (i.e. miners or validators).”
Piatt’s background is rich in additional data-centric endeavors, and before Blocklytics, Sheridan worked for eight years at the online gambling company, The Stars Group.
Archer DAO has received no outside investment at the time of press.
This broad overview outlines one attempt at formalizing and integrating harmful MEV and creating a more virtuous dynamic.
By including more stakeholders, Archer is essentially crowdsourcing a walled-garden of opportunity. They write that “The losers in this equation are existing bots, especially those that front-run transactions in the mempool and strain the network.”
Unfortunately, this places a lot of hope on the idea that these bots, and those who deploy them, will join the Archer ecosystem. Indeed, this is currently the largest obstacle facing the project.
Until they can entice a handful of powerful entities to join, others will likely continue to operate independently as there would be no additional value in a crowd-sourced network of opportunities that lacks a crowd.