Today, I am pleased to announce that Multicoin Capital has led a $17.4 million round on Eden Network, along with participation from Jump Capital, Alameda Research, Wintermute, GSR, Defiance Capital, and Andre Cronje, the founder of Yearn. finance.
ethereum block producers (i.e. “miners” in proof-of-work, “validators” in proof-of-stake) have two main powers: the ability to select which transactions are included in a block, and the order of those transactions within the block. this power is the source of what is commonly known as “m.e.v.” or mining extractable value. mev on ethereum is estimated to be over $700M as of early 2021 and grows naturally as total defi activity on ethereum grows.
mev is expressed in many ways. The most basic form of mev is arbitrage between decentralized exchanges. If the price of an asset is different between Uniswap and Sushiswap, the first trader who can execute the arbitrage is guaranteed a profit. the block producer for each block chooses which transaction will be the first in that block and can decide who will get this arbitrage profit. mev can be defined as the sum of the guaranteed profits on the chain that the block producers can claim.
Simple arbitrages like this are considered “beneficial” because they promote smooth functioning of defi markets by keeping prices in line between exchanges. this is in contrast to “malicious mev” such as “frontrunning” and “sandwich attacks” and other tactics from the high-frequency trading world. another form of malicious mev is called a “time bandit attack”. this is a more advanced attack where a block producer (or cartel of block producers) rearranges a blockchain to capture mev.
mev has massive negative externalities. it makes the whole system less secure, less stable and less efficient, and is purely value extractive. if not mitigated, it is likely to pose a major hurdle to the widespread adoption of ethereum defi.
what is the eden network?
eden network protects users from malicious mev and finances beneficial mev into a token. eden does this by establishing fair and transparent rules for deciding the order of transactions within a block.
eden’s main loop is simple. block producers propose blocks according to the rules outlined by the eden network (running eden-geth, the network’s augmented version of geth), and are rewarded with eth and eden tokens for doing so.
users of the eden network must buy and bet eden. the order of transactions within a block is sorted by the amount of eden an address has wagered, and the more an address wagers, the higher up in the block the transaction is placed (this is a bit simplified, for details, read this). this drives the demand for eden tokens because traders will always compete to stake more eden so that their arbitrage trades come first.
Users can also gain access to a private relay connection and private mempool with the eden network block producers by staking a minimum of 100 eden. this protects the user from frontal attacks because potential attackers cannot see the user’s transaction until it is mined.
Our investment thesis is that rational arbitrage traders will continue to buy and stake eden until the value of eden staked equals the discounted cash flow value of expected future arbitrage earnings in ethereum. on top of that, eden has great utility in the form of front end protection for regular users who will be buying and staking the token. this will drive demand for eden and make participating in the eden network the most profitable option for ethereum block producers.
ethereum security post eip-1559
ethereum went through a major update a month ago to enable eip-1559. Under EIP-1559, transaction fees, which used to go to Ethereum block producers, are burned instead. this change was praised by many because it burns a significant amount of eth, making eth less inflationary and possibly even deflationary. however, this reduction in profits for ethereum block producers has reduced the security budget for ethereum.
many ethereum block producers are looking to mev to supplement their earnings after eip 1559. historically mev has been very spiky, a block can hold 1,000 times the mev earnings of an average block. if the block producers charge mev directly and don’t win the block with the 1,000x mev gain, then they have to make a decision: accept the block that the competitor pool proposed and lose the jackpot, or ignore the block that it proposed the competition group and stay trying to win the jackpot. when a block producer chooses the second option and is successful, this creates a chain fork within ethereum called a “time bandit attack”.
time bandit attacks slow down ethereum and provide poor user experience for all ethereum users worldwide. During periods of extreme market volatility, there is a lot of MEV, which means that the incentive for temporary bandit attacks is greater when the need and demand to use Ethereum is also greater. time bandit attacks are more easily carried out in larger groups. if time bandit attacks become a major source of revenue, it becomes a centralizing force in ethereum block production because it is easier for larger groups to execute this attack than smaller ones.
on the contrary, the eden network increases and softens the rewards of block producers. within the eden network, block producers get a uniform payout of eden tokens, which track the value of the priority block space, rather than pointed mev. this removes the incentive for eden network block producers to execute time bandit attacks and helps increase the security and decentralization of ethereum block production.
other mev projects
Other mev projects, such as flashbots and bloxroute, try to create efficient markets between mining pools and bot operators to extract maximum value from the average network participants. these systems do not try to mitigate malicious mev, but rather facilitate their extraction. their systems are closed, with centralized integration processes that exclude some block producers and take advantage of opaque reputation scores that favor certain addresses over others.
eden focuses on reducing malicious mev and creating positive externalities for ethereum as a whole. eden is fully transparent and permissionless: all block producers, bot operators and users can join the network as long as they abide by the open and transparent rules of the protocol.
The network was launched on the ethereum mainnet at block 12,965,000 along with the london hard fork. since then, the network has converted more than half of ethereum’s hashrate; 54% of all blocks mined in the last week are part of the eden network.
There are currently over 2,000 participants in eden and that number is growing rapidly. recently, andre cronje, founder of yearn finance and keep3r network, announced that keep3r will use the eden network for its business activities.
the adoption of eden network has shown that there is a demand for explicitly defined rules for building blocks that incorporate the realities of mev. the use of the eden token as a coordination unit in the construction of blocks has allowed a fairer, more open and consistent distribution of mev between the participants of the ethereum network.
Disclosure: multicoin has established, maintains and enforces written policies and procedures reasonably designed to effectively identify and manage conflicts of interest related to its investment activities. multicoin capital adheres to a “no trading policy” for the assets listed in this report for 3 days (“no trading period”) after their public release. at press time, multicoin capital holds positions in eden.