Hive Mind brings you weekly insights into DAOs, culture, crypto, and more. Our latest Substack release compiles the week's Hive Mind essays and some interesting links shared from around the space. This week’s roundup includes writing on MEV, the state of consumer crypto, and L3s.
Favorite Links
Another crypto market map.
Crypto industry trends report.
Decentralized AI resource.
Away's influencer playbook.
Craving the tangible.
The end of social media.
Everything is downstream of compute.
Goldman and their tokenization projects.
A running list of crypto companies.
VC deal insights from this past quarter.
MEV Overview
As blockchains become more advanced, optimizing throughput has become a critical goal to support mass adoption. However, this increase in throughput has led to a corresponding rise in MEV, which can negatively impact user experience. Chains like Solana and Base are particularly affected by these issues.
What is MEV? Maximal Extractable Value (MEV) refers to the potential profit block producers (miners/validators) can extract by reordering, including, or censoring transactions within a block. This practice has a variety of negative externalities including:
• Increased Transaction Costs: MEV strategies often result in bidding wars for block space, causing network congestion and higher fees.
• Centralization and Censorship: MEV can centralize power among a few sophisticated actors, contrary to the decentralized ethos of blockchain.
• Reduced Privacy: MEV actors monitoring the mempool can predict and exploit user transactions, diminishing privacy. MEV as a practice goes against the values of blockchain as a whole and diminishes the user experience for people that are just trying to use a consumer dApp.
For crypto to go mainstream, many argue that MEV can not continue to exist in its current form. Already, some chains have implemented functionality to reduce the incentive for MEV:
1. Ethereum's MEVA (Miner Extractable Value Auction):
• Priority Gas Auction (PGA) Era: In the early days, MEV strategies led to open-bid, first-price auctions for transaction inclusion. Searchers identified profitable MEV opportunities and bid against each other to include their transactions in blocks. This led to costly on-chain auctions, increasing network congestion and transaction fees. Even failed transactions incurred gas costs, contributing to network inefficiency.
• Flashbots and EIP-1559: Flashbots introduced a more structured approach by creating relays that act as intermediaries between searchers and block producers. This transitioned the MEV marketplace to a sealed-bid auction, where searchers submit their bids privately to relays, reducing the risk of bid escalation. EIP-1559 further simplified the bidding process by introducing a base fee model.
• Proposer-Builder Separation (PBS): Following Ethereum's transition to Proof of Stake (PoS), PBS further refined the block production process. In this model, block builders create blocks and submit them to relays, which forward the blocks to validators. Validators then choose the most profitable blocks. This separation helps ensure data availability and block validity but also introduces centralization risks, as a few dominant builders can gain significant market power.
2. Solana's Jito Network:
• Jito addresses Solana’s high spamming rate due to low transaction costs. It introduces a MEVA layer to bring order and determinism to the block production process. Though exploiting MEV itself, Jito has taken steps (such as shutting down their mempool) to reduce the negative externalities, maximize rewards to stakers, and promote long term health of the Solana ecosystem.
Next, some lessons from high-performance blockchains.
1. Monad's Deferred Execution Model:
• Architecture: Monad decouples prior execution from consensus, allowing nodes to agree only on transaction ordering. This model extends the gas budget to the full block time, offering more flexibility in execution. Unlike Ethereum, where blocks are agreed upon after execution, Monad nodes execute transactions in block N while agreeing on transactions for block N+1. This separation allows for more efficient use of computational resources.
• Challenges: The deferred execution model introduces indeterminism, as builders and relays cannot simulate transactions against the latest block state. This makes block valuation probabilistic rather than deterministic, posing challenges for searchers and builders who need to infer transaction outcomes based on older states.
2. Probabilistic Strategies:
• Searchers: In probabilistic settings like Monad, searchers face higher risks of transaction reverts. They must rely on probabilistic signals to make decisions, similar to high-frequency trading. This approach balances risk and reward, allowing searchers to act quickly even without the most recent state information.
Lastly, some strategies to combat probabilistic MEV.
1. MEV-Resistant Protocols:
• Flashbots and MEV-Boost: These tools offer protection against MEV by allowing private transactions and redistributing MEV value back to transaction originators. Flashbots screens transactions and shares those with MEV potential only with trusted builders, ensuring better protection.
• SUAVE (Single Unifying Auction for Value Expression): SUAVE decouples the mempool and block proposer roles, providing a decentralized alternative to mitigate MEV [https://writings.flashbots.net/the-future-of-mev-is-suave…]. It unbundles the responsibilities of mempool and block building, allowing for more flexible and efficient transaction processing.
2. Enhancing Privacy:
• Private Transaction Mechanisms: Tools like @merkle_mev's QuickNode reroutes transactions and hides transaction details until they are mined, protecting them from MEV exploitation.
• Zero-Knowledge Proofs: Introducing “ZK squared” rollups can hide transaction details while ensuring their validity [https://cameronsepahi.medium.com/to-what-extent-can-mev-be-minimized-ed4502622611…]. This technique uses an additional ZK layer on top of the traditional rollup architecture to obscure transaction details.
3. Regulatory and Incentive-Based Approaches:
• Economic Incentives: Creating incentives for honest behavior among miners and validators can help maintain network integrity.
• Regulatory Frameworks: Establishing regulations to penalize malicious MEV activities and promote transparency can mitigate MEV. Regulatory action has already been proposed by the International Organization of Securities Commissions’ and has caught the attention of watchdog groups in the EU.
Increasing throughput in blockchains like Solana and Base poses challenges related to probabilistic MEV. By implementing fair transaction ordering, adopting MEV-resistant protocols, enhancing privacy, and exploring regulatory and incentive-based approaches, these chains can effectively combat probabilistic MEV. These strategies improve user experience and uphold the principles of decentralization.
Consumer Crypto Musings
“We’re still in that awkward phase where we make the distinction between ‘crypto’ and ‘non-crypto’ because many still can’t comprehend why or how crypto becomes the preferred operating standard to transmit value.” - @santiagoroel
This sentiment highlights the shift towards crypto as the value transfer layer of the internet. As of late, crypto culture has arguably been the largest producer of interesting things online. Novel coordination methods and new incentive models opening up an entirely new design space.
Still, mainstream narratives surrounding crypto often overlook its non-financial nuances. From a consumer perspective, most don’t equate crypto with enjoying an open internet and having fun online. To give more context to this point, let's look at the reactions to one of the most interesting consumer crypto experiences as of late: @cryptothegame_.
Crypto The Game is a competition where contestants buy in with 0.1 ETH, participate in various challenges, and vote off other players. The goal is to be the last one standing and claim the prize pool comprised of entrance fees. The game's collaborative nature is evident in its challenges, which often involve interacting with other protocols or products. The first season of CTG, held in February, boasted a 41 ETH prize worth approximately $140,000. The second season, which took place in April, saw 800 players compete for an 80 ETH pot.
Recently, CTG was announced as a 2024 Emmy Awards nominee in the "Outstanding Emerging Media Program" [https://www.emmys.com/sites/default/files/ballots/emerging-media-2024-v1.pdf] category. This category recognizes creative productions that enhance viewers' experiences “beyond traditional linear programming”. Side note: Uniswap acquired CTG the same week.
As CTG founder @DylanAbruscato stated, "Interactive experiences like CTG are the bridge to expanding the decentralized ecosystem, we'll continue to bring new users into crypto by creatively encouraging adoption." This ephemeral game structure with clear incentive structures was a huge success.
Slightly switching directions, a recent @seyitaylor tweet provides another relevant perspective: "A lot of the ideas from crypto are going to make their way into the mainstream; but without the crypto. Some of the patterns are good... brilliant, actually — even if it's often not apparent due to poor UX or excessive financialization."
This observation gained traction when MSCHF released their own Venmo-based survivor-style game, sparking debates about potential inspiration from CTG. While some questioned if MSCHF had copied CTG, it's possible that both concepts emerged from the current zeitgeist.
MSCHF's creative process involves working on hundreds of ideas simultaneously, typically spending 12 months refining a concept before launch. Their creations often comment on consumer culture absurdities, pushing against copyright laws through visual remixes of iconic brand symbols.
The emergence of new social games in both crypto and mainstream spaces highlights an interesting trend. It echoes the thoughts that @seyitaylor shared around some of the best ideas in crypto transitioning to the mainstream without retaining their crypto elements. More broadly, it points to lightweight games and disposable apps being a strong playing field for crypto. Are ideas like these more valuable on crypto rails?
In a recent interview with a founder of MSCHF, Gabe Whaley, their complicated relationship with crypto was touched on. A few interesting quotes.
- "We got a lot of signals about it over the last couple of years because there's a pretty big subset of that absurdist crypto community that sort of like built their projects in reference to MSCHF... they were like following the MSCHF."
- "We bought an original Andy Warhol ink drawing, forged it 999 times, shuffled the original in, and sold all of them as 'Possibly Real Fairies by Andy Warhol by MSCHF.' The crypto world saw it as a crypto project, but it wasn’t."
- "We did projects that spoke to themes of crypto like decentralization and splitting up assets and democratizing.. without doing a crypto NFT project."
Azelle Rose Harris, founder of Maia Agency, calls MSCHF “the brand model for the future” as “it avoids all of this unnecessary — and soon-to-be automated — marketing tactic that’s part of a complicated path to convince someone to buy in, instead of creating something so interesting that they want to be a part of it.”
Their genius falls not just in their product innovation, but in their communication. The crypto world could take a page from this playbook, learning to craft compelling narratives as skillfully as they design the products themselves.
Both Crypto The Game and MSCHF's interpretations of large-scale social games are important in their own regard. The point of this piece isn’t to decide who copied who, but to highlight experiences that poke holes in the models of traditional platforms. With time (and on separate planes), these reference points distill crypto as the value transfer layer of the internet.
As @2irl4u recently pointed out, "Building for web3 is flawed. You're building for people. You may happen to be using crypto to create value."
Rather than solely focusing on onboarding billions to blockchain technology, there's immense potential in meeting users halfway. Concepts like programmable money, patronage-based profit models, timestamped provenance, and directly monetized attention are primitives that will be enhanced on crypto rails - catering to particular user personas remains an incredibly open idea space.
Consider the idea that every brand will eventually have its own fan channel. While not a novel concept, those immersed in crypto often claim this space as its origin, even when crypto isn't directly involved. Examples like these start to illustrate how crypto's influence permeates beyond its immediate sphere, whether it receives explicit credit or not.
The introduction of the Emmys' emerging media category for productions that "elevate the audience's viewing experience beyond traditional linear programming" could serve as the foundation for an entire consumer crypto company. This approach demonstrates how crypto principles can be applied to create more engaging and interactive experiences across various media. The key lies in understanding and addressing people's needs, whether through crypto-native solutions or by applying crypto-inspired ideas to non-crypto contexts.
“One app can change the trajectory of this entire industry, and it can come from anywhere, it can happen on any chain”. - @binji_
Until then: If you have a good understanding of culture it is part of your noblesse oblige to annually commit to one (1) fringe idea to the mainstream. - @ansonyuu
L3s
“L3s represent an important leap forward toward unparalleled community-centric customization.” - @syndicateio
Could L3s be the final scaling solution? In this scenario, L3s would serve as tailored ecosystems where both applications and communities can thrive, each with its own specialized execution environment addressing unique requirements and use cases.
Syndicate has seen success onboarding @degen @airstack and others to develop L3s and the recent traction of @PirateNation’s L3 continues to bring mindshare toward the benefits of a personal execution layer
It’s easy to point the finger at scalability as “L3s make mainstream applications more viable technically and economically.” With an alt-DA layer as well, we’ve seen examples like Pirate Nation integrating gasless interactions for users. This has been picking up more traction with @b3dotfun, @uniteio, and @GoldChainDev all looking to offer a seamless experience for users while leveraging the scalability of L3 networks
Developers also see the viability of L3s for their innate customizability. From using a custom gas token to leveraging ‘smart RPCs’ to incentivize only the types of transactions you hope to see the chain used for. L3s are lightweight, requiring minimal operating costs, making this customizability come without the drawbacks of appchains where entire validator networks need to be spun up and incentivized.
This customizability and a level of usability that opens the door to mainstream users makes L3s a perfect environment for community-driven models of ownership as “this degree of integration of community at the network level creates a greater sense of ownership and belonging, leading to higher engagement, growth, and resilience.” Crypto as a socioeconomic movement has been driven by a focus on community. Like minded gamers, creators, and everyday users may look to L3s as a playground for experimentation to best support and embrace communities they align with.
Like everything in this industry, these advantages come with their share of drawbacks
L3s lend themselves to only specific use cases where a custom, isolated execution environment can be beneficial. Gaming is a great example of this and this is why we see much of the L3 adoption in this industry. While interoperability between games (i.e. using my Pirate Nation NFT in Fortnite) still stands out as an ideal use case for web3, owning the marketplace and user experience is likely to be in most game studios' best interest.
Hate to be another person beating this drum, but we are yet to fix interoperability amongst all these layers and chains. Chain abstraction promises a solution over the coming years, but for now, we have a decent onboarding with minimal to no interoperability for the everyday user.
We’re in the early days, but @syndicateio has shown that the design space enabled by L3s is just getting started. It will be something to watch especially as the momentum from @PirateNation starts to trickle across the ecosystem.