Introduction to dYdX v4 Chain and MEV
The dYdX v4 chain is designed to provide users with an optimal trading experience, featuring zero gas fees, low latency, high throughput, and deep liquidity. These characteristics make it comparable to a centralized exchange. To achieve this, the dYdX chain employs an in-memory order book where only filled orders are committed to consensus off-chain. This design could potentially lead to Miner Extractable Value (MEV) extraction through both new and established methods. The dYdX team is proactively addressing these concerns from the outset and plans to release more specific information about their MEV solutions soon.
Understanding MEV
MEV refers to the profits that validators can earn by reordering or censoring transactions to their advantage. This practice can negatively impact dYdX users by affecting pricing. When developing dYdX v4, the team explored various strategies used in the crypto ecosystem to mitigate MEV risk and protect users. In the Ethereum ecosystem, a neutral approach is taken towards MEV, utilizing a Proposer-Builder Separation (PBS) approach for auctioning off block space. Although PBS mitigates centralization risks related to MEV, it still harms average users. In contrast, the Cosmos ecosystem, particularly Osmosis, adopts a more opinionated stance against MEV and aims to minimize harmful MEV while capturing any benign MEV generated.
The Choice of Cosmos Infrastructure
dYdX's goal is to offer the best product experience on the dYdX v4 chain. By choosing the Cosmos infrastructure, the team can create a fully decentralized exchange with high performance. This infrastructure also allows them to integrate unique MEV solutions directly into the dYdX v4 chain. The flexibility provided by Cosmos in terms of block construction and MEV management can be built into the protocol code itself. This approach aligns the incentives of validators and dYdX users through an on-chain solution, preventing validators from profiting at users' expense. Such behavior is considered detrimental to both the protocol and community, and it is expected that the community will take steps to disincentivize and punish bad actors.
Collaboration with MEV Experts
As part of their efforts to address MEV concerns, dYdX has been working closely with MEV experts such as Skip Protocol and ChorusOne to develop mitigation strategies for the dYdX v4 chain. More details on these strategies will be released in the coming months leading up to the Mainnet launch. This collaboration demonstrates dYdX's commitment to prioritizing user experience and security in their v4 chain.
About dYdX
dYdX is a leading developer of decentralized exchanges, dedicated to building open, secure, and powerful financial products. The platform currently operates on audited smart contracts on Ethereum, eliminating the need for users to trust a central exchange while trading. By combining the security and transparency of a decentralized exchange with the speed and usability of a centralized exchange, dYdX aims to revolutionize the world of cryptocurrency trading.