Crypto's Annoying MEV Problem: Solana's Challenges and Solutions

In the ever-evolving world of cryptocurrency, Solana has emerged as a formidable player, known for its high-speed transactions and low fees. However, like all blockchain networks, it faces its own set of challenges. In a recent episode of the Lightspeed podcast, hosts Jack Cubanak and Mert Mumtaz, along with guest Dan Smith, delved into some of the most pressing issues facing Solana and the broader crypto ecosystem. From the intricacies of Maximal Extractable Value (MEV) to the growth of stablecoins, the discussion shed light on the complexities of the crypto market and the innovative solutions being developed to address these challenges.

The Wash Trading Bot Phenomenon

One of the most intriguing topics discussed was the recent discovery of a wash trading bot on Solana that generated a staggering $800 billion in volume over just a couple of days. Dan Smith, known for his keen eye in spotting blockchain anomalies, explained how he uncovered this peculiar activity:

"Our Solana dex volumes just absolutely exploded. So I checked that pretty much every day because I'm very interested in what's driving the needle on Solana. And right now it's dex volumes. And so I logged in and there's like a $800 billion candle on the most recent day."

This discovery highlights the importance of critical analysis when interpreting blockchain data. The bot's creator admitted to wanting to test if token prices responded to volume, showcasing the experimental nature of some actors in the crypto space.

Navigating Crypto Data Noise

For the average trader or even crypto professional, distinguishing between genuine market movements and data noise can be challenging. Dan Smith offered valuable advice on how to approach crypto data:

"Your first question when you see an anomaly in data should not be like, 'Holy shit, look at this growth.' That should never be the first reaction. It should always be 'why?' Like, what's the driver?"

This cautionary approach is crucial in an ecosystem where metrics can be easily manipulated. Smith emphasized the importance of understanding the motivations behind sudden spikes in activity and assessing their sustainability.

The Reliability of Revenue (REV) as a Metric

In the midst of various metrics that can be gamed or misinterpreted, Smith pointed to revenue (REV) as a more reliable indicator of blockchain health:

"This is why we are like, this is literally why there is a much harder to game metric. Like, if you think about Solana, like, okay, every validator could choose to spam their own blocks. But then they'd have to pay the burn."

REV represents the monetary demand to transact on a chain, making it a more robust measure of genuine economic activity on a blockchain network.

The Stablecoin Landscape

The conversation shifted to the state of stablecoins across various blockchain networks. Dan Smith shared some intriguing insights:

"Ethereum's lead in the stablecoin game is like staggering. They have about $110 billion and then it's like everybody else combined is like another $50 billion maybe, which is fascinating to see."

This revelation underscores Ethereum's dominance in the stablecoin market, but also highlights the potential for growth on other chains like Solana.

Solana's Stablecoin Growth

Despite Ethereum's lead, Solana is making significant strides in the stablecoin arena. Smith noted:

"Solana's actually doing quite well in their stablecoin balance is on our Solana dashboard that you can check out in the show. So I would say that things are looking pretty strong. And it's all largely driven by USDC."

This growth in USDC on Solana is a positive indicator of the network's increasing adoption and utility in the DeFi space.

The MEV Challenge on Solana

Maximal Extractable Value (MEV) and specifically the issue of sandwiching attacks emerged as a central topic of discussion. Sandwiching is a form of front-running where bots insert transactions before and after a user's trade to profit from price movements.

Mert Mumtaz explained the current state of sandwiching on Solana:

"We did the math on this and it seems something like the stake will, if at the current rate would grow maybe 0.2% per year. And so perhaps the centralization concern was a little overstated, but we'll see."

This suggests that while sandwiching is a concern, its impact on network centralization might not be as severe as initially feared.

Innovative Solutions to MEV

The podcast highlighted several innovative approaches being developed to combat MEV on Solana:

1. Conditional Liquidity: Platforms like D flow are introducing new trading structures to mitigate MEV.

2. Declarative Swaps: The Helios explorer is implementing a swap function using declarative swaps, which aims to provide better execution for retail traders.

3. Protocol-Level Changes: Modifications like SIMD 96 aim to reduce or remove the burn, potentially altering the incentives for MEV.

4. Improving Transaction Pipeline: Work is being done to reduce the latency between getting a quote and executing a transaction, which could naturally reduce the window for sandwiching attacks.

The Legal Implications of Front-Running

An important point raised during the discussion was the potential legal ramifications of allowing front-running on blockchain networks. Mert Mumtaz cautioned:

"There's also a legal side to this, right? Traged by people, governments, regulators know what front running is. This is something that exists. It's looked up on as being illegal in many jurisdictions."

This serves as a stark reminder for protocol operators and developers to consider the regulatory implications of their design choices.

The Future of Stablecoins

The podcast touched on the potential proliferation of stablecoins, with various companies considering launching their own. Dan Smith pondered:

"PayPal wanted to get their ring and their hat in the ring for the same reason. You could probably see an end state where everyone's got their own stable."

However, he also noted that market forces might push back against this trend, potentially leading to a more consolidated stablecoin landscape.

Innovative Payment Models

The discussion concluded with a mention of innovative payment models, such as the "buy now, pay everything" concept proposed by Multi-coin Capital. This model would allow users to stake assets like wrapped SOL to pay for services over time, potentially opening up new use cases for Solana's native token.

Conclusion

The Lightspeed podcast episode highlighted the complex challenges facing Solana and the broader crypto ecosystem. From tackling MEV and sandwiching attacks to fostering stablecoin growth, the Solana community is actively working on innovative solutions. While challenges remain, the discussion painted a picture of a vibrant ecosystem that's continuously evolving to meet the needs of users and navigate the regulatory landscape.

As Solana continues to grow and mature, these discussions and the solutions they inspire will play a crucial role in shaping the future of the network. With its high speed, low fees, and growing ecosystem of developers and projects, Solana is well-positioned to address these challenges and emerge as a leading blockchain platform for the next generation of decentralized applications.

Facts + Figures

• A wash trading bot on Solana generated $800 billion in volume over a couple of days.
• Ethereum leads in stablecoin supply with about $110 billion, while all other chains combined have around $50 billion.
• Solana's stablecoin growth is largely driven by USDC.
• The stake growth from sandwiching attacks on Solana is estimated to be around 0.2% per year.
• Median transaction land time using Helios state connections is about 0.8 seconds on Solana.
• IEX, designed to limit HFT advantages, has never achieved more than 4% market share of US trading in a decade.
• On Solana, one entity was responsible for about 50% of all sandwiching attacks at the time of recording.
• Tether reported $5.2 billion in net profit for the first half of 2024.
• Aave and Curve's stablecoins have reached around 100 million in supply each.
• The Solana dashboard by Blockworks Research is available at solana.blockworksresearch.com.

Questions Answered

What is wash trading and how was it recently exploited on Solana?

Wash trading is a form of market manipulation where an entity trades with itself to create artificial volume. On Solana, a bot recently exploited this by creating its own Orca pool with zero swap fees, taking out flash loans, and swapping large amounts back and forth. This generated an astounding $800 billion in volume over just a couple of days, highlighting the need for more robust filtering mechanisms in crypto data analysis.

How does Solana compare to Ethereum in terms of stablecoin supply?

While Ethereum leads significantly in stablecoin supply with about $110 billion, Solana is showing strong growth in this area. The Solana ecosystem's stablecoin balance is increasing, primarily driven by USDC. This growth indicates increasing adoption and utility of Solana in the DeFi space, although it still has a way to go to catch up with Ethereum's dominant position.

What is MEV and how does it affect Solana?

MEV, or Maximal Extractable Value, refers to the profit that can be extracted from reordering or inserting transactions within a block. On Solana, this manifests primarily as sandwiching attacks, where bots front-run user transactions to profit from price movements. While this is a concern, recent analysis suggests the impact on network centralization might be less severe than initially feared, with stake growth from these attacks estimated at around 0.2% per year.

What solutions are being developed to combat MEV on Solana?

Several innovative approaches are being developed to address MEV on Solana. These include conditional liquidity structures by platforms like D flow, declarative swaps implemented in the Helios explorer, protocol-level changes like SIMD 96 to alter MEV incentives, and improvements to the transaction pipeline to reduce the window for sandwiching attacks. These solutions aim to provide better execution for traders and maintain the network's decentralization.

How reliable is revenue (REV) as a metric for blockchain health?

Revenue (REV) is considered a more reliable metric for blockchain health compared to other easily manipulated metrics. It represents the monetary demand to transact on a chain and is harder to game, especially on networks like Solana. While other metrics can be inflated through various means, REV provides a clearer picture of genuine economic activity on a blockchain network.

What are the potential legal implications of front-running in crypto?

Front-running, which includes practices like sandwiching attacks, is viewed as illegal in many jurisdictions when it comes to traditional financial markets. This legal perspective is beginning to extend to the crypto space, potentially exposing protocol operators and developers to regulatory scrutiny if they knowingly allow or facilitate such practices. This underscores the importance of addressing MEV not just for user experience, but also for regulatory compliance.

How might the stablecoin landscape evolve in the future?

The stablecoin landscape could potentially see significant changes, with various companies, including traditional financial institutions, considering launching their own stablecoins. However, market forces may push back against this proliferation, potentially leading to a more consolidated landscape. The success of new stablecoins will likely depend on factors such as regulatory compliance, user adoption, and integration with existing financial systems.

What innovative payment models are being proposed for Solana?

One innovative payment model proposed for Solana is the "buy now, pay everything" concept. This model would allow users to stake assets like wrapped SOL to pay for services over time. Such models could open up new use cases for Solana's native token and potentially increase its utility in everyday transactions, further driving adoption of the Solana ecosystem.