Disclaimer: This article is intended to convey more market information and does not constitute any investment advice. The article only represents the author's point of view and does not represent the official position of Mars Finance.
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Source: Ethereum enthusiast
A year ago, Gnosis Protocol v1 was launched, and a new decentralized exchange mechanism was introduced on Ethereum.
Today, we have good news to announce: Gnosis Protocol v2 (GPv2) is coming soon!
Gnosis Protocol v2 will use batch auctions to defend against MEV (Maximum Extractable Value) attacks, and integrate various decentralized exchanges as liquidity sources to provide traders with the best price . Before
goes live, we have a big news to share with you: CowSwap, a decentralized exchange used as a proof-of-concept, has been launched, and now offers up to 90% gas subsidy. New features of GPv2 will be rolled out gradually on CowSwap.
In addition, we have teamed up with Balancer to create an integration protocol Balancer-Gnosis-Protocol. The protocol is expected to go live in mid-June and build a stable GPv2 version based on the Balancer v2 Vault. Although Balancer-Gnosis-Protocol can interoperate with any decentralized exchange, it is most gas efficient when trading with Balancer pools. Just like the movie universe, Balancer-Gnosis-Protocol (BGP) is the combined universe of the cryptocurrency industry.
We have applied the lessons learned from Gnosis Protocol v1 to the upcoming v2, with an increased focus on improving user experience and mining on-chain liquidity sources, while continuing to protect traders from MEV attacks. Since January 2020, MEV has reached 0.1% of all DEX order values.1
GPv2 might solve this problem?
The Owl in the Dark Forest
In 2020, a blockchain-related horror story caused panic within the Ethereum community. Through this story, the dark forest is brought to the surface. We know that in the dark forest, any open and valuable trade is likely to be hunted. The so-called dark forest refers to the transaction pool of Ethereum: in a dark transaction pool, transactions waiting to be packaged wander around.
Although this issue was originally pointed out in 2019, it was only recently that it was officially named "Maximum Extractable Value (formerly known as Miner Extractable Value)" and received widespread attention. The term MEV was coined by Phil Daian and is defined as “the profit in cryptocurrency that miners can extract directly from the operation of a smart contract”2. Since January 1, 2020, the value extracted from Ethereum users totaled $402.6 million 3 , or 13.7% of Ethereum’s total transaction fees during the same period 4 .
By far, the most common MEV attack experienced by users is front-running. The so-called preemption is to use the information of transactions that have been broadcast on the network but not yet on the chain (the information is public) to preemptively execute transactions and make profits from them. Front-running has the potential to be hugely rewarding, as front-running traders execute trades before the price of an asset changes and earn huge spreads from it. While the impact on Ethereum appears to be just a rise in gas prices, the front-running form of MEV hurts decentralized exchanges the most, as traders can experience a double whammy of failed trades and high slippage. The main force of the rush is the arbitrage bots on Ethereum. However, the current trend is that malicious miners will directly run away from the transaction orders. We expect that in the future, Ethereum users will be siphoned off more value5.
However, preemption is only a form of MEV. Backrunning and "sandwiching" are new forms that have become popular in recent months. This is largely due to the newly developed MEV-geth client software by the Flashbot team. The team sought to address concerns raised by the MEV Dark Forest 6. In the past, only a few entities with mining pool resources were able to obtain MEV. However, with the MEV-geth client, anyone can easily monitor transactions with MEV, notify miners of these arbitrage opportunities, and then share the profits with them. Since January 2021, MEV drawn is projected to increase by 136%5.
However, in the dark forest, owls can also see.
- Trade on GPv2's proof-of-concept decentralized exchange CowSwap and enjoy 90% gas subsidy-
Gnosis Protocol V2 utilizes a batch auction mechanism, combined with off-chain order placement and Ethereum's on-chain liquidity, to solve the problem MEV problem. The improved GPv2 of
based on Gnosis Protocol v1 is optimized in terms of "Conformance of Requirements (CoW)". The so-called demand consistency is “an economic phenomenon in which both parties to a transaction have what the other party wants and conduct transactions directly”. Similarly, on GPv2, if two traders each hold the assets the other party wants, they can trade directly without relying on external market makers or liquidity providers. This means that without the middle party making the difference, both parties to the transaction can get a better price. Only the remainder that cannot be settled directly with GPv2 traders will be sent to the underlying automated market maker. Finally, the batch auction mechanism will continuously settle orders on the protocol in batches, and the size of each batch of orders is only limited by the block gas limit.Each batch of transactions is forced to adopt a unified settlement price, that is, the assets obtained by the orders executed in the same batch are settled at the same price. From the user's perspective, the global on-chain liquidity pool means that GPv2 can ensure that traders receive quotes that are comparable to or better than other decentralized exchanges. The unique design features of
GPv2 provide traders with MEV protection in the following two cases:
- If GPv2 discovers CoW, there is no need to use other sources of on-chain liquidity to settle the transaction, as the liquidity is present within the batch of transactions. The MEV attack surface is completely eliminated as attackers cannot use mechanisms such as transaction ordering to replicate transactions. Since GPv2 adopts a unified settlement price, the results of each batch of transactions are independent of internal ordering.
- If GPv2 does not discover CoW, it will use the on-chain liquidity pool to provide the best price for auction settlement. Since Gnosis Protocol V2 solvers will keep slippage at extremely low levels, MEV attackers have a hard time replicating transactions as it is unprofitable for them and only certified solvers can commit Bulk billing solution.
User-submitted trade orders need some flexibility, as solvers need to find the best settlement method. Instead of using a centralized operator or constant function market maker to settle transactions, GPv2 decides the best solution from batch settlement solutions submitted by solvers. The protocol rewards the winning solver with 1 GNO. In other words, the protocol rewards solvers with 1 GNO for every batch of transactions executed. Anyone can become a solver, but the following conditions must be met:
- Ethereum addresses that want to become solvers need to stake 100 GNO tokens in GnosisDAO.
- Once 100 GNO tokens are staked (locked), GnosisDAO must vote to approve or reject that Ethereum address as a resolver.
- Additionally, solvers must have technical knowledge on how to create a proper batching solution and take the risk of being penalized by GnosisDAO for mishandling.
Economically incentivized solvers earn rewards by competing to provide traders with the best order settlement solution. Since optimal trade settlement can be achieved through different combinations, we believe that order settlement through decentralized and permissionless competition means that GPv2 can offer the fairest price in the entire DeFi space. By combining a batch auction mechanism with off-chain order placement and Ethereum's on-chain liquidity supply, Gnosis Protocol V2 offers traders a new way to withstand MEV and leave the dark forest unscathed. However, owl-like night vision alone is not enough to save every user...
The United Universe of Cryptocurrency Industry: Balancer-Gnosis-Protocol
- Click here to see the announcement of Gnosis and Balancer Labs partnership - Gnosis and Balancer has teamed up to create an unparalleled decentralized exchange experience. Balancer-Gnosis-Protocol (BGP) combines the advantages of two protocols: Balancer V2 flexible liquidity pool implemented by a single vault architecture and asset manager and price discovery mechanism and MEV protection of Gnosis Protocol V2. Balancer-Gnosis-Protocol (BGP) will go through the following rollout stages:
stage one
- CowSwap alpha (GPv2) : Gnosis Protocol V2 alpha has been applied to CowSwap, a proof-of-concept decentralized exchange. Currently trading on CowSwap can get a 90% gas fee subsidy. The new features of GPv2 will be rolled out gradually on CowSwap. Users, please note that although CowSwap has been peer-audited, it is currently undergoing a more formal audit. Therefore, users trade on CowSwap at their own risk.
Stage 2
- Balancer V2: Balancer V2 has been launched and is only for developers for the time being. In the next few weeks, traders can migrate liquidity to Balancer V2. At this stage, migrating liquidity from Balancer V1 to Balancer V2 can earn BAL tokens as a reward.
- CowSwap beta(GPv2): CowSwap will be migrated to the final version GPv2 contract that integrates Balancer V2.
Stage 3
- Balancer-Gnosis-Protocol: Balancer V2 will fully integrate Gnosis Protocol V2 in mid-June to form Balancer-Gnosis-Protocol and launch a joint incentive plan.
Through collaboration, we can provide tools with decentralization, transparency and great value to outperform the traditional financial industry. We will soon publish an article on how Gnosis Protocol V2 solves MEV by analyzing blocks step by step, and an announcement that BGP will go live in mid-June, so stay tuned. If you have any questions? Please join our Gnosis Discord channel. For updates on the progress of Gnosis Protocol V2, CowSwap and Balancer-Gnosis-Protocol, follow @GnosisPM on Twitter and check out our forum for the Gnosis Protocol collection.
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