About Arbiter

Arbiter is a pioneering protocol that addresses the issue of Maximal Extractable Value (MEV) in a protocol-centric and sustainable way. Instead of allowing validators (miners) to capture most of the value, Arbiter redirects a most of this value back to the protocol and its liquidity providers, fostering a more balanced and profitable ecosystem.

What is MEV, PEV and EV?

definitions

Maximal Extractable Value - MEV

"refers to the maximum amount of value a blockchain miner or validator can make by including, excluding, or changing the order of transactions during the block production process." - source MEV consists of two different ways of extracting value:

  • Liquidity Tap Extractable Value (LEV): refers to a value that can be extracted from the the last state of a blockchain while creating a new block.

  • Transaction Extractable Value (TxEV): refers to a value that can be extracted by sequencing transactions and messages.

Protocol Extractable Value - PEV

PEV is similar to MEV but applies specifically within the context of a single DeFi protocol or smart contract. As MEV, PEV consists of pLEV and pTxEV. Actors who look for MEV opportunities are called Searchers.

examples

  • LEV Examples:

    • Dex-Dex Arbitrage

      For example, if Token A price at end of the last block was $100 on Uniswap and $102 on SushiSwap , an actor could buy Token A on Uniswap and sell it on SushiSwap simultaneously, performing arbitrage. (Currently, validators choose the actor that shares most of the profit with them.)

    • Dex-Cex Arbitrage (pLEV) If, just before the next block production, Token A is trading at $100 on Uniswap and $102 on Binance, an actor could submit a transaction to buy Token A on Uniswap and sell it on Binance, capturing the $2 profit per token. (Currently, validators choose the actor that shares most of the profit with them.)

    • Liquidation Arbitrage (pLEV) In DeFi lending protocols and leveraged trading (margin and futures) platforms, if a borrower’s or trader’s collateral or margin value falls below a certain threshold, their position can be liquidated. An actor might monitor these protocols for arbitrage opportunities and submit a transaction to profit when an opportunity arises. (Currently, validators choose the actor that shares most of the profit with them.)

    • Researching more examples...

  • TxEV Examples:

    • Frontrunning: Placing a transaction ahead of a known pending transaction to profit from the price impact it will cause. For example, buying tokens just before a large buy order to sell them later at a higher price.

    • Backrunning: Placing a transaction immediately after a known pending transaction to capitalize on the price movement it creates. For example, selling tokens after a large buy order drives up the price.

    • Sandwiching: Combining both frontrunning and backrunning by placing a buy order before and a sell order after a target transaction, profiting from the price impact of the sandwiched transaction.

Problem Statement

Many DeFi protocols rely on external Liquidity Providers (LPs) to supply liquidity, which, combined with fluctuating market conditions, creates arbitrage opportunities. However, the higher the risk borne by LPs, the greater the potential for arbitrage profits—a dynamic that disproportionately benefits a small group of searchers and validators, while LPs face substantial risks with minimal reward.

Additionally, user interactions with these protocols are often exploited through frontrunning, backrunning, and sandwiching attacks. Currently, searchers compete for profits by tipping validators, leading to a system where the majority of Extractable Value flows to validators. This leaves LPs, who take on significant capital risks, and searchers, who provide operational effort, with no or only a small share of the MEV revenue.

Solution

Liquidity Providers would benefit from having a single searcher who shares a portion of their profits. With only one searcher, the need for undercutting and validator tipping is eliminated, increasing the overall yields for that searcher. Even after sharing part of their gains, the searcher would still profit more while simultaneously boosting the returns for Liquidity Providers.

This can be achieved by restricting access to the Extractable Value or by granting one actor preferential access. This privilege could be auctioned periodically, with the highest bidder receiving exclusive access. The auction system ensures that the most efficient searcher receives the preferential access. The proceeds from these auctions would be redistributed to Liquidity Providers.

In this auction process, the integrated protocol's native token may be used as currency, providing additional utility for tokens of any project integrated with Arbiter.

Advantages

  • Extracted Value is kept by Liquidity Providers and searchers

  • Constructive Competition among searchers increases yields of Liquidity Providers and leads to higher efficiency

  • Creation of Utility for Tokens of projects integrated with Arbiter

Summary

Arbiter can be seamlessly integrated with DeFi protocols where Protocol Extractable Value (PEV) exists. It introduces a unique entity called the Protocol/Contract Arbiter—a designated address with privileged access to the protocol or contract. This Arbiter role, which provides a competitive edge in capturing PEV, is auctioned off for specific time periods. Through this mechanism, PEV is indirectly funneled back into the protocol, benefiting both the protocol and potentially Liquidity Providers.

Candidates for the Arbiter role compete by developing the most effective strategies for capturing PEV in order to win the auction.

NextArbiter Auction Models

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