RFP 2 - An Options Protocol for Pre-Reserving Cross-Domain Block Space

Cross-domain MEV
1

Researchers: Matheus Ferreira, Bruno Mazorra

Summary

Cross-domain MEV, as a relatively new concept, is relatively understudied. Similarly, tools for optimal extraction of cross-domain MEV are lacking. One potentially useful new cross-domain MEV extraction mechanism would be a cross-domain options protocol for pre-reserving block space. Creating this options protocol is the objective of this RFP.

This research initiative will contribute the following:

  • A model for pricing/conditioning cross-domain MEV
  • An options protocol for pre-reserving cross-domain block space

Background & Problem Statement

Background

Core background concepts/definitions are as follows:

Cross-Domain MEV:

A cross-domain intent settlement platform (such as that being developed by Composable) reshapes an emerging type of maximal extractible value (MEV): cross-domain MEV. As this is a relatively novel form of MEV, and MEV is still a poorly studied and reported phenomenon, a number of questions thus arise. In particular, we at Composable believe that cross-domain MEV could impact the price of intent settlement in a positive way, decreasing costs for users. In fact, this type of MEV is a positive for all levels of the supply chain.

Cross-domain MEV can be defined as the extraction of value from cross-chain transactions. This extractible value originates from two primary sources (McMenamin, 2023):

  1. Intrinsic-extractable value: expected value for an extractor at the precise time the state or transaction must be acted on (t = 0).

  2. In an order, this is approximately the expected value of all front- and back-running opportunities combined.

  3. In a pool, this is approximately the expected value from moving a price up or down at the time when orders are included in the chain.

  4. Time-extractable value: derived similarly to an option, this is the value derived because the extractor has the time between blocks to determine if they should act on a particular blockchain state.

  5. For extractors, this is the sum of all events with a positive extractable value at expiration, multiplied by the probability of that event happening.

This type of MEV has been previously mathematically defined by Obadia et al, 2021. To summarize, this research found that cross-domain MEV is the maximum of the sum of final balances across all considered domains into a single base asset (canonically the first domain considered), given there is some assortment of transactions across all those domains that are executed together. Importantly, their research also concluded that “We expect bridges to play an extremely important role in such an MEV ecosystem, as the cheaper, more ubiquitous, and faster bridges become, the more competitive these arbitrage transactions naturally become by decreasing the inequality of the action space across players as a function of their capital.”

Composable’s MANTIS:

Composable’s Multichain Agnostic Normalized Trust-minimized Intent Settlement (MANTIS) is an ecosystem-agnostic intent settlement framework. MANTIS facilitates the settlement of cross-chain user intents, optimizing the supply chain to deliver upon our vision of a user-centric, ecosystem-agnostic future for DeFi.

In the Composable ecosystem specifically, cross-domain MEV is potentiated from the cross-chain intent settlement. Composable’s MANTIS receives user transaction intents, which are then picked up by solvers who compete to find the best solution to execute these intents. Once the optimal solution is chosen via a scoring mechanism, the winning solver must then execute their proposed solution.

A single solution can involve a number of different domains. Searchers can access the order flow from these solutions not only within each domain but also between domains by accessing the mempool:

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This results in cross-domain MEV.

Problem Statement

The problem at hand is proving the benefit of cross-domain pre-reserved block space and creating a system for doing so. Before all of this, we need to figure out how to assess MEV and condition it so people understand that cross-chain MEV is real/viable. Suppose an MEV opportunity only exists if one acquires block space in two distinct chains. The status quo would require the developer to participate in two distinct markets, and even if they win the block space in one market, they risk losing the block space in the other market. This is known as the exposure problem, and addressing it is likely to open a new frontier on cross-chain MEV. Thus, we need to figure out how to facilitate the expression of cross-chain MEV and to build a system around it.

Thus, the research questions are:

  1. How do we price/condition cross-chain MEV?
  2. How do we build a model for the above?
  3. How do we use this model to create an options market that mitigates the exposure problem?

Plan & Deliverables

Expected outputs/deliverables are as follows:

  • A thorough understanding/quantification of cross-domain MEV as it already exists and is being extracted
  • A model for accurately pricing/conditioning cross-domain MEV
  • An options protocol for pre-reserving cross-domain block space, based on the above model

The plan for achieving this output is outlined below:

Experiment 1: Pricing/Conditioning Cross-Chain MEV

Regarding the first research question, one option would be to pay builders proportionally from the MEV revenue coming from each chain.

Experiment 2: Modeling Cross-Chain MEV

Regarding the second question, it is likely possible to create this model based on data from MEV Boost. We could then take this data and run an experiment with:

  1. Swaps to Ethereum
  2. Swaps to Solana
  3. Swaps between Ethereum and Solana

Then, we could see what these swaps are priced at, what the payoff is, and what we think these should be priced at. There should be enough data on MEV Boost to test cross-chain arbitrage payoff per block.

Experiment 3: Creating an Options Protocol for Pre-Reserving Cross-Chain Block Space

Regarding the third question, we will use the model generated for the second question and leverage Composable’s existing cross-chain infrastructure, along with its research team’s developmental resources, to make this option market functional.

References

How to Participate

If you’re a researcher who believes that you would be a good fit to contribute to any of the Composable RFPs, please reach out to Composable’s Lead Research Associate, Sydney Sweck, at sydney@composable.finance. In the email, be sure to include:

  • The RFP number(s) you’d like to contribute to
  • Your relevant background experience
  • How you think you could contribute to the research