dYdX v4 Social Mitigation Strategy for MEV

[RoboMcGobo]

@luisqa

How is it so important? How many times has the issue surfaced? What data do you have to back up any of the claims?

In a previous post, @carlbergman mentioned dYdX trading tried running a malicious validator on testnet to test whether MEV could occur on the chain and whether the dashboard could catch it. Based on these tests, we know that MEV is certainly possible on dYdX.

@carlbergman

To help test the dashboard, the dYdX Trading research team has been running a malicious validator on testnet. The validator employs a sandwiching strategy that manipulates orders to capture MEV. This is exactly the kind of behavior that we would want to catch and punish to protect the integrity of dYdX v4. The dashboard has successfully captured the behavior, with the malicious validator displaying noticeably higher discrepancy compared to other validators.

Obviously, as the chain is not yet live there’s been no data on MEV on mainnet, but it would be naive to assume that MEV is possible and yet won’t be exploited. In the event that MEV is exploited by one or more malicious validators, due to the volume that flows through dYdX every day, it’s likely that far more value than the ask of this proposal will be extracted by searchers in a single day.

This group is not only there to catch these malicious actions and make recommendations on them, but also to act as a deterrent for potentially malicious validators. If people know that this process exists, they will be far less likely to engage in bad MEV practices. The value being asked for that peace of mind seems well worth it, imo.