This will be a controversial post about LEB4 and MEV. It may even be wrong, so enjoy picking it apart.
You and 9 coworkers have a pool for lottery tickets. Your plan has been to benefit from your coworkers’ wins, but if you win you are just going to keep all the money, You, ser, are a cheat. Amazingly, you win the lottery and take off running with a million dollars. Your coworkers are pissed because you stole 100,000$ from each of them.
They never had a 100,000$ portion. If your lottery number came up, the possibilities were either 1) you were not in their pool, so the pool didn’t win or 2) you were going to steal their money. There is no scenario where that money would belong to them. They just didn’t know until you won.
Your real theft is from taking a share of the money if anyone else won. You decreased their expected returns by 10% as soon as you entered the pool. And in 9 wins out of 10, your theft would never have been discovered.
How this applies:
Assuming maximum penalties, a NO that wins a large block and doesn’t share with rETH is still strongly net positive for rETH. This is fairly easy to prove:
An 8E minipool operator gets a 100 ETH block and keeps it rather than sending to their fee distributor address. They are penalized 8 ETH plus 2.4 ETH worth of RPL; so rETH benefits from 10.4 E of MEV- expected rewards from decades of honest validating. If that minipool was never created, or the minipool had missed the proposal/been offline, rETH would have gotten 0 from the block. More specifically, there would have been about a 3% chance that block would have gone to a rocket pool validator; 65% would have gone to rETH. so about 2ETH expected returns instead of 10.4 ETH (if that validator was honest). Not to mention the high likelihood it would have gone to Lido or a centralized competitor. So to summarize, 10.4 ETH > 2 ETH. I wish we all had thieves like that.
So where is the actual theft? The thieves bringing down expected value are all the others who are planning to steal, but are benefiting from honest operators while waiting for their lottery block.
Why this matters for Rocket pool MEV theft:
Both lottery block and continuous theft scenarios can be quantified as ongoing drags, one hidden and the other in the open. Specifically, properly categorizing who is actually stealing execution block value (ie, the numerous minipools that would steal blocks, but haven’t yet) lays the moral groundwork for the solution below for why ‘innocent’ NOs should pay for stealing blocks.
The numbers for LEB4 (these are not set in stone):
RPL bond 2.8 ETH
rETH share of rewards: ~75%
Penalty maximum (6 ETH- leave 0.8 ETH for exit bribe, see below)
Lottery block threshold (8 ETH=6/0.75)
MEV persistent theft: ~0.48 ETH per year per validator (32E x 2% x 75%)
MEV large block theft: ~0.0336 ETH/year/validator (0.07 x 0.64 x 75% - ~7% of execution rewards above 8ETH (valdorf calc) * 75%)
N.B. I separately calculated about 0.00996 ETH per block from october until july for all flashbot blocks (886471 blocks, 815 lottery blocks, 8834 ETH at risk above 8ETH cutoff); at 3.46 blocker per year that’s about 0.0345 eth per validator per year; remarkably close.
Obviously penalties need reworking. 2 strikes, and 1 ETH maximum doesn’t make sense, particularly as oDAO can then award as many strikes as possible for a single infraction, or no infraction. Plus this is RPL’s better use as collateral than as a last resort. Plus we should formalize un-penalizable bribe money to encourage malicious NOs to exit (i used 0.8 ETH).
To me, the easiest way to deal with this is penalizing the offending minipool’s commission. This requires a smart contract change (but has no conceivable effect on honest NOs), but if every minipool with a penalty drops commission to such that all skimmed rewards go to rETH (negative commission ~1.78%), this will direct ~.32E/year to rETH, resulting in a net 0.16 ETH/year average profit, or a breakeven time of 4/0.16 = 25 years, assuming no changes in reward structure (the scourge) or decrease in rewards. In reality, the median minipool will essentially have a nearly infinite breakeven timeframe. I think this is sufficient to discourage any theft of this kind.
Large block theft:
Here, again I make the point that the actual theft is perpetrated by silent actors, and not the ones we see. So we just have to make up 0.0336 ETH/year/validator by assuming every possible cheater is cheating. If commission is 14%, rETH is paying ~0.2352 ETH/year to a 4E validator; at 12%, rETH is paying ~0.2016. The difference is ~0.0336. So a drop of 2% will make up large block theft to rETH. Increase by 50% to 3% commission decrease for good measure.
Would a NO form LEB4 for a reduced commission?
Numbers for 11% commssion:
The return in ETH is greater, 77% rather than 42% more than solo staking
If tokenomic changes occur, the increased rETH produced and the decreased ratio of RPL to borrowed ETH would synergistically increase RPL rewards- doubling or more.
With a minimum RPL collateral of 70% of bonded ETH, anyone forming LEB4s will be, almost by definition, much more concerned about RPL rewards and much more bullish on RPL than LEB16s
If you already have the RPL, this is ‘free money’ to bond reduce. There are probably not many RPL naive individuals as seeing a 70% collateral as the time to jump on board.
Who loses in this situation?
non-rocket pool validators- this is the smoothing effect, those juicy MEV blocks that would go mostly to lido/coinbase/centralized services instead go to either rocket pool protocol or node operator (For example, with current market share RP has about ~75% chance of missing ALL 10 of the biggest block rewards from the last year). Unfortunately, I don’t care about these losses, nor should the pDAO based on our charter. I guess i do care that they don’t go to solo validators- but there aren’t that many
Honest NOs - although non-stealers will still do far better with LEB4s under this scenario than under LEB8s due to capital efficiencies, they do worse than LEB4 at 14% commissoin. But please see next section
Normalizing lottery block MEV theft:
Two years ago, MEV was seen as unfair practices by a few assholes leeching off ethereum. Now MEV boost is a mark of responsible citizenship in rocket pool, and failing to collect MEV will result in heavy penalties. This is how practices get normalized.
Currently, we rely on ethical entreaties and small penalties to prevent large block theft. These only serve to prevent small blocks and ethical/lazy/unsophisticated people from stealing (whether we are talking about LEB4, LEB8, or LEB16). About more than 1/3 of all the possible lottery block theft is in just 10 blocks; for these mega blocks (200+ ETH), there is no reasonable way to retroactively punish thieves.
What if we enabled and encouraged people to keep their large blocks? If everyone kept their large blocks, it would have no net effect on folks outside the smoothing pool, and within the smoothing pool it would make some proportion (on the order of 10%?) of your execution layer rewards unsmoothed.
How would it work? Something along the lines of: smart node directs all MEV blocks greater than some level (let’s say 8 ETH) to a different fee distributor, one per node. From there, calling distribute would send the first 6 ETH to rETH, and the remainder to the node’s withdrawal address. The minipool is not penalized and can continue validating because it is now doing what we want; there is no significant benefit to cheating- no benefit to sybiling- no specific need for high collateral per megapool to allow lower LEBs.
Benefits and risks:
The expected value of rETH and honest NOs increases
The expected value of MEV stealers decreases
The volatility of rETH value decreases somewhat
The volatility of NO rewards increases somewhat
Effectively removes an important oDAO duty in all but weird edge cases
No inefficiencies with penalizing/liquidating RPL/exiting/pariah status for block stealing
Low minimum bond requirement is needed (haven’t calculated, but suspect still be quite attractive to roll out 2ETH minipools, particularly with RPL tokenomic changes)
Doesn’t rely or even benefit from ‘forced’ exits
As a NO bond increases (in megapools), the payment needed per validator could decrease
Alternatively, a dual system could exist, where minipools could either be ‘pay as you go’ or have high bonded megapools
The 2% or 3% haircut goes to an earnest money account; if each time a large block goes to a NO, the appropriate amount comes out to rETH; after a year, any remaining money gets shared amongst node operators (this ensures NOs aren’t overpaying for security)
The amount of “stolen” MEV gets charged to NOs on a monthly basis with a variable commission
You don’t have to strive for a system with no corruption. You can make a system where some corruption is present but red tape is minimized, and everyone is still better off. Better yet, you can take what we call corruption, regulate it with proper incentives, and call it something uplifting or even heroic; now all parties can participate in the benefits, rather than just the unethical.