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Interview With Aleph Zero On The MEV Problem That Could Cost Ethereum Users $1 Trillion In Losses

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The Ethereum network remains to this day one of the most active and innovative blockchains in the crypto space. Onboarding thousands of users since its inception, Ethereum is the king of DeFi and some of the hottest trends in this industry with billions in total value locked (TVL).

However, Ethereum is also one of the most expensive platforms for regular users. This has led to a surge in competitors trying to capitalize on the problem-driven by bad actors, MEV tactics, and other strategies to front-run regular people out of the network.

In the Ethereum ecosystem, many projects are working on delivering a needed fix to this issue. In that sense, we sat down with Adam Gagol, Ph.D., the co-founder of Cardinal Cryptography, a Web3 venture studio, and Aleph Zero, a Swiss non-profit organization looking to provide an enterprise-grade solution to the MEV problem. This is what they told us.

Q: What is Aleph Zero and what are the project’s objectives?

A: Aleph Zero is a fast and high-throughput blockchain built with a DAG-based consensus protocol.

We’re developing a privacy-centric framework with use cases that span multiple addressable markets, including the decentralized finance (DeFi) sector, healthcare, gaming, digitization, supply chain management, and more.

The Aleph Zero blockchain aims to solve privacy issues by offering the first hybrid privacy solution which will offer innovative security measures based on a unique combination of “zero-knowledge” proofs (ZKPs) and Secure Multiparty Computation (sMPC).

Q: Could tell our readers unfamiliar with the topics, what MEV stands for and why it’s one of the most important issues to address for Ethereum at the moment?

A: MEV stands for Maximal Extractable Value, which is the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by including, excluding, and changing the order of transactions in a block.

This type of attack occurs when a block producer is able to see the transactions submitted on-chain and insert their own transactions ahead of users — getting the best deals and leaving everyone else with less value.

Aleph Zero plans to tackle the Maximal Extractable Value (MEV) problem via our Liminal MPC framework and submarine sends. We’ve done so by ensuring an encrypted transaction is immediately ordered but only revealed after a specific period (as an example, after three blocks have been finalized).

Through this method, block producers are unable to influence the ordering for their own benefit because when they need to provide an order on transactions, the content of the transactions remains unknown.

Q: How is Aleph Zero different from other projects trying to mitigate the MEV effect on Ethereum, such as Flashbots?

A: We’re actually solving the MEV problem at its root.

There are plenty of other efforts to resolve the issue, Flashbots for one. But none of these upgrades addresses the root cause of the MEV problem, which is that block creators have the power and are incentivized to order transactions in a way that benefits the block producer the most. One of the applications of Liminal is to automate the process of submarine sends.

In a classical submarine send scenario, the user could not reveal encrypted transactions because everything happened manually. These systems lack atomicity, but Aleph Zero solves this issue by ensuring an encrypted transaction is immediately ordered but only revealed after a specific period (for example, after three blocks have been finalized).

Q: Many users were hoping that the change in Ethereum’s market fee with EIP-1559 was going to bring a solution to the high cost of using the network. Months later high transaction fees have persisted, what is really at the core of this phenomenon? And what is Aleph Zero doing to improve the ecosystem?

A: When it comes to transaction cost, the crux of the issue is the low throughput of Ethereum blockchain. It can achieve around ~15 transactions per second, and there are clearly more people wanting to put their transactions on-chain.

EIP-1559 was not aimed to solve the MEV problem, so no one should be surprised that it didn’t. If anything, the EIP-1559 implementation in London upgrade made the problem even worse. Although it put mechanisms in place to lower fees and protect them against volatility, it did so at the expense of miners. Block production revenue was cut by something like a third, so MEV is more incentivized than ever.

It didn’t remove the power of miners to reorder transactions, and since they’re now earning less per block, they’ll need to make up that 30 percent revenue somewhere else. So long as the incentive and ability remain, manipulation will continue to keep MEV high at the expense of the network’s users.

What Liminal has to offer DeFi is not only privacy, but also greater economic consequences.  One of them is the fact that the block producers will be unable to arbitrarily reorder transactions in an inequitable way.

Q: What do you think it’s the biggest obstacle for crypto and blockchain technology to achieve mass adoption? Could MEV become a deterrent for users to onboard on a blockchain?

A: It wouldn’t impact new users so much but MEV could halt adoption from bigger players who tend to trade higher quantities. But it’s only a part of the greater need for us as developers to remove all friction to make the blockchain as accessible to everybody as web 2 is.

Accessibility and expense are still the biggest challenges for the industry to overcome for mass adoption. When you look at something like the iPhone or smart TVs, these devices are simple to use, whether you’re 8 or 80.

DeFi, NFTs, and all these great web 3 use cases of blockchain are still very much accessible mostly to enterprise users. The average person doesn’t want to remember a long key phrase or lose a thumb drive that  can cost them a fortune in lost crypto. It needs to be as easy (or easier) to access as web 2. And that includes the expense.

Two of the big crypto stories last month were the Constitution DAO and ENS airdrop. Both required transaction fees of $50 or more, and in the case of the Constitution DAO, you double that fee in pulling the money out when it failed to win the Sotheby’s auction. $100 is a lot of money to pay just to donate $100 to a cause. DeFi was supposed to remove all these intermediaries from the financial system, but there’s no way you would pay a 100% fee upfront to your bank.

Q: How do you see Aleph Zero in the coming decade with an increase in institutions and people taking an interest in this nascent space?

A: We plan to continue scaling our platform. Aleph Zero will aim to provide cross-chain interoperability with an industry-leading privacy framework. The world in ten years won’t be dominated by just one blockchain solution like Ethereum, but at the same time, none of these so-called “Ethereum killers” is likely to take it offline.

There was a time when people assumed only Bitcoin could survive or only a small handful of blockchain solutions. But why? There’s not a single web-building app, a single camera app or music player or email provider. In reality, we’re more likely progressing toward a world where there will be more smart contract networks than ever.

And that’s great — that’s why Aleph Zero is so focused on providing a secure solution with cross-chain compatibility. We’re helping developers future-proof their projects to remain nimble, regardless of what happens down the road.

 

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Why Gold Is Beating Bitcoin In 2022

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Bitcoin continues to underperform as a general “risk-off” sentiment has investors driving toward gold as a safe haven asset.

Not Risking It

Concerns about the Russo-Ukrainian war continue. The U.S. inflation struggles at a four-decade high and Fed rate hike fears prevail. The uncertainty extends to the world economy as a recession is expected instead of a recovery. The IMF’s managing director Kristalina Georgieva called it “a crisis on top of a crisis.”

“The war is a supply shock that reduces economic output and raises prices. Indeed, we forecast inflation will accelerate to 5.5 percent in advanced economies and to 9.3 percent in emerging European economies excluding Russia, Turkey, and Ukraine. ” The IMF stated last week.

Reuters recently quoted Commerzbank analyst Daniel Briesemann, who talked in a note about the factors that have “lent buoyancy to gold in recent days,” mentioning the “strong buying interest on the part of ETF (Exchange Traded Fund) investors” and news about the Ukraine war.

“Russia appears to be preparing to launch a major offensive in the east of the country – that is generating considerable demand for gold as a safe haven,” the analyst said.

This summarizes the “risk-off” sentiment at the moment. As expected, equities suffer as investors are selling risky assets and purchasing the ones negatively correlated to the traditional market. Thus, the crypto space is struggling alongside de stocks market and gold is rising.

Bitcoin Outperformed By Gold

Data from Arcane Research’s latest weekly report notes that it has been a gloomy year for the “digital gold.” In the first three weeks of 2022, Bitcoin sank 25% and it is still down by 18% in the year despite its slight recovery.

Similarly, Nasdaq records a 19% decline in the year, having underperformed against bitcoin “by a small margin,” notes the report, adding that “This is surprising given that bitcoin has tended to follow Nasdaq, albeit with higher volatility.”

The general fear over geopolitical and macroeconomic uncertainty has given gold the safe-haven asset spotlight once more. The asset outperformed all the other indexes seen below with a 4% gain.

Physical gold outperforming “digital gold” in 2022 | Source: Arcane Research

Meanwhile, the currency market is performing with “the same risk-off patterns.” The Dollar has been proving its “risk-off” dominance as the US Dollar Index (DXY) is up 7%. The Chinese yuan has taken a hit over concerns about the country’s “zero-covid” policy –which creates issues for the global supply chain– and the slowing down Chinese economy. In contrast, investors have been running to the US Dollar for safety.

Bitcoin supporters usually refer to the coin as “digital gold” alleging it is a safe haven asset, and this narrative had held well while BTC had been “uncorrelated with most other major asset classes,” but the tide is shifting with the 2022 scenario as investors are rather placing the coin “into the risk-on basket”.

A previous Arcane Research report indicated that bitcoin’s 30 -day correlation with the Nasdaq is revisiting July 2020 highs while its correlation with gold has reached all-time lows.

A pseudonym traded noted that “As Bitcoin adoption goes on and more institutional investors enter the market, the correlation of BTC and stocks becomes more and more tight. That is a paradigm that the crypto world struggled to come to terms with in the past but is now more real than ever. A healthy stock market is good for Bitcoin.”

Meanwhile, the general sentiment of traders seems to be bearish, with many saying that the coin could visit the $30k level soon.

Bitcoin
Bitcoin trading at $39k in the daily chart | BTCUSD on TradingView.com

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Attendees talk the future of NFTs

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The crypto community headed to Nassau in the Bahamas this week for the inaugural Crypto Bahamas conference.

Like most conferences, panels fill up the agenda and on Wednesday the topics at Crypto Bahamas ranged from NFTs to crypto in sports and to asset allocation in Web3. During one particular conversation, titled Evolution of NFTs: Culture, Utility and Regulation, panelists had some insightful musings on the NFT market.

To put the Crypto Bahamas conference into context, Sam Bankman-Fried’s cryptocurrency exchange FTX moved its headquarters from Hong Kong to the Bahamas in Sept. 2021. It recently inked a multi-year partnership with Anthony Scaramucci’s investment firm SkyBridge Capital, and its events arm SkyBridge Alternatives, or SALT. They jointly presented the conference.

That’s why the NFT panel consisted of multiple perspectives from Tristan Yver, head of strategy at FTX U.S., Joseph Doll, attorney at Fenwick law firm, Roham Gharegozlou, the chief executive officer at Dapper Labs, and Sarah Hammer, the managing director of The Stevens Center for Innovation in Finance at The Wharton School. Zack Guzman, writer for the Meta-owned newsletter platform Bulletin, moderated.

Gharegozlou pointed out how new the NFT market truly is when “most people have only been thinking about it for a year and a half,” making valuations “very immature.” As the CEO of Dapper Labs, the company behind NBA Top Shot,  Gharegozlou recognized that “utility, rewards and the how you value and NFT is primarily based on the strength of that of the community.”

He added that a good way for an NFT collection to build a strong community is to have multiple tiers of scarcity. In the case of NBA Top Shot, at the higher price end there is extreme scarcity, but there are also millions of “common” moments so that people can “get their first NFT and see how it feels without breaking the bank.” 

Tristan Yver echoed that the current valuation and pricing model for NFTs is based on a collective perception on value based on the amount of people willing to buy an asset for a certain amount. He anticipated a “movement away from this consensus view to a more unique singular view where people buy things that resonate with them rather than what resonates with a larger community.”

Joseph Doll chimed in to say that “communities need to be thoughtful about democratizing access.” There are some “massive” barriers to entry to certain projects, he said, including not being early enough or not having enough capital at the time. He questioned, “That’s not what crypto is about, right? It’s kind of about the exact opposite of that.” Democratization, he suggested, can come in the form of derivative projects at better price points.

Another important point brought up by Yver was the reality of scams, especially on Discord and Twitter. He said that “we need to move past security aspects to be able to really bring in the next large mass of users.” He recommended talking among family and friends or asking a Discord moderator to make sure “you click the right link when minting that NFT” because “wallet security sucks right now.”

Gharegozlou even said that Elon Musk, the new owner of Twitter, should use Web3 to fix Twitter’s fraud problem, just as Discord should use Web3 authentication and verification as well. “Once NFT’s are the sort of identity bridge across all these different social networks, identity and assets, authenticity, provenance,” then the system can be more resilient he added.

When asked what “main alpha” the audience should bear in mind, Doll said to engage with and be part of these NFT communities even if it’s “scary,” because getting scammed is a “part of the journey.”

Sarah Hammer, who leads the Cypher Accelerator at Wharton business school, said that the school is launching an incubator specifically for NFT projects in partnership with Dapper Labs because the “NFT model is a business model for the future.” She emphasized that the greatest way to grow and innovate in the space is to increase education efforts in order to get more people learning and working together.

Related: Goldman Sachs reportedly eyes FTX alliance with regulatory and public listing assistance

Recently the Bahamian government allowed residents to use digital assets, including the world’s first central bank digital currency, or CBDC, to pay for taxes in 2022.