With C.o.R.E.3 beginning next week, the Tokemak team has lined up a series of AMAs ("Ask Me Anything") with various Reactor candidates.
The Spotlight Series will allow the Tokemak community to familiarize itself with the protocols that are interested in securing a Reactor of their own, and get a peek into why these DAOs are so interested in moving away from liquidity mining in favor of sustainable liquidity.
Next up is Rook, a protocol that generalizes MEV (Maximal Extractable Value) capture on the application layer in a positive flywheel that increases market efficiency and allows users to extract transaction order flow profits for themselves rather than give it to miners.
Rook is an open settlement protocol that leverages the world’s best algorithmic strategists in order to maximize the value of every transaction for protocols, market makers, and traders alike.
For more information about Rook:
C.o.R.E. Spotlight Schedule
- StakeDAO - Monday April 25, 9:30am PDT
- Angle Protocol - Tuesday April 26, 9am PDT
- Silo - Wednesday April 27, 10am PDT
- Redacted - Thursday April 28, 10am PDT
- Rook - Friday April 29, 11am PDT
- DODO - Tuesday May 3, 9am PDT
- Immutable X - Tuesday May 3, 5pm PDT
- Paladin - Wednesday May 4, 10am PDT
- Goldfinch - Wednesday May 4, 11:30am PDT
- Badger DAO - Thursday May 5, 11am PDT
Alternatively, the recording is available on SoundCloud.
"So you've created MEV by creating a transaction. You don't know you've created it. Right? It depends on all kinds of factors, and you're not aware of this, but you have. And when you do, it's caught, captured, and then sent back to you. So it's kind of going up the chain rather than down the chain to the miners." – Hazard
- Hazard is the CEO of Rook, an engineer by trade, and a mathematician by training.
- Rook is a DAO focused on building an open infrastructure for transaction settlement in a way that allows value to be extracted by users rather than by miners.
- Users can use the Rook dapp to trade and provide liquidity, and if value is extracted during the transaction, the user receives it as a rebate.
- "Like being able to farm your own transaction flow." - Gman (Rook engineer)
- MEV stands for "Maximal Extractable Value." Miners pick up transactions from a pool, put them in a block, and mine them. The order of transaction execution can have a market impact (for example: arbitrage). This is an opportunity for profit.
- Flashbots democratizes MEV by distributing profits fairly on the miner level.
- Rook allows users to extract this value on the application layer and share it, rather than allow the miners to profit.
- Exploitation of MEV by miners carries risks of centralizing Ethereum by cartelizing the hash power required to extract value.
- The Rook protocol denominates MEV profits in the form of ROOK tokens. ROOK stakers receive a share of MEV profits.
- ROOK is burned as profit captured and is therefore deflationary.
- MEV Searchers identify opportunities and generally claim ~5% of the profits, while the miners claim the remaining 95%.
- Rook allows the users to capture 95% of the profit, and uses 15% of that profit to secure and operate the Keeper network.
- Rook has a built-in network of Searchers that find the best transaction route.
- Searchers could potentially have their own liquidity and directly fill the bid. Tokemak could potentially be a source of liquidity for this.
"And it's so fascinating, because the routes that you get and the efficiency you get are leaps and bounds better than what you'd be able to get from other aggregators...because you're sourcing from the sort of competitive network of aggregators that are just tuned like race cars to be able to hit these orders. It's really fascinating to just watch them at work." – Hazard
- Rook is upstream of the consensus mechanism, so Ethereum's move to Proof-of-Stake and the increased usage of L2 will not have a drastic effect on the protocol.
"...because the way that our protocol actually captures this MEV occurs sort of upstream of that. So by the time these transactions get to these block producers, it's sort of over, right?" – Hazard
- Over half a billion dollars of MEV has been extracted from Ethereum transactions in the past year.
"The miner doesn't deserve it. They don't participate in this. They just kind of wait and are fed by these searchers and stuff. So what is the real problem? Or the second problem here is to take this value that's now flowing out of the system, the blockchain... 'waste heat,' and capture it and recycle it and put it back into your pocket or your protocol's pocket, which is where it started and where it should remain." – Hazard
- Rook was originally Keeper DAO, and has gone through multiple iterations before settling on the app-layer MEV problem.
- Rook's long term vision is to enable MEV as a public good.
- In traditional finance, Citadel Securities exploits the order flow similarly to how MEV works on the blockchain. Users in TradFi have no control over extracting this value themselves.
"I want to see us reach an economy of scale to where all of the transaction flow on blockchains is going through a protocol like [Rook]. So that all the rewards for that flow, all the value – the excess value – is being distributed out to the people who are originating it, and that's the de facto standard on the blockchain.
"On the blockchain, you own the value in your own order flow, and it's the fair value, right? You're able to verify – trustlessly – how the auction happened... what happened – and who did it, how did they do it? You can see all of that. It's not a black box." – Hazard
- Liquidity for ROOK is currently "crude." Market depth is decent on Bancor but low on Uniswap and Sushiswap. Tokemak can help increase liquidity across these exchanges.
- Rook currently needs to go "door to door" to protocols for integrations, but since Tokemak sits a layer above DeFi, it can help simplify the transaction flow.
"What are they really looking for? It's transaction flow. So if you can give them the opportunity to bid on transactions and then settle them...even if it's just a little bit, if their margin is just a little bit better than it is in the wild...that's absolutely worth it for them. They'll absolutely be working for that. It's a game of expectations in a statistical sense. It's about how much profit can you make iterated hundreds of times per day for years. And you can make quite a bit." – Hazard
[00:00:00.850] - CJ
So welcome back, everyone. This is number five of our CoRE Spotlight series. Full week, busy week for us today. We are joined by Rook, previously Keeper DAO, and we have Hazard with us today. Hey, Hazard, good morning. Welcome to the CoRE Spotlight.
[00:00:18.710] - Hazard
Good morning. Thank you for having me.
[00:00:21.290] - CJ
It's a pleasure. Looking forward to learning about you guys today and figuring out how we can collaborate here in the future with Tokemak. To kick things off, could you give us a little bit of background on yourself, what you do for Rook, and a brief introduction of your protocol to our community?
[00:00:40.070] - Hazard
Sure. So I am an engineer by trade. I'm a mathematician by training. I am currently the CEO of Rook, which is a DAO focused on building...an open infrastructure for transaction settlement in a way that allows value such as MEV (which some folks may have heard of) to be extracted on behalf of users and protocols and applications rather than on behalf of miners, essentially.
So what you can think of it as is...a protocol where transaction flow goes in and you get paid for essentially just settling your transactions as you normally would. So you can trade, you can rebalance, you can provide liquidity, you can do any of the things that you'd normally do. But by relaying them through this infrastructure, when those things have value, like they may for various reasons associated with MEV or other kinds of opportunities...that value will be captured, and it will be rebated to you on your behalf.
So one of our engineers described this memorably as being able to farm your own transaction flow, and that's basically what it does. So it's a very interesting protocol. I hope we can talk more about it.
[00:02:10.340] - CJ
Yeah, definitely. Let's break it down at a little simpler level. Can you explain MEV for some of us in the audience who might not know what it is and explain why it's important to address or help solve?
[00:02:22.620] - Hazard
For sure. MEV is basically this situation that happens on the blockchain. So it stands for maximal extractable value. But that's sort of a maximally confusing definition.
So essentially what happens on a blockchain is when you want to make a transaction – you want to do something, make a trade – it doesn't happen right away the way that it does on a centralized exchange. It's like a request. It goes out and gets broadcast out into the public, and then to a miner today or a validator in the future. After the merge, Ethereum has to pick that request up out of the pool of all the different requests that are happening all the time and put it into a block in a certain order. Right. And then that block will get mined in.
Now, what's interesting is that the order of the transactions can matter sometimes. So, for example, if you're trying to sell a lot of some token and it leaves a market impact and it creates an imbalance on the market you sold the tokens on versus another market that you didn't sell them on...that imbalance can be exploited using, for example, arbitrage. You can run a route, kind of buy low on the market where you left your footprint and sell high on the other market to bring the two prices into equilibrium, and you can make a profit off of that.
[00:03:44.460] - Hazard
But you need to do that right after you sell all of those tokens to leave that footprint. If you do that before, then there's no arbitrage. You just wasted a bunch of money. Your transaction won't really work.
And if somebody else does it before you after this footprint is left, well, then they're going to get all the profit, and you're not going to get anything. So the ordering matters of these transactions...and the fact that you as the person making the trade or making the transaction can't control the order in which it actually happens inside the block, on the blockchain...the fact that you don't have control directly over that order leads to this situation where whoever controls the ordering of these transactions can determine and capture the profit that's possible by putting them in the best order.
And so what we do is allow a system of lots of participants to order your transactions as well as other transactions in such a way to create the maximum profit and then share that profit with you rather than have it go to other parties as it does today.
[00:04:59.930] - CJ
That makes sense. That was really well explained. Thank you. Quick note: anyone with questions out there, feel free to drop them into the CoRE3 channel and we will make sure we get to them towards the end of the AMA.
[00:05:14.570] - end0xiii
I have a few quick questions. So Hazard, you'd say that the advantage of using the system over like a Flashbots RPC is that you actually get some of that value accrual back to you, the user?
[00:05:26.830] - Hazard
Flashbots is really interesting, and I get this question a lot. So first of all, I love Flashbots and we work with folks who work on Flashbots and stuff. Flashbots is sort of a totally different animal because it's really...let's say you can imagine this flow of MEV, this value. What you don't want to happen is you don't want the ones that control the ordering in the block – let's say that it's called the miners. That's what they are today.
So what you don't want is...you don't want these folks to be able to grab transactions and then make some of their own transactions maybe that are going to capture this profit and put them in the block in the right places and capture all that money for themselves. Because what will happen is a runaway sort of flywheel in which the miners who have the most hash power will be able to capture the most value. Therefore, allowing them to buy more mining rigs and capture more hash power and ultimately centralize the block production on the network and harm the security of Ethereum or blockchain like Ethereum. You want to prevent that.
[00:06:35.670] - Hazard
So what the Flashbots in a conceptual way does is it allows this extraction – which is the technical term for it, right? So when you put these transactions in a certain order and you make a profit that's sort of extracting some value, it allows this extraction to not happen to any one miner. It sort of distributes it uniformly across all the different miners, and then in doing so, it prevents any one of them from dominating. But it doesn't stop the flow of this value. It still flows to these miners in one way or another.
I won't get into some of the technical reasons that it does that, but it's still essentially going to the miners. What we do is we have a separate system at a different layer of the blockchain processing that actually reverses this flow. So you've created MEV by creating a transaction. You don't know you've created it. Right? It depends on all kinds of factors, and you're not aware of this, but you have. And when you do, it's caught, captured, and then sent back to you. So it's kind of going up the chain rather than down the chain to the miners.
[00:07:43.230] - Hazard
So there's sort of fundamentally different things, and there's always going to be a flow of this value happening. And so whatever we don't catch, for example, we still want to make sure that it's going to not accrue to any one miner. Right. And so stuff like Flashbots is still really important, and we kind of are at separate ends of this problem – fully compatible.
But yes, for example, if you wanted to use Flashbots RPC, you're going to stop a lot of the negative effects like sandwich attacks and front-running and all of that. And that's really important on our RPC that we're building and some of the other services we provide; we allow that to happen as well. But then we also have this additional ability to actually use the value that's been captured for you and return that to you as sort of positive gain for you as a protocol or as a user. Right.
[00:08:35.030] - end0xiii
Got you. And so the Rook token...do you stake the Rook token and then the value is shared amongst stakers as...pro rata, or how does that come into play?
[00:08:51.470] - Hazard
The Rook token is really interesting. So in this system, folks may be interested to note that today, let's say there's this flow of MEV happening to miners. It's typically carried to them by automated bots called searchers. You may have heard of this term from the Flashbots literature. It's Flashbots terminology.
Searchers identify these opportunities and will profit from them about 5% of the total value of that profit. Whereas the miner is going to take about 95% of that profit. And so what we do is by allowing that 95% to instead go to the user...well, today they're getting 0%, right? So we can give them, let's say, 80% – let the Keeper maintain that 5%, maybe we'll give them five and a half or 6% – just kind of incentivize them to use this. And then the remaining, let's say, I don't know, 10% or whatever it should be, is used to secure our infrastructure and our network of Keepers and all of the economic incentives. And this is totally adjustable by governance and by other things. The goal is to seek the best distribution here to do this, but of that remaining percent that's not going to the user and not going to Keepers.
[00:10:07.750] - Hazard
One of the factors in there is burning some of these Rook tokens, because I should say that the way that MEV is denominated in our system is in Rook. So these searchers in our system are bidding on transactions. They'll bid on your transactions in an auction using Rook, and then the winning bidder will be able to settle the transaction. And the Rook paid for this bid is what flows through the system. It's what goes back to the user. It's what goes to the searcher as their fee. And it's what goes into this part of the system that distributes rewards to the folks working in the Rook infrastructure.
So one of the ways that happens is through distribution to a staking pool. So you can stake your Rook and receive essentially a portion – you can think of it almost as a fee – a portion of each of the bits of MEV from each transaction that goes through the protocol and that's distributed pro rata among the stakers in this pool. And what's interesting is that the Rook token...what's interesting is that this isn't inflation. Right? Because usually it would be inflation. In this system, we have a circulating cap.
[00:11:27.370] - Hazard
I mean, Rook is not being emitted. A portion of each transaction's. MEV as denominated in Rook is burned, actually. So the token is deflationary, and the more volume that goes through the system – the more MEV there is – the more Rook will be burned, and the more Rook will be distributed to stakeholders.
So one way to think about this is that...let's say you are going to trade or something, and you're going to trade using our app or whatever, and you're going to make some transactions flow through. So you're going to be a user. What's going to happen is you're going to receive as...the yield. If you say you're farming your token or your transactions, your yield is going to be in Rook. So now you own this governance token. So you're essentially now you're an owner. You're an owner of the Rook network. So say you stake that now. Now you're an owner of the Rook network, and you're also going to be receiving a share of the revenue of that network for every transaction that goes through that from then on all the way into the future. And it's not going to be a diluted share.
[00:12:37.860] - Hazard
It's going to...you know, your share will only increase because it's going to be a deflationary token as well. And so it's this interesting cycle where users can become owners and actually own not just the value of their particular transaction in terms of MEV, but at the same time, if they choose to stake it, a part of the value of all future transactions – of all users and protocols that use the infrastructure. And that's not going to be diluted in any way. That share of theirs is only going to increase. And interestingly, because there's no emissions options.
Where does the Rook enter the system? Well, these searchers need to purchase it, right? They need to purchase it at the open market. There's no other place for them to find it. And they purchase it there and they have to stake it and then bid on these auctions and things.
So there's sort of a closed loop, if you like, and it's intended to create sort of an ownership economy, because the people who are staking the Rook are sort of responsible for the network now. They want to see it grow. They want to see volumes grow.
[00:13:45.160] - Hazard
Right. They want to see integrations, and they want to make sure that the searchers and everybody else participating in the ecosystem are adhering to the protocol correctly. So sort of policing this – ensuring that all of its guarantees are holding true. It's a very interesting game-theoretical system.
[00:14:01.410] - end0xiii
Yeah, that's very cool.
[00:14:08.650] - end0xiii
When you place an order through the Rook app -- sorry if you mentioned this already -- is it basically like an aggregator? It just searches for the best possible price?
[00:14:19.520] - Hazard
Yes. This is so fascinating because everybody's familiar with aggregators, right? So things like 1Inch and Matcha and stuff. And what's interesting is that if you talk to these searchers – folks who actually have to do routing and stuff to capture these arbitrages – you know they're not using these routers. Right. They're not using them because the routes aren't always the best routes, and the gas isn't always the best price. And they can't always source off chain liquidity on centralized exchanges or in other places, right?
So what's really cool about our system is that we have...built in this network of searchers who are going to bid on transactions. So if you imagine this auction happening, who's going to win this auction? It's going to be the searcher that can find the best liquidity, the lowest slippage, the lowest gas, the best route. They may even in the future...we know this is sort of a trend. They may maintain their own liquidity and be able to quote you a price right then and there from their own inventory. You know, there's no gas for that. That's easy to settle, right? So that could be a strategy and they could bid really high because their margins...they wouldn't have this much settlement cost at all.
[00:15:41.350] - Hazard
So the way the auction works is it drives efficiency and this high value towards finding the right liquidity. And these searches – I can't emphasize how sophisticated they are about being able to source this liquidity. Like this is...the source of their power.
[00:16:03.740] - Hazard
Like this is how they're competing with each other in the wild today to capture these arbitrages and these exotic routes and things. And if you go to our Twitter or onto our app, you'll be able to see some of the crazy ways that they fill these orders with like seven-leg arbitrages and things, through tokens that seemingly have nothing to do with what you're doing. So it's a wonderful...
...to answer your question, it is an aggregator. You can trade many-to-many different pairs and stuff that are on-chain. And it's so fascinating because the routes that you get and the efficiency you get are leaps and bounds better than what you'd be able to get from other aggregators...because you're sourcing from the competitive network of aggregators that are just tuned like race cars to be able to hit these orders. It's really fascinating to just watch them at work.
[00:16:55.800] - 70k3m3ch
Honestly, this is actually just incredible because...with your explanation, I kind of got something: that you kind of have two pieces, right? That perfectly work together. You have one – on one hand, you could say you disaggregated like a classic one-stop shop aggregator, right. Like 1inch where you have, like, basically...all these searches are aggregators to themselves. Right. In competition, so to speak. So you create like this ecosystem in which just the most efficient will win, right? It was highly interesting.
And then on the other hand, this is...the thing I was thinking about earlier. A really cartoon version of it would be to say, like, ultimately how you set up this social network is by offering them basically higher rewards – like more profit for basically taking part in that network versus another network. Like you said, like they get 5%, right. And here they can get up to 10%. It's kind of a no-brainer for them to partake in this network and then in return, share.
[00:18:07.450] - Hazard
Exactly. Yes. So when we talk to searchers...we run a searcher in house as well. I should say we're sort of vertically integrated in that sense. So we sort of understand the mindset and mentality. These are often mysterious folks to people that are kind of looking at MEV from the outside. But when you talk to them, what is the most important thing for them? What are they really looking for? It's transaction flow.
So if you can give them the opportunity to bid on transactions and then settle them – even if it's just a little bit – if their margin is just a little bit better than it is in the wild, that's absolutely worth it for them, right? They'll absolutely be working for that. It's a game of expectations in a statistical sense. It's about how much profit can you make iterated hundreds of times per day for years. Right. And you can make quite a bit. It's a really interesting system and it allows for some fascinating things. Like we had about $100,000 stable coin swap happened from, I think, USDT to gosh... I don't remember the other stable coin, but there was no slippage. It was like dollar for dollar.
[00:19:27.570] - Hazard
And the user making the trade actually received $35 worth of Rook as the MEV from this trade. So they didn't pay gas; they didn't have any slippage; but they made a stable swap...but they actually got paid for it. So there was somebody joking about it on Twitter that it was like paying negative gas or something. It's wild. You can do some really interesting things and cross -chain as well. Right. Because these searchers are going to do the settlement – they're going to handle all of the settlement.
So to the user, what's presented is something that is sort of agnostic to the chain. And like I said, we can already source off-chain liquidity from, like, centralized exchanges and things through these searchers. We have market makers that are connected to the network as well to provide things. And that's always fascinating, too. So, yeah, lots of interesting things you can do with this.
[00:20:19.270] - 70k3m3ch
In a way it's like kind of individual OTC trades.
[00:20:24.650] - Hazard
That precisely. Yes. That's not a wrong way to look at it at all. And it's just sort of being able to do that at scale in a protocol-ized way, right? It's highly gas-efficient. It's very interesting.
And what we've been working on in the last three months is we, of course, have this component for traders – for users who want to trade, and for automation that wants to trade through our APIs, like market makers. Right. But we've actually started to incorporate more what I kind of call structural flows, which are transactions that may be made by protocols.
So, for example, we have an integration coming with GMX. It may go live at any moment today or this weekend...where we'll be able to coordinate their oracle updates to capture essentially for GMX, this exchange on Avalanche and Arbitrum, this arbitrage. That's been happening when an oracle update changes the price of one of their derivative contracts, and it allows a spread to be created between the derivatives price and the price of the underlying on one of the spot markets. And this has just been...you can measure how much arbitrage has been happening.
[00:21:37.050] - Hazard
And it's sort of a feeding frenzy for these arbitrage bots, right? But this is really value that ought to go to GMX. I mean, they're creating this arbitrage in a way. And so it's cool because what we were able to do was make an integration where this arbitrage in this oracle update will now happen through our coordinator, and that will allow this auction to happen for updating this oracle.
Depending on how much money there is in the arbitrage, that would result from being able to control the fact that I'm going to update the oracle in one transaction and then I'm going to immediately capture this arbitrage in the next transaction. So that's valuable. It's worth as much as the arbitrage is, right? So folks will bid on that. The value of the arbitrage role in that way flows back to GMX, and they can then distribute it to their liquidity providers.
But a fraction of that is going to be captured by the Rook token. And folks who are staking Rook, a fraction of it will result in contraction of the Rook supply through burning...it's fascinating. We can pass all kinds of different transactions through the system.
[00:22:43.770] - Hazard
GMX is just one example. We have about five or six more standing up for all kinds of things. Liquidation portfolio, rebalancing stable coin swaps on something like mStable, where you're balancing a basket of tokens in a portfolio. So many interesting different things, I can't even talk about them all.
[00:23:03.730] - end0xiii
Amazing. I do have one more question. Then I'll hand it back to CJ to get us back on track. But just curious: how much, if any, changes after the merge with how these systems work, if that makes sense?
[00:23:22.450] - Hazard
Yeah, no, it absolutely makes sense. The top two questions we typically get about the protocol – I'll say when folks are coming and they're looking into the future – is: one, tell me about the merge, what's going to happen, the change to proof of stake from proof of work. The other one is: tell me about L2s. How are L2s going to change the game here?
I love answering these questions because the reality is that they're going to change a little bit about the game at the margins, but the fundamentals of the game will be the exact same. They may even be worse, in terms of worse for the network. The risks may be higher. The importance of a system like ours would be higher. Right.
So the way to think about this is that we are...like I mentioned before, upstream, if you like, of these questions that happen about how do the blocks get produced. So a proof of work or proof of stake, it matters less how that actually happens – how block construction occurs and who does it – because the way that our protocol actually captures this MEV occurs sort of upstream of that.
[00:24:34.360] - Hazard
So by the time these transactions get to these block producers, it's sort of over, right? There's no MEV for them to extract at that point, because of the way that we've packaged things. And so from that perspective, there won't be really any change.
The same is generally true for L2s. We know that on L2s, MEV exists. They sometimes say that it doesn't. That's a little bit of a dodge. It certainly does. So, for example – this user is just an example – of GMX. So Avalanche is where we're deploying first there and then Arbitrum as well, which is an L2. So...certainly our problems on both MEV will continue to exist after the merge, and it will in a way be even more prominent, I worry. And so, yeah, the importance of this will not change, and we're fully equipped to handle both the transition to proof of stake as well. We're embracing – we're rushing into these L2s, actually, because it's so great. And again, the multi-chain L2, the merge, all of this. What's wonderful about this is that our CoRE infrastructure is this network of searchers, and they're off chain, right?
[00:25:53.610] - Hazard
That's off chain infrastructure that does all this computation. The settlement happens on-chain, but this lets our network evolve to meet whatever the technological demands are, and they'll follow the value, right? So we're very adaptable. It's very enviable that we have to develop a protocol, but we don't actually have to develop all of the different systems that need to.
How do we settle on this L2 or on this before the merger or after the merge? Luckily, that's not actually a problem we have to deal with. I guess we have to deal with it for our Keeper, our searcher that we have in house, but we don't have to deal with it in the large. So that's kind of nice.
[00:26:32.510] - CJ
How do you measure the impact of MEV? Do you look at the total amount of dollars extracted? Do you look at the percentage of total transactions in a network being attacked or interfered with? Like, what's the best way for someone to wrap their head around how big an issue this might be?
[00:26:48.070] - Hazard
Yeah, I think the Flashbots just recently released a Dune dashboard with great data. Great dashboard. I know a lot of work went into it, and before that, they had – I think they still do – they have a portal called MEV Explorer, and you can go to that at explorer.flashbots.net. And that's an aggregator that will let you sort of see the scale of the problem. And the interesting thing is that the scale is significant. You can tell by just by looking at it.
But the important thing to understand – this looks like since the beginning of measurements, let's say 2020, late 2020, – looking about $613,000,000 of total extracted MEV. $613,000,000...about $367,000 in the last 24 hours. 367 thousand dollars -- not million dollars -- in the last 24 hours.
And what's interesting about this is that this is only on Ethereum, and it's only for certain kinds of MEV. It's really hard to measure the total impact, actually. This is only on Ethereum; it's only some kinds of MEV. We know that this is an underestimate. We don't know. This is sort of the lower bound. It's likely more than a billion dollars. Basically in the last year – year and a half – a vast amount of money is being directed from users and protocols to block producers to miners.
[00:28:30.570] - Hazard
Even if, let's say, Flashbots is solving the problem – so it's going to all the miners equally – that's an important problem to solve, and they jumped on it, and they've largely solved that or mitigated that. And that's a slippery thing to do, and it's an amazing job.
But the problem that remains is that...okay, this half a billion dollars, it's coming from somewhere. It's not coming from nowhere. It's coming from your pocket, right? It's coming from the pocket of protocols and from AMMs and marketplaces. It's coming from the pocket of LPs.
Impermanent loss. Sometimes arbitrage causes impermanent loss, right? Because the market making, the AMM, is off size compared to an off chain market. And so you as an LP are suffering impermanent loss, but a bot and a miner is actually...where's that loss coming from? It's going to them, because somebody arbitraged you against the centralized exchange. Where does that value make its way down to the miner for some reason? The miner doesn't deserve it. They don't participate in this. They just kind of wait and are fed by these searchers and stuff. So what is the real problem?
Or the second problem here is to take this value that's now flowing out of the system, the blockchain...'waste heat,' and capture it and recycle it and put it back into your pocket or your protocol's pocket, which is where it started and where it should remain.
[00:30:00.590] - Hazard
And overall, that's going to make this whole blockchain economy much more efficient, right, because it shouldn't have left in the first place.
[00:30:11.650] - 70k3m3ch
One more thing before I give back to CJ. What I love about this in conclusion is that a lot of people always see these searches and stuff. You could see them as, like, exploitative and kind of preying on the average person trying to make a trade, but...ultimately, right, these things will always exist and they always have existed. Also like in TradFi trading. And they also...in a way with the arbitrage, for example, they actually help kind of keep the balance in a way.
What I love about this is that it doesn't try to...combat these things, but bring them together basically with everyone else, and align the incentives so that ultimately everyone can benefit from these.
[00:31:06.070] - Hazard
We need arbitrators. They drive – like you're saying – they drive price discovery on-chain. Absolutely. Most on-chain markets and products. And many smart contracts run on arbitrage as almost like a decentralized network of folks who are going to come and execute these contracts and keep the prices in equilibrium and everything. They're vital.
And so what's interesting is when you talk to searchers...they have sort of a bad reputation, and there are certainly folks who are exploitative, but many of them are deeply concerned about the network – its security and its properties – because they're so deeply involved in it. They're embedded in the research culture and the research community as much as anybody. And they know more about the sort of the dark corners of how these systems operate than almost anybody else, right, because they exploit them for profit. And it's wonderful working with them because they want to coordinate on this. Right. They want to see a better outcome for this. And many of them morally feel – like I just said – that this is value that belongs to the user, and...because they're not keeping 90% of it. Like I said, they're keeping five. The miners are getting 95, and they're looking at that and saying: I'm happy with five.
[00:32:22.160] - Hazard
But what I think people don't pay attention to is that the miners are gorging on this value that they're not doing any work for. And that's the problem. And that's what's bothered a lot of these searchers for a long time. And having a solution like ours really makes them feel a little bit a lot better, because then they're contributing to...they're running a flywheel that is recycling this value back to the users and back to the network, rather than just blowing it out the door to miners, where it doesn't really get to participate or stay in the market.
[00:32:57.910] - 70k3m3ch
Which in a way is also more sustainable for them.
[00:33:00.470] - Hazard
[00:33:01.690] - 70k3m3ch
And like I said, it's like a collateralization issue with the miners.
[00:33:06.550] - Hazard
[00:33:08.710] - CJ
I got one more. And then we'll talk on a little bit about liquidity. Obviously, we're all super engaged and interested in this, but I want to ask: what is your vision of what Rook can be like? What is the most successful version of Rook, and what would it take for you to get there?
[00:33:28.210] - Hazard
Great question! So when we were called Keeper DAO, we went through a lot of iterations. At first, we were sort of a liquidity backstop, so a giant liquidity pool to make sure that the whole ecosystem could absorb liquidity shocks like in March 2020. Right. Then we focused a little bit more on trading for individual users and stuff, which we still do. We have a wonderful app. I encourage everybody to use it, and that's a big part of flows on-chain in general.
But we sort of woke up to the reality that this is a systemic problem that we could solve. Actually, there's a systemic problem here, the one that we just talked about. And we changed some of what we did. We instituted a new organization for what we call Rook Labs to bring on contributors and to start to scale up our research, and our engineering, and our operations in order to capture this problem more fully...and began to invest some of our treasury funds into finding and retaining this talent and building out the infrastructure that we needed to capture this. So what does the most successful version of this look like? And what is the vision?
[00:34:48.230] - Hazard
The vision that I have is MEV as a public good.
So the big problem with all of this stuff we just talked about is there's all this value sloshing around at the application layer, let's say, so...users, wallets, protocols. Right. In traditional markets, we know that there are actors. The canonical one is Citadel Securities, who profit by finding that value and finding the people that that value comes from, and making deals with them. It's called payment for order flow, right? And the deal is: you send us your orders, and we will send you some money. The money we send you is going to be a lot of money to you. We know what a lot of money is to you, and we're going to give you that. Say it's a million dollars. Now, don't worry about how much money we're actually making on your order flow, though. That may be a hundred million dollars, but hey, at least you're making a million and not zero, right?
So in these arrangements that you see in traditional finance, there's no ability for the person who's providing, or the entity who's providing their order flow, to actually control pricing...the pricing of that order flow.
[00:36:11.830] - Hazard
And this is a problem because entities like Citadel, when they get more order flow, they can make better trades, they can make more money, and then they can pay more to folks to get more order flow and more order flow.
Today, Citadel Securities settles about 40% of all equities trading in the United States. 40% of those trade executions for all the stocks in the United States go through one company that can control the way that that execution and settlement happens and make just a ton of money off of it. Right. And they can pay a little bit of that back to the brokers and places that are starting those executions.
But those brokerages...they don't have pricing power. They can't demand more from Citadel. And if somebody were going to offer more – to say, well, I'll go pay them more – well, you're not going to be able to make as much money off of their orders as Citadel can, because Citadel controls 40% of all orders. That's a lot of information. They can make a lot more money than you. They will always be able to outbid you, but only just a little bit. They're not going to pay the fair value of those orders, because why would they?
[00:37:26.070] - Hazard
They're going to walk away with a bunch of profit. That's a problem.
And it's going to come to blockchains, too, because all of this MEV is the same kind of value, and it's sloshing around at the application layer. And right now, for lack of sophistication, it's going to miners.
But we know it's possible for it to be captured in another way. We know it because we're doing it. And if we can do it, somebody like Citadel could come and do it. And if they do, if they come and try to reach the same kind of economy of scale that they have in traditional markets...it doesn't have to be Citadel. It could be a blockchain firm. It could be somebody we've never heard of.
But if they do that, it's going to represent a real crisis. It's going to be a centralizing crisis just as bad as the one that Flashbots was able to avoid among the miners. And so my vision is for Rook to front-run – in the same way that Flashbots did – to front-run that payment for order flow crisis. Right. We want to plug this protocol into that hole and then crank the profits for the users – the people who are actually giving their transactions of their order flow to the maximum extent possible – and just shut out any potential for another actor to come in and start quoting better prices.
[00:38:46.190] - Hazard
And I want to see us reach an economy of scale to where all of the transaction flow on blockchains is going through a protocol like this. So that all the rewards for that flow – all the value, the excess value – is being distributed out to the people who are originating it, and that's the de facto standard on the blockchain.
Maybe on the traditional markets, you can get screwed over with one of these arrangements, but that's not how it would work on the blockchain. On the blockchain, you own the value in your own order flow, and it's the fair value, right? You're able to verify that, trustlessly – how the auction happened. What happened? Who did it? How did they do it? You can see all of that. It's not a black box.
And the really fascinating thing about this is the whole point of payment for order flow is...one of the arguments is always that it can make markets more efficient, because if you control more information, you can make markets more efficient. That's actually true. But what we can do is push that even further, because they make it efficient enough that it's better, and then they keep the rest of the profits.
[00:39:53.300] - Hazard
But if you do this in the way that we would like to do this as a public good, where you're passing the maximum amount back to the users, you're going to be able to make it even more efficient – even more efficient than you could – because more of that value is going to be remaining in the system.
And what I would love to see is a situation where the markets that you can create on-chain are more sophisticated and they're more liquid and they're more efficient to use than a traditional market, because there's not this same kind of rent-seeking behavior when you have the ability to order these transactions. That's what I would like to see. And so the vision for Rook is to be the steward of all this transaction flow – to extract value on behalf of everybody. Right.
So people ask: what percentage of transactions would you like to...? All of them. All of them. You have to set a point at infinity when you're looking to grow and reach an economy of scale. So all of them. All transactions should flow through a protocol like Rook's that can coordinate all of these actors together and ensure that you, as a user or as a protocol, are receiving the exact amount – the verifiable amount of value in your transactions – that those transactions can cause.
[00:41:09.320] - Hazard
That should be the de facto standard, and you should accept nothing less. Because this is possible, so there's no reason to accept anything less. And so that's the standard we want to set. That's the default way to do payment for order flow. And that's what we want to do.
[00:41:23.590] - 70k3m3ch
Yeah. Because it's basically...you could say this is what I thought in the very beginning when we started talking about Citadel. It's...the exact inverse of a Citadel, right? It's like this. You take your Citadel, you take this order flow, but make it a public good.
[00:41:39.530] - Hazard
Which is like...my one sentence answer is MEV is a public good, or – imagine Citadel is a public good. That sounds crazy, but you could do it. And we're all about crazy things in DeFi, right?
[00:41:56.470] - 70k3m3ch
The other thing is also, as you mentioned...they actually are, I think slowly but surely, moving into crypto. It's definitely a...payment.
[00:42:06.110] - Hazard
Absolutely they are. I don't think they'll be into payment for order flow for a while, but we know they're becoming involved. We know Jump is already involved. Many firms. And we work with institutional market making firms already. We work with Amber Group and Bastion and Sell Capital and some other firms. I think that one day...and you asked for...that was my public vision.
My private vision is: one day I would like to see Citadel come to the table and want to run a searcher or a market maker on this network, on the Rook network, because that's the game you have to play on the blockchain.
So there's a lot of game theory involved in our protocols. So there's a lot of jokes in our community and on our team about games and changing the game and all of that. And I think the game on traditional markets...it's fair to say Citadel knows how to play that game, and they've benefited mightily from it. And if we tried to play that same game on the blockchain, I think Citadel would probably win. Like Rook is not Citadel, and they would probably school us, right? And that's why we're focused on changing the game.
[00:43:14.710] - Hazard
And then when they arrive in force, they'll be playing our game instead of the game that they're used to playing in traditional markets. And the great thing about our game is that even when you're super predatory, you want to extract the most amount. It has a property called incentive compatibility, where it expects every actor to behave in the most selfish way possible.
And the more that they do that, the more they...struggle. Right. The better the system becomes. We would want Citadel to come at their greediest, because that would actually drive the most value to the user through Citadel, too, right? They would extract the most value that the system could bear for them, but at the same time, it would give you the maximum amount of value that you would deserve.
So I would love to see Citadel and all these other firms come and participate, because it's really easy for them to make money. There's a lot of money printers in the MEV business, and we have a couple...we've got market makers, we've got searchers. And now users are able to print money from their own transactions, too. So it's a situation where everybody wins, right?
[00:44:29.270] - Hazard
I would love to see Citadel when they arrive come and use a system like this.
[00:44:35.270] - CJ
So moving on to liquidity for a minute. We have 13 minutes remaining in the hour. Can you talk about your thoughts on liquidity and how you've approached it thus far, and why you'd be interested in trying to win a token Reactor during our CoRE event, which kicks off next week?
[00:44:53.630] - Hazard
Yeah. So liquidity has been this...like I mentioned, actually the initial concept for Rook back when it was KeeperDAO – this is back in 2020 – was as a liquidity backstop. So in a way, liquidity has been part of the kind of DNA for the project for a long time.
At the time, obviously, compared to today, the liquidity was extremely unsophisticated. Right now, there are many more sophisticated ways to obtain liquidity, direct liquidity...and some of them are very fascinating. We've actually managed liquidity primarily for the purpose of capturing opportunities for Keepers and things. So I'm talking about...thinking flash loans and things like those kinds of pools.
But more recently: when we provide liquidity for the Rook token, it's somewhat crude. I'll say we have some on Uniswap v2. I think there's a little bit on v3. We have a large and really nice pool on Bancor who we work with extensively and have partnered with for a long time. And I think we did an Olympus – we did some Olympus Bonds as well. But really, that's all. And so it's not like a very sophisticated strategy.
But more recently, the community has begun...in the DAO has begun allowing us to experiment more with different liquidity strategies because, like I mentioned, one important factor of the way that our protocol works is that there's this sort of constant demand for the Rook token because searchers will need to purchase it in order to stake it on a staking contract.
[00:46:44.530] - Hazard
And then from that contract, bid on transactions using that Rook. So there's sort of a built-in demand, aside from even traders trading it, where liquidity is a nice thing to have. And so...I'm not sure if people are aware, but...we have for the past four or five months been managing a rather decently sized position of CVX token. I think it's about 378,000-380,000 thousand CVX that we managed through the DAO treasury and received bribe and come from.
And that kind of opened us to the possibility of doing similar potentials with something like Tokemak. So we have not voted a gauge for ourselves. We don't have a Curve pool, but that was something we had considered at one point. But it's something where we're looking for interesting opportunities, right? And having read about what Tokemak is doing and spoken with some of the members of the team, it's something we found pretty intriguing.
[00:47:57.120] - CJ
In terms of collateralization options between Rook and Tokemak, are there ideas beyond a Reactor you've thought of? I have one, but I'm curious to hear your thoughts on the subject.
[00:48:13.990] - Hazard
I'm curious about your thoughts, too. The thing that my mind goes to is: I had a conversation with some of the core team members...I don't know, it was maybe almost a month and a half ago. Time flies; I can't really tell. But I think in a way, our goals on the blockchain...our values are somewhat aligned, because I love the idea of optimizing the way that liquidity is being provided that Tokemak allows to happen.
And one thing that we have looked at is providing ways to enhance yields on some of the strategies that are used to provide the liquidity for Tokemak in a similar way to something that we're exploring with folks at mStable and B protocol and some other protocols. But there's some research on that pending on our end, and I think there's also some protocol upgrades, maybe on your end, that we had agreed to come back together on and then see what could be done. But I think long term, both sort of parties left the table saying: I think our paths will cross, our values are highly aligned, and we're working in similar areas.
[00:49:27.050] - Hazard
So, yeah, I think there's definitely going to be something there. But I'm curious to hear your idea – maybe it's something I hadn't considered.
[00:49:34.340] - CJ
Yeah, I think you're right. We do need a follow-up call. Based on today's conversation, I took a note earlier...you mentioned that some of the searchers either have or would be interested in possibly setting up their own liquidity pools. And so my thought was that...Tokemak is a layer that sits above DeFi. We're starting to flow liquidity into DEXes, but ultimately we want to flow liquidity wherever it's needed. Possibly there could be demand from those searchers to have liquidity routed their way. So I'm not sure if that's something that you've considered, but when you mentioned that it popped right up.
[00:50:11.300] - Hazard
Yeah. I wonder about that. Because one of the challenges can be liquidity, especially for the less liquid pairs, right? I mean, the less...like Ethereum, basically, or some stable coins and stuff. And something that's interesting about Tokemak's ability to direct liquidity is that you can make a certain pair...maybe more liquid, not quite on-demand...and within the span of time of a block. But if, for example, there is intensified desire to trade a particular asset – to be able to concentrate that liquidity – that can be very beneficial for searchers and for other folks in our ecosystem as well. And I think that kind of collateralization where the liquidity is actually able to be controlled, as well as the other aspects of execution, is quite fascinating. Yeah. So I think that would be definitely worth following up on. And I have some numbers about liquidity requirements for folks that might be interesting.
[00:51:16.110] - 70k3m3ch
Yeah. Another one that I was just thinking of was that, for example, also your staking component, right? It's not only like the protocol native revenue that goes into this, but also like treasury revenue, right, that supplements the staking. So I was thinking if there might be a potential for you to do liquidity deployments and then, going deeper from there, there might be something that's definitely like a more in-depth exploration of if this can be in concert with the needs of certain searches, for example. Right.
[00:51:57.300] - 70k3m3ch
Liquidity from KeeperDAO, for example, directly to Tokemak, as required by searchers. But there's definitely a lot there.
[00:52:06.780] - Hazard
Yeah, absolutely. And I'd love to explore some of those because it's exactly the kind of thing...projects like Tokemak are what I like to work with, because I have the unenviable position of having to go essentially door to door, right? Because in order to work on these transaction flow problems at the application layer, I have to talk to protocol A and B and C and D and have these separate conversations. And we build APIs and we build stuff to make it easy for everybody to integrate. But it really is sort of a many-to-one situation.
It's very important work, but it's not exactly the most convenient. And stuff like Tokemak...I love working with because it's sort of like you're saying...it's kind of a layer above DeFi. And so anything we do with you kind of transitively carries over to and can have effects on many other protocols at the same time, right? So I look for those kinds of opportunities for us, because the impact we can have and the impact we can receive – like the benefits we can receive – are always multiplied. So I love those sorts of situations.
[00:53:15.680] - CJ
I think a follow-up call is definitely in order. This has been great. End, 70k3m3ch, any final thoughts or words? It looks like the community reaction in the CoRE channel has been awesome so far, and I see a couple of your teammates chiming in and providing information. So thank you, Wes...and I think I saw someone else. Any final questions from our side?
[00:53:38.490] - end0xiii
No. Thanks for coming on. This has been incredibly informative and I'm excited to either re-listen to this or re-read all of it to digest it again, so tratium: I hope you caught most of this.
[00:53:53.790] - Hazard
Yeah, this was a blast. I really enjoyed coming on. Great questions. I love to see all the engagement in the community too. I love this project. I just think it's so cool. So yeah, looking forward to it.
[00:54:05.450] - CJ
Thank you. This is also a mandatory re-listen for me, so I'm echoing that sentiment.
Awesome, Hazard. I really appreciate the time. I love learning more about Rook. I'm sure our community did too. Best of luck in CoRE, and I hope to see you in CoRE3 next week popping in saying hi, answering questions...and yeah, good luck.
[00:54:24.510] - 70k3m3ch
[00:54:25.390] - Hazard
[00:54:26.730] - end0xiii