New version — Flash Trade on swaps.io (demo)
Maximal Extracted Value (MEV) is one of the most prominent phenomena of cross-chain that significantly affects the DeFi market. It refers to the maximum profit validators can extract by manipulating users' orders. On the one hand, it attracts many traders (or MEV searches) to the market, significantly increasing available liquidity. On the other hand, it worsens user experience on many decentralized platforms due to MEV attacks.
Due to the technical features of blockchain operations and decentralized trading mechanisms, it is possible to manipulate the transactions of ordinary users, resulting in a reduction of potential profits during exchanges. When a transaction is initiated, it is added to a public waiting area called the mempool (short for memory pool). This area contains all the pending transactions waiting to be validated. Validators select and arrange the transactions from the mempool to create a block, allowing them to choose the order that is the most beneficial for them.
MEV is particularly easy to extract with complex cross-chain exchanges on automated aggregators. During the initiation of the exchange, the entire planned route is published to the public, giving MEV searches a chance to capitalize on it easily. Various trading bots also help with MEV extraction by analyzing market prices, calculating several trades ahead, and filling orders automatically. Learn more about MEV and innovative SUAVE architecture in this post.
There are several prevalent MEV attacks, including front-running, back-running, and sandwich attacks. The first involves placing a similar transaction in a block before a known transaction to profit from price movement at the expense of a user who placed the order first. During back-running, the attacker inserts a transaction immediately after the target transaction (usually a large one) to profit from price movements. Lastly, sandwich attacks allow traders to profit from price fluctuations twice by putting their two trades around the third one (like a sandwich). MEV searches may exploit traders unaware of malicious price manipulations through such attacks.
Apart from mempools, slippages are another phenomenon that makes MEV possible. Slippage is the difference between the price a user requests and the price at which an order is executed. For instance, a user wants to sell a crypto asset for 10 U.S. dollars and chooses the 2-3% slippage. Then, another trader, market maker, or resolver can buy this asset for 8 U.S. dollars instead and sell it for 10 U.S. dollars elsewhere, profiting from the difference. The larger the slippage, the bigger the chances that someone will fill the user's order as quickly as possible, attracted by the possibility of buying or selling their assets with a great advantage.
Thus, mempools and slippages contribute to the maximum insecurity of cross-chain payments made through aggregators and their potential unprofitability.
Flash Trade, Kinetex's innovative mode, can eliminate risks associated with MEV attacks. It is possible thanks to direct peer-to-peer transactions. Such an approach has multiple advantages. Firstly, direct trades mean there is no slippage. Two sides of an exchange agree upon the rate, which cannot be changed during the process. Thus, users can be sure they will receive what they want precisely and at the chosen price.
The second advantage is access to market makers (also called resolvers in the Kinetex ecosystem). They can bridge liquidity from both CeFi and DeFi, offering advantageous rates to Kinetex users. Moreover, thanks to a resolving model proposed by Kinetex, resolvers compete for user orders, which also positively influences provided rates. This competition is driven by arbitrage opportunities and collateral.
Kinetex provides resolvers with a convenient platform for market-making, enabling resolvers to build their own smart bots, create and test various trading strategies, and engage in arbitrage trading across blockchains. However, all resolvers must first deposit collateral to be able to fill orders, which brings us to the third advantage - security. Collateral motivates resolvers to fill orders quickly and effectively and discourages malicious activity and irresponsibility.
The last advantage is zero-knowledge technology (Zk), which allows Kinetex to improve the security, speed, and costs of trades in the Flash Trade mode. Using Zk proofs, Kinetex eliminates the need to rely on third-party validators that are often targeted by hackers or get compromised otherwise. Additionally, Zk proofs enable Kinetex to validate transactions faster and cheaper because they need far less time to be checked (You can learn more about Zk proofs and Zk solutions for cross-chain by clicking respective links).
Therefore, Flash Trade can provide users with MEV protection along with multiple other benefits, including guaranteed and competitive prices, sufficient liquidity, and enhanced security.
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