Appchains, Sovereign MEV, and Skip

MEV. Maximum extractable value. PBS. Order flow auctions. Shared sequencers. Cross-domain MEV. If you’re keeping up with the discourse in crypto today, nearly every discussion involves these terms, and for good reason. MEV touches nearly every on-chain transaction, and the goal of protocols is to identify and extract it as efficiently and fairly as possible. Those protocols who are not able to capture the MEV they create will struggle to accrue value. This is where Skip comes in, providing the infrastructure for Cosmos appchains to capture their MEV.

In Ethereum, the MEV landscape is defined by Flashbots and PBS (proposer/builder separation). For a general purpose chain like Ethereum, building blocks is hard. Due to the size, variety, and complexity of transaction sets, the complex task of building blocks is outsourced to specialized parties called block builders. This has the benefit of keeping validator requirements low, but does not address the source of MEV itself and moves this centralizing factor to block builders instead. The supply chain also ends with the validator, which means the MEV goes to the current proposing validator (who has a single slot monopoly) instead of the entire Ethereum protocol (or the apps that create the MEV like Uniswap) itself.

The sovereign MEV thesis looks to address this shortcoming, taking the typical MEV supply chain one step further; why don’t we end with the protocol instead of the validator, and allow the protocol to “internalize” the MEV it creates?

This is the idea behind sovereign MEV, appchains, and what Skip protocol is building towards. Sovereign MEV does not mean that appchains can somehow “solve” MEV, but that chains have a choice in how it’s extracted, what is allowable, and where it accrues. Skip defines the sovereign MEV supply chain with three criteria:

Community Determines Who Accrues MEV: This can be LPs, stakers, end-users, validators, or even smart contract devs. Who should the chain prioritize and why? If you are an AMM chain like Osmosis, does it make more sense to prioritize stakers of OSMO or the LPs?
Community Determination of Allowable In-Protocol MEV: Cosmos communities DO NOT like front-running or sandwiching, so much so that Skip has made both of these activities essentially illegal by default. While validators can do whatever they want, with smaller validator sets in Cosmos they are more accountable. Reputations are important and delegators can freely move between validators more easily. This is fundamentally more challenging on Ethereum, not just because of the larger validator set, but because you cannot choose who you delegate to with liquid staking tokens like Lido (your stake is spread across Lido validators).
Community Determination of How MEV Is Extracted: Does extraction take place out-of-protocol? In-protocol? how democratic/accessible is it, and does a community prefer maximum decentralization over maximum efficiency?

Every appchain is different in its construction. Some strive for lower latency, others for privacy, some are orderbooks, others are AMMs. All of these generate MEV in different ways considering their design choices/tradeoffs, and thus protocols can create more tailored and granular solutions for how they build blocks. Compare this to a general purpose chain where you cannot get to this level of granularity considering all the diverse and competing activities. In short,

Of course, when we think of sovereign appchains, we think of Cosmos, and it’s important to set this report up with a general framework for how the MEV landscape will look in the future and how Skip will play a part.

Breaking Down MEV in Cosmos

An ecosystem of diverse appchains has unique considerations. While the categories outlined below are applicable to every ecosystem, the way MEV will be handled in Cosmos differs mostly due to how chains customize and express their sovereignty. Total MEV can be split out into three categories: internal MEV, CeFi-DeFi MEV, a