Table of Contents:
What is MEV?
What are Flash Loans?
What is a rebase token?
What is MEV? MEV, at a high level, refers to the additional value that can be extracted, in most blockchain systems, by block creators through their ability to reorder transactions and decide which make it into a block. This happens because block creators are economically incentivized to include transactions that pay them the most fees.
What does this usually look like in practice? Well, typically, MEV is initially found by bots who monitor incoming transactions for possible arbitrage, liquidation, or other opportunities that can be taken advantage of to earn a profit. When a bot sees something they would like to take advantage of, they will “talk” to miners to specify what transactions they want to add and in what order. Some percent of revenue is given to miners as incentives to accept these additional transactions, and the rest is kept by the bot operator.
Now, MEV may seem inherently bad, and there are certainly arguments for that being the case. However, it is something that blockchains like Ethereum make into an issue by design, and there are also some good forms of MEV (like incentivizing bots to liquidate parties at the correct time). Projects like Flashbots are seeking to democratize MEV to the highest extent possible by providing a public communication channel that can be used by anyone who builds a bot to send bundles to miners. This way, these channels are not only available to specific parties, and anyone who wants to and has the “know how” can capture MEV. There are also other projects, like Chainlink’s Fair Sequencing Services or Solana’s mempool-less design, working on methods to minimize or eliminate MEV.
Video:Article: https://www.paradigm.xyz/2020/08/ethereum-is-a-dark-forest/
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-What are Flash Loans? A flash loan is, as you may expect from the name, a type of loan that is obtainable in certain DeFi ecosystems. Most commonly, in Ethereum. For the sake of simplifying the explanation, let’s focus on flash loans in Ethereum; the same logic applies elsewhere.
As you may know by now, the Ethereum blockchain produces a new block roughly every 13 seconds, and each block contains transactions. Each of these transactions, in turn, can contain a variety of operations. An operation could be swapping one token for another, buying an NFT, updating data in a smart contract, or a variety of other possibilities. The interesting part about these transactions, and the part that makes flash loans possible, is that each transaction is atomic. Meaning, in order for a transaction to be included in a block, ALL operations in the transaction must succeed. If even one fails, the entire transaction fails.
With this knowledge, we can more easily understand how a flash loan works. A flash loan is actually just a type of transaction - specifically, a transaction where one obtains a loan from a loan provider (Aave, dYdX, Pancake Swap, or other decentralized exchanges that provide these type of loans), uses the loaned tokens to make a profit in some way (for instance, by arbitraging the price of a token on one DEX vs another), and then pays back the loan and keeping any profit. All of this must be done in a single transaction. If the strategy does not pan out and the user cannot pay back the loan, the transaction will fail and it will be as if the loan never even occurred in the first place. Essentially, flash loans provide a risk-free way to access a large pool of capital and interact with various DeFi projects, provided that the loan can be paid back in the exact same transaction.
There are a few dashboards that allow users to configure their own flash loans, but, in practice, most flash loans are done through custom-coded smart contracts. This makes sense, especially when you consider the technicality of many successful flash loans. Use cases for flash loans include attacks on certain protocols (what they are, sadly, best known for at this point), arbitrage opportunities, swapping collateral on a DeFi loan, and others.
Video:What is a rebase token? Rebase tokens have been around for a while now, but have become especially common recently with the rise of Olympus (OHM, a rebase token) and its forks (other projects that use essentially the same smart contracts as Olympus, so they also include rebase tokens). What actually is a rebase token?
A "rebase" refers to the balance of token holders being automatically adjusted at a certain, pre-determined time (usually repeated, such as "every 8 hours"). The best way to understand this is through an example, so let's look at OHM.
OHM can be staked, which gives you an equal amount of sOHM. sOHM is a rebase token - due to the way that Olympus is set up (discussed more in our OHM token report), more OHM can consistently be minted. This newly minted OHM is passed on to sOHM holders through rebases that occur every few hours. Every few hours, the amount of sOHM you own will go up a bit. Say the entire supply of sOHM was 100 tokens, and you owned 20 of them. If 10 new OHM were due to be rewarded at the next rebase, when the next rebase occurs your balance of sOHM would go up by 2, since you own 20% of the sOHM supply and are therefore entitled to 20% of new OHM rewards. This automatic change in your balance is known as a rebase.
Keep in mind that, depending on the token and the way it's setup, rebases can sometimes negatively affect your balance. One example of this, stETH, is mentioned in our LDO token report.
Video:Article: https://coinmarketcap.com/alexandria/glossary/rebase
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