Da Hongfei on Neo’s MEV-Resistant Solutions

In the ever-evolving landscape of blockchain technology, combating the exploitation of Maximal Extractable Value (MEV) has emerged as a critical concern. Da Hongfei, the Founder of Neo, stands at the forefront of addressing this pressing issue. With over a decade of experience since founding Neo in 2014, Da Hongfei brings unique insights into how blockchains can prevent malicious actors from profiting off MEV, while driving security for users.

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Recent reports have shed light on the alarming magnitude of MEV, with malicious actors opportunistically siphoning over $5.5 million in profit from Ethereum alone in the past 30 days. Against this backdrop, Da Hongfei argues that it’s time for the industry to fortify its defenses against MEV. He contends that a combination of innovative mechanisms, including enveloping transactions and the delegated Byzantine Fault Tolerance (dBFT), presents a promising solution.

Da Hongfei’s recent article outlines the efficacy of these technologies in tandem, offering valuable insights into how they can enhance MEV resistance while ensuring user security. As the industry strives towards a Smart Economy, Da Hongfei’s expertise illuminates the path towards greater fairness, security, and resilience in the blockchain ecosystem.

Read the full interview for a deeper dive into Da Hongfei’s perspectives and solutions on addressing MEV.

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Can you explain the concept of Maximal Extractable Value (MEV) and why it’s become a significant concern in the blockchain industry, particularly within the context of Neo?

MEV, short for Miner Extractable Value or Maximal Extractable Value, can be implemented in various forms. The majority of MEV attacks are initiated by miners or validators who manipulate transaction orders to gain additional value for themselves, which is known as “toxic MEV”. Examples include front-running, sandwich attacks, block withholding, and time bandit attacks.

MEV embodies the struggle between centralization and decentralization inherent in the blockchain industry. Miners and validators have the power to rearrange transaction orders to their advantage, seeking additional profits beyond standard rewards and gas fees.

It’s reasonable to estimate that billions of dollars are being lost to toxic MEV annually, and recent figures suggest that more than $1 billion has been extracted from Ethereum alone, showcasing the scale of the issue.

What motivated your interest in addressing MEV within Neo, and why do you believe it’s crucial for the ecosystem?

MEV attacks threaten the decentralized and transparent ethos of blockchain, creating significant fairness and security issues in the DeFi space. This is not only problematic for those interacting with the technology, but also impacts the overarching reputation associated with DeFi. Therefore, in order to bolster continued investment, DeFi must address MEV.

Neo’s vision is to establish an open network for the Smart Economy, prioritizing fairness and security for all participants. To achieve this, Neo has launched our EVM-compatible sidechain, Neo X, capable of eliminating toxic MEV in the DeFi and broader blockchain sector, fostering trust within the industry.

You mentioned combining enveloped transactions with the delegated Byzantine Fault Tolerance (dBFT) consensus mechanism as a potential solution to MEV. Could you elaborate on how these mechanisms work together to tackle MEV?

In combating MEV attacks, Neo X introduces two innovative features, targeting consensus mechanism exploitation and transaction manipulation.

Firstly, the dBFT consensus mechanism, pioneered by Neo, eliminates toxic MEV from the protocol level, preventing miners or validators from compromising the block generation process. It ensures that no consensus nodes can withhold the block-producing process or, once a block is generated, rearrange transactions.

Secondly, Neo X utilizes a combination of two classic cryptography tools, Distributed Key Generation (DKG) and threshold decryption, to encrypt and decrypt transaction information. This ensures that transaction processors cannot see the information contained inside transactions, meaning they must process all transactions neutrally.

This combined method is known as “enveloped transactions”. Similar to the transition from HTTP to HTTPS, enveloped transactions add security and protection for the user.

How do enveloped transactions ensure user privacy and protect against potential exploitation by malicious actors in the context of MEV?

To achieve MEV resistance, Neo X utilizes enveloped transactions to ensure all information is enveloped until included in a block and ordered, whereby consensus nodes will then decrypt the transactions.

To do this, Neo X uses DKG, where each consensus node owns a partial private key, and all the consensus nodes own a single common public key. This allows users to encrypt their transactions with the common public key, preventing others from viewing the transaction content before the transaction is ordered in a new block.

Then, each consensus node runs threshold decryption with its own partial private key, which cannot directly decrypt the raw transaction. To recover the whole raw transaction, there must be enough consensus nodes (no less than the threshold; larger than two thirds in practice) that each provide their own partially decrypted result.

DKG and threshold decryption serve as a robust privacy-preserving mechanism in blockchain networks, exemplified in how we are using it with Neo X. The technology ensures that even though individual consensus nodes hold only partial information about a transaction, the complete transaction data can be reconstructed securely when a sufficient number of participating nodes cooperate.

This thereby maintains the confidentiality and integrity of the blockchain ecosystem, preventing malicious actors from engaging in toxic MEV.

Could you provide insights into how the dBFT consensus mechanism, as implemented, contributes to preventing toxic MEV and maintaining transaction integrity within Neo?

As the inventor and pioneer of the dBFT consensus mechanism, Neo X (and Neo’s legacy chain) inherently prevents MEV attacks.

The dBFT consensus mechanism achieves this in an innovative way: Transactions in Neo have absolute finality as soon as they are confirmed in a single block, ensuring there’s no room for time bandit attacks, while every consensus node’s behavior is under the community’s review. If some nodes withhold a block too long, the other nodes will start a new consensus view and continue producing blocks.

If some nodes continue to withhold blocks, the community can see this behavior and will punish it, thereby preventing toxic MEV players from profiting. If a node is rational and performs its job correctly, the community will see this, ensuring transparency and security.

It’s worth noting that, combined with enveloped transactions, the dBFT consensus mechanism allows for the highest level of security and fairness in blockchain transaction validation.
“Neo X introduces a unique, innovative MEV-resistant solution without radically overhauling the protocol layer that improves blockchain security and performance, which is paramount to the blockchain industry.”

Da Hongfei, Founder of Neo

What do you perceive as the main challenges hindering the widespread adoption of MEV-resistant solutions within Neo or similar platforms?

MEV has existed for a long time. The different approaches taken to tackle MEV result from varying views and each public chain’s different inherent nature. While there are many solutions to MEV, and we’re sure that industry is constantly exploring new ways to tackle MEV, Ethereum and Neo for example take very different approaches:

Ethereum’s solution is to use Flashbots to mitigate the negative externalities posed by MEV. In other words, this means democratically distributing the profit generated from MEV among players in the blockchain ecosystem, validators, MEV searchers, and users. The distribution strategy keeps evolving to achieve the fairest outcome possible.
Neo’s approach is to use the dBFT consensus mechanism alongside enveloped transactions to eliminate MEV, ensuring absolute fairness.

We believe each approach stems from the particular chain’s own nature. Neo, uniquely equipped with the dBFT consensus mechanism, naturally circumvents this issue. Upholding the spirit of innovation and decentralization, we hope other blockchains and communities will follow suit. There’s plenty of space for learning from each other and collaboration.

As recent figures point to toxic MEV being responsible for more than $1 billion lost on Ethereum alone, the main challenge now is ensuring the industry introduces the changes needed to combat the problem.

How do you anticipate the landscape of blockchain technology evolving concerning MEV prevention and enhancing overall security, particularly within the Neo ecosystem?

We believe that as the industry matures, fairness and security should always be prioritized, with the interests of ordinary users protected. Neo, through our new Neo X and our legacy chain, opens the gate to EVM-based developers and offers MEV-resistant protection, which is of the utmost importance in the blockchain industry. We believe this will be one of the most important features that will grow our vibrant ecosystem.

As we drive progress towards the Smart Economy, the industry will require the utmost in user protection and security which, through our Neo X and legacy chains, is already evident. We hope, and will see in time, that more blockchains realize the potential of combining enveloped transactions with the dBFT consensus mechanism to make this a reality.