Introducing Paladin

Solving Bad MEV for Good (1/4)

TLDR

Paladin makes it more profitable for Solana validators NOT to frontrun.

It has 2 components:

1. The Paladin bot — open-source bot to capture only good MEV

• 100% open-source, decentralized, and permissionless — runs locally in the leader and uses no external block-builders, searchers, or relays
• Designed to run on top of the Jito client and can only improve APY

2. The PAL token — captures MEV

• Paladin funnels 10% of MEV into a token, but validators capture almost all of it back (97.5% of MEV).
• Funneling MEV rewards to token holders does not create more value. But Tokenizing future cashflows creates significant collateral for the validators, which negates their short-term incentive to frontrun* - which does create more value.

*👇

The short-term incentive to frontrun users

Frontrunning users pay ~$100M per year, which is A LOT of money for almost anyone.

But it’s not a lot for SOL stakers and their $65B bags of SOL!
for them it’s +0.15% APY (7.4% → 7.55%).

If SOL stakers had a miraculous way to make predatory MEV go away, helping DeFi flourish on Solana, gain more liquidity and activity, and compete with CeFi, it would affect the price of SOL.

By how much? Would it 10x the price, or 2x, or maybe just +10%? I have no idea — but definitely more than +0.15% /yr. So the long-term incentive for validators and stakers is to get rid of predatory MEV.

Unfortunately, while it would be great if everyone stopped frontrunning, when it’s my turn to be the leader and I see a tx trying to buy $1M worth of SOL, I’m better off buying SOL just before it and selling the SOL right after it (sandwich).
Sure, my $1K profit destroys $10K for everyone, but only a fraction of the harm affects me directly. This is a classic “tragedy of the commons” and my game-theoretic winning strategy is to sandwich.

It’s sad… BUT it also means Paladin needs only to align the short-term incentive — the long-term incentive is already aligned! 😊

Paladin’s Key Principle

It is impossible to prevent validators from front-running, or even to prove that a validator frontran a Tx. Paladin doesn’t prevent it, it just makes it very uneconomical.

First, it offers the Paladin bot to capture good MEV directly, which improves the APY of the Jito-client. Even if there was no PAL token, no greater goal of preventing predatory MEV — it would still make sense for a validator to run Paladin and be a “Palidator”.

Second, the Paladin protocol directs 10% of the MEV to the PAL token, and airdrops 50% of all PAL to all validators and their stakers. This creates a collateral for each validator, which can be slashed by the majority of other Palidators if they think a validator doesn’t run Paladin, tweak Paladin in any way, frontrun, or dishonest.

Each validator of the top-25, who jointly control 40% of SOL stake, controls 1%-3.3% of SOL stake, and will be airdropped (with its stakers) 0.5%-1.5% of all PAL.

So the key principle is to award validators significant amounts of a valuable token — not a meme, not “governance”, but actual cashflow — and have it used as collateral which strongly outweigh dishonest behavior.

In a sense, PAL is a restaking token, which incentivizes Palidators for a desired behavior.

The Value of PAL

Is the PAL collateral significant enough to prevent front-running?

It’s impossible to say exactly how valuable is a tokenized cashflow of 10% of Solana MEV, but as a thought experiment, if all validators captured the current $500M/yr MEV and funneled 10% to PAL, it would amount to $50M/yr cashflow.

• Crypto assets are notoriously speculative, so we will not even try to evaluate their effect on price.
• Ignoring speculation, the “dry” formal way to evaluate present value of a “perpetuity” cashflow is: cashflow / interest_rate
  Assuming 5% interest rate, that’s $1B ($1,000,000,000), which would airdrop $5M–16M to each of the top-25 validators, totaling $500M for all validators and stakers.
• The long term value of PAL depends on this cashflow, which in turn depends on the success or failure of Solana’s DeFi ecosystem.
  If Solana attracts more liquidity & activity, it is expected to grow.
  If it dries up, it is expected to shrink.

But if (and it’s a big if!) you think the value of the PAL is in that domain, then no sane validator will “cheat” and risk being slashed millions of $ to make another $1K or $10K.

In fact, even if a validator doesn’t believe in Paladin at all, it would still be better off to run Paladin, and gradually sell its PAL rather than “cheat” and frontrun. We explore how even this strategy keeps Palidaotrs honest in our next post.

To sum it all up, Paladin’s high level idea is to align validators’ short-term incentive not to frontrun by creating a valuable token, giving this valuable token to the validators, and have it act as collateral, so at any given time there’s A LOT more to lose by “cheating” than there is to gain.

The mission

Paladin’s mission is to get rid of predatory MEV without introducing any centralization. Paladin is 100% decentralized, open-source, and permissionless.

If it works, it’s thanks to aligning everyones’ incentives.
If it fails, it’s because we failed to align them properly.

We’re not a Foundation or Labs — we don’t run any part of Paladin, we don’t develop it, we don’t maintain it, we don’t try to get it listed, we don’t market-make, and we don’t promote.

Anyone in the Solana ecosystem can (and is encouraged to!) start a foundation, fork the code, gather a team to extend it, build dashboards, or whatever — Paladin even funnels funds to a Dev Fund controlled by validators that could fund any such activity.

But we will do none of it.
Once Paladin launches — it’s truly decentralized and in the hands of the Solana community.

What’s ahead

In the following posts we describe:

1. The Paladin bot
2. The PAL token— the essence of Paladin (because running a bot in the leader is nothing new)
3. Paladin dynamics — the dynamics PAL’s design creates

Acknowledgments

First and foremost, thanks goes to Oliver , Edgar and the Anza team for working tirelessly to design and implement the Paladin bot and protocol.

Additional thanks to the Firedancer team, Solana Foundation, Solana Labs, Toly and the many, many, many, many members of Solana’s DeFi and Validator ecosystems for their invaluable feedback.