The Interchain Lab Ep. 11— Skip Protocol (Welcome back!)
The Interchain Lab (TIL) occurs biweekly on Fridays at 3PM ET (20:00 UTC) in the Osmosis discord lounge. On this episode of The Interchain Lab: Togg and Waterspinner host a sit down with Jeremey and David from Skip Protocol to deep-dive into the launch of ProtoRev and more.
Jeremy and David are both software engineers at Skip.
What is ProtoRev?
Skip Protocol’s ProtoRev is a new module that detects and captures arbitrage opportunities on Osmosis by rebalancing pools to capture profits and redistributes them to the community. It is expected to generate $50–150k in monthly revenue for the community as trading volumes increase, and profits will be distributed based on a schema voted on by the community!
Skip Protocol receives a share of the new revenue generated from the module for developing, maintaining, and upgrading the solution (20% in year 1, halving to 5%), but only from revenue that wouldn’t have been captured otherwise. The goal is to establish a long-term partnership with the Osmosis community, developing on-chain technologies to capture Miner Extractable Value (MEV) as protocol revenue for long-term sustainability and rewards.
ProtoRev Launch
ProtoRev launched with the V15 upgrade on March 16th, 2023. It has recaptured over $5,500 in the first week of deployment, with the majority of the denom now accruing in $OSMO. The ProtoRev address can be found here. This matches with the team’s initial projections of $5,000 per $27,000,000 of transaction volume. The protocol uses highest liquidity routes and hot routes to capture MEV revenue.
Highest liquidity routes account for a majority of the revenue and are performed automatically on-chain. Hot routes are added from off-chain sources. This two-step process allows ProtoRev to backrun and capture MEV for balancer pools, stable swap pools, and concentrated liquidity pools. The approach is carefully bounded so it does not exceed 100 milliseconds a block to simulate.
How is the Team Feeling About the Experiment?
Jeremy: “The amount it’s captured, at least from my perspective, has actually exceeded my expectations, particularly the highest liquidity routing… which has captured a majority of the background arbitrage profits.”
The TIL hosts asked Skip Protocol how the team is feeling about the experiment, and if the module is performing as expected. Jeremy shared that the team is feeling good about the experiment and they are continuing to review the results. The team is determining if they would still be generating less USD value compared to $OSMO if they did not add the hot routes. They are continuing to establish the parameters they need to put in place, which adds extra compute. However, they have added guardrails to ensure that the extra compute does not impact the chain block times.
What Else Does Skip Protocol Have in the Works?
Skip Protocol is developing a Protocol Owned Builders (POB) module which is pushing the ethos of sovereign MEV.
David: “Rather than submitting to a centralized provider, POB allows for parameters to be set by on-chain governance. Chains and delegators will have the right to determine how blocks are built, types of behaviors that are enabled, and how to distribute any MEV that is generated.”
POB also allows for cross-domain MEV between Centralized and Decentralized Exchanges, such as Osmosis (DEX) to Binance (CEX).
Jeremy: “Internally we have been viewing ProtoRev kind of in the same light of POB. It’s all about giving the chain more power back and deciding how MEV is distributed.”
The Future of the On-Chain MEV Experiment
Jeremy: “Sunny puts this really well. Bad MEV largely looks like MEV that relies on a transaction itself whereas good MEV largely relies purely on blockchain state.”
ProtoRev looks at the state of a chain after a transaction is processed and analyzes the chain state to determine if an imbalance was created. Value is accrued as ProtoRev rebalances these pools. It does not impact the execution price like some harmful MEVs, such as sandwich attacks. This is an important distinction between ProtoRev and POB compared to other MEV modules.
As development continues, Skip wants to move away from centralized control to chain governance control. They also plan to look to incorporate non-AMM MEV opportunities in Cosmos such as liquidations and cross-chain MEV.
Don’t miss the full recording of this episode of TIL which delves much deeper into the concepts discussed in this article. You can stay updated on Skip Protocol by following their Twitter and reviewing their documentation. You can also join the discussion on what is coming next on Skip’s forum.
Enter the laboratory at Osmosis.zone, the first decentralized exchange powered by the Cosmos SDK and IBC. See our published lab reports at the Osmosis blog, our bench notes at Github and help plan future experiments in our Commonwealth
Connect with other DeFi Scientists by following us on Telegram, Twitter, Discord, Reddit, and the new Facebook and Instagram pages
Reach out to Osmosis Community Updates by Email or Twitter and the Osmosis Support Lab by Email or Twitter
