What Is Ethereum Request For Comment (ERC)?

What Is Ethereum Request For Comment (ERC)?

Ethereum Request for Comment (ERC) is a set of standards and guidelines for proposing improvements to the Ethereum blockchain. Each ERC defines a unique protocol or set of rules, specifying how new features, tokens, or functionalities can be added to the Ethereum network. These standards facilitate interoperability and compatibility among different Ethereum-based projects.

ERCs are similar to proposals in Bitcoin as BIP , and they play a crucial role in the development and evolution of the Ethereum ecosystem. They cover various aspects such as token standards, smart contract interfaces, and other technical specifications. Developers and the Ethereum community use ERCs as a collaborative tool to discuss, debate, and refine proposed changes before implementing them on the Ethereum blockchain.

Common ERC standards include ERC-20 (fungible tokens), ERC-721 (non-fungible tokens or NFTs), and ERC-223 (token transfer improvement). Each ERC standard addresses specific use cases and requirements, promoting consistency and widespread adoption across the Ethereum platform.

What Is Maximal Extractable Value (MEV)?

Maximal Extractable Value (MEV), formerly known as miner extractable value, gauges the profit potential for miners, validators, sequencers, etc., by allowing them to arbitrarily manipulate transactions within the blocks they generate. MEV represents the overall profit achievable through ordering, including, or omitting transactions from a block. While it offers additional revenue streams, MEV introduces potential risks to a network's security, fairness, and stability.

The relevance of MEV has surged with the rise of decentralized finance (DeFi) platforms on blockchain ecosystems. These platforms facilitate intricate financial transactions, and as the volume and complexity of transactions increase, there is a higher risk of exploitation by malicious actors.

The concept of MEV dates back to the early days of blockchain, gaining prominence with Ethereum's smart contract capabilities. Ethereum's programmable nature has led to the development of diverse financial products, creating opportunities for extraction by both savvy and unscrupulous actors.

Unlike proof-of-stake chains, proof-of-work chains like Bitcoin are less susceptible to MEV. Bitcoin's lack of smart contracts limits opportunities for transaction reordering. Consequently, parties seeking to exploit MEV opportunities typically focus on ETH rather than BTC due to Ethereum's versatile smart contract functionalities.

How Does MEV Work?

Opportunities can arise when actors with influence over transaction orders can benefit from them. Examples are price differences between DEXs or liquidation events in lending platforms.

The key idea is that transactions compete with each other for confirmation. When a user submits a transaction, it is broadcast to the network and placed in a pool of pending transactions known as the mempool. The transactions with the highest transaction fees tend to get prioritized by profit-seeking miners and validators. Thus, strategically manipulating the ordering of transactions within a block allows them to increase their profits at the expense of others.

What Is Flashbots?

Flashbots was launched as an independent research and development organization with an aim to lessen the adverse effects of the Maximal Extractable Value (MEV) extraction. At the same time, the organization works to avoid the existential risk MEV poses to a stateful blockchain such as Ethereum.

Flashbots aims to provide a platform for MEV transactions that is fair, transparent and permissionless. Flashbots comes with three main goals:

—> Making the MEV revenue public

—> Making the MEV activity transparent

—> Making the distribution of MEV revenue fair

MEV Crisis

The Maximal Extractable Value is the maximum value extracted from block production in Ethereum. MEV benefits not only the transactors but also the miners (or validators). With the recent increase in the usage of Ethereum, the MEV system’s mechanism issues have posed threats to network security. The increase in demand for DeFi caused Ethereum to be congested. 
As a result, Ethereum introduced an independent centralized R&D organization, FlashBots, which takes the MEV transactions off the main public chain. Flashbots keep transactions private and increase network security. They connect mining pools and searchers directly with each other while keeping information secure, making them perfect for DeFi.

How Flashbots Work?

Searchers look through the whole network for MEV opportunities. As they come across one, they launch the transaction protocol for that opportunity and upload this to the Flashbot server instead of broadcasting it to the whole Ethereum chain. 

Then the Flashbots server comes into play. The bot transfers the transaction details to network miners, and a private auction takes place where miners bid on the transaction to build a block on it. Miners are also allowed to include non-MEV transactions from the public network to these blocks.

Drawbacks

Flashbots is working to make the MEV public to execute its core goal of making the blockchain network transparent and permissionless. But the mechanism is not entirely transparent. The process of generating MEV is still a black box for users.

Furthermore, Flashbots is not the only solution to the MEV crisis. Several other networks have also launched their programs for the solution.

What Is the Fork Choice Rule?

The Fork Choice Rule (FCR) is a fundamental concept in blockchain protocols, particularly in the context of consensus mechanisms such as Proof of Stake (PoS) and Byzantine Fault Tolerance (BFT). The Fork Choice Rule dictates how nodes in a distributed network should choose between multiple competing chains or forks to reach consensus on the canonical or accepted version of the blockchain.

In essence, when multiple branches or forks of a blockchain exist due to the simultaneous creation of different blocks, the Fork Choice Rule guides nodes in selecting the most valid and preferred chain. This decision is crucial for maintaining the integrity and coherence of the distributed ledger.

Key aspects of the Fork Choice Rule include:

1. Longest Chain Rule (Proof of Work): In Proof of Work (PoW) consensus, the most commonly used Fork Choice Rule is the Longest Chain Rule. Nodes in the network typically choose the chain with the longest valid proof-of-work, considering it as the legitimate and accepted chain.

2. Weighted Voting (Proof of Stake): In Proof of Stake (PoS) consensus mechanisms, nodes' influence in the fork choice is determined by the amount of cryptocurrency they hold or "stake." Nodes with a higher stake may have more voting power, and the Fork Choice Rule may consider the chain with the most stake behind it as the canonical chain.

3. Safety and Liveness: The Fork Choice Rule aims to achieve a balance between safety and liveness. Safety ensures that conflicting transactions are not included in the chosen chain, maintaining the consistency of the ledger. Liveness ensures that the system keeps making progress, even in the presence of conflicting blocks.

4. Finality: Some Fork Choice Rules aim to achieve finality, meaning that once a block is included in the chain, it is considered irreversible. Finality provides a higher level of security and confidence in the state of the blockchain.

Different blockchain networks may employ variations of the Fork Choice Rule, and the choice often depends on the specific consensus algorithm and goals of the blockchain platform. The Fork Choice Rule plays a vital role in establishing decentralized agreement and preventing double-spending or other security threats in distributed ledger systems.