Arbitrum’s DAO passed a vote to implement a new sequence replacement feature, named: Timeboost™️. But it could have disastrous effects on users in the Arbitrum ecosystem.
Written by: joshuabaker.eth
Compiled by: Shan Ouba, Golden Finance
Recently, Arbitrum’s DAO passed a vote to implement a new sequence replacement feature, dubbed: Timeboost™️. I end this post with the mission of imploring the Arbitrum DAO and team to reconsider their implementation of Timeboost™️, but I know it’s probably a futile exercise. I see some major issues, not only with the greedy and short-sighted reasons they are pushing for this feature, but also with the disastrous effects it could have on users in the Arbitrum ecosystem.
When talking to people in the CeFi (centralized finance) space, I often cite Arbitrum as the only beacon of hope in an increasingly deteriorating MEV (maximum extractable value) environment. Sadly, this is no longer possible. The first-come, first-served mechanism used to be a very special ordering structure that made Arbitrum a safe haven for users who didn't want their transactions to be exploited in various ways, but this "upgrade" (if you can call it that) fundamentally undermines that.
Why did they build this monstrosity?
First, let’s look at some data on other L2 profit sources:
Also take a look at Arbitrum and Base's revenue and profit data over the past year:
Let’s focus on two data points in particular because this is a really interesting set of charts that our lovely friend 0xRenaud presented on his Dune dashboard.
Look at that comeback! This is, in my opinion, the most frightening data point for Arbitrum as a top player, as Base has surpassed them on both the 9-month and 6-month profit benchmarks. As you can clearly see in the SMG data posted above, the majority of Base’s profits come from priority fees, which are the fees that searchers and market makers (MMs) pay to get their arbitrage and MEV priority. To date, Arbitrum has no priority gas fee mechanism and is still making a killing.
This is why the Foundation and the DAO want to build a preferred gas fee mechanism, but I want to be clear: I have no problem with this! What I hate is this over-engineered mechanism that threatens to overwhelm Arbitrum’s retail users and results in more MEV being extracted per dollar of transaction volume than any other chain in the Ethereum ecosystem. I’ll detail some alternatives I recommend the Foundation and the DAO explore at the end of this post, but first, let’s take a closer look at the design of this “mechanism.”
The mechanism itself
Here is a snippet from the FAQ in the Arbitrum official documentation:
These two data points caught my attention: Timeboost™️ sells the right to put transactions at the beginning of blocks for a full minute. Given that this will extend Arbitrum block times by 200ms to 450ms (also mentioned in the documentation), this means that the auction winner will get exclusive first-of-the-block control for about 133 blocks at a time on average. I brought this up on Twitter a few days ago, and now I want to dig into a few ways that some serious searchers could completely destroy the system:
First, let’s look at an example that the Chaos Labs team detailed in their Timeboost™️ risk assessment, but I think they severely underestimated:
Here's what I drew for those of you with clear heads:
If you read the Arbitrum docs/FAQ about Timeboost™️, you'll see that they are actually advocating for this mechanism. They argue that simple pre- and post-transaction operations within each block are a good thing, because in theory the auction will capture a large portion of the MEV (Maximum Extractable Value). But this is only true if the auction is only for one block. The current auction is actually for 133 blocks. This means that they are essentially selling the right to "squeeze" for 132 consecutive blocks (the first block doesn't count because it's free). This fact will lead to massive multi-block MEV, possibly of an order of magnitude never seen before. I also want to point out another potential vicious game theory scenario that I expect to happen at least once.
Here’s a quote from Wikipedia on the Prisoner’s Dilemma. Very basic stuff. In any infinite game, cooperation is the optimal strategy! But in any finite game, the end result is often that you screw your opponent. This is why events like Celsius or FTX happen, but it also explains why platforms like eBay have very low fraud rates. What does this mean for Arbitrum’s Timeboost™️ mechanism? Simple, if I am an anonymous auction bidder with the ability to generate 2^256 different public keys to bid on, then I can do whatever I want because I am not playing an infinite game, but an infinite number of finite games. It seems to me that a potential attack vector is price manipulation similar to the Chaos Labs example, but it would be carried out across multiple blocks.
Assume that this searcher is smart enough to have a model that can predict the price change of a token on a centralized exchange (CEX) with a probability of more than 50% based on market liquidity. In fact, this is the job of a market maker, collecting data, making predictions based on this data, and adjusting spreads and orders accordingly. Assume that the Chaos Labs team is right, and because of Timeboost, no one will try to do CEX-DEX (decentralized exchange) arbitrage during the 200 millisecond delay transaction period of each block:
If you’ve ever heard of the Prisoner’s Dilemma, you know that the solution is always to be the last person to drop the soap…wait, that’s not right. Wait a minute…
It’s also important to note that shorter block times reduce the MEV that can be extracted by on-chain “LVR” (Lag Price Arbitrage) (backed by the paper): In this scenario, searchers know exactly that all order flow in a block is from retail or low-sophisticated users. Therefore, they can effectively treat the entire 1-minute period as one giant block that runs for a full minute. That is, instead of arbitrage every block, they can strategically postpone arbitrage operations, let prices fluctuate, and then execute large-scale arbitrage after T+n blocks. This scenario is impossible to model without Timeboost™️ running in real time, but it’s worth being aware that there may be searchers paying attention to this. This may become a form of value extraction that may only be tested sporadically on certain blocks at first, and then gradually put into large-scale production. We may well see some kind of arms race between searchers who succeed in bidding and those who don’t.
For example, the winning searcher "A" in their first minute chooses not to arbitrage block n-2, but instead merges blocks n-2 and n-1 into one block, using the method I just described. They then place the post-transaction into the last block, thereby treating the first two blocks as one larger, more profitable block.
Let’s say searcher “B” notices this. They realize they can include a transaction during the delay period of block n-1 to arbitrage the block before “A” does. So in the next minute, “A” puts a post-transaction in block n-2 to complete the arbitrage before “B” does, making “B” the victim of the arbitrage of the first transaction in the next block.
I’m sorry if this is a bit confusing, but this all turns into a prisoner’s dilemma. If “A” knows that “B” won’t screw them over in the next block, they’ll betray “A” before they get the chance. If “A” figures this out, they’ll be smarter next time.
Summarize
Please don’t implement this mechanism. If you must implement it, at least give me some popcorn to watch the fun. But seriously, I think there are some interesting ideas in the Timeboost mechanism that are worth exploring, but the multi-block MEV opportunity is too serious to be ignored. Arbitrum has always been my favorite chain, and as I mentioned earlier, I tell every traditional finance practitioner that this is a great MEV ecosystem chain where users get good pricing, liquidity, and are protected from front-end transaction exploitation.
However, this proposal would ruin all that.
