Project description (please explain how your project works):

TL;DR:

The overarching goal of this grant is to propose to Optimism DAO to evaluate (and at a later stage implement) how to implement front-running and censorship protection via a shielded/encrypted mempool by threshold encrypting transactions until they’re signed by the sequencer.

The problem we’re aiming to solve:

Front-running and censorship are huge threats to the base layer neutrality of Ethereum and the L2 ecosystems. One specific problem this creates is that especially larger crypto investors, who are aware of front-running, are keeping billions of dollars side-lined from DeFi because they know that they’ll get front-run.

Solution:

We propose to add a shielded mempool using threshold encryption to the OP Stack. One way to achieve this would be an implementation of the threshold encryption DKG as implemented by Shutter Network for Optimism, adding another module and more optionality for beneficiaries of the OP stack.

Benefits for builders on top of OP stack and their end users:

With a shielded mempool, we’re expecting the following benefits, especially for DEXs and DEFI protocols and their end users of Optimism based rollups: a higher degree of base layer neutrality leading to a) better and fairer prices on DEXs and DeFi protocols on Optimism due to front-running protection and b) an additional censorship resistance layer.
For sequencers in the OP stack ecosystem, the added neutrality should result in better plausible deniability against anyone arguing that the sequencer role isn’t neutral, i.e., end users or even regulators.

On Shutter Network:

Shutter Network is an open-source project that aims to prevent front-running on Ethereum L1/L2 by using a threshold cryptography-based distributed key generation (DKG) protocol.
Our primary instantiation of this protocol is what we call Rolling Shutter, which is a plug-in for L2s to protect their entire rollup from front-running/malicious MEV, as well as improve censorship characteristics. Rolling Shutter generally prevents the parts of MEV which are considered malicious (front-running, sandwich attacks) while leaving the distribution of the benign types of MEV (arbitrage, liquidations) to the chosen MEV distribution mechanism (most likely Optimism MEVA in this case). Rolling Shutter (as a plug-in) is essentially finished and ready for rollups to integrate.

Additional sequencer decentralization path:

Besides MEV, a secondary goal of the grant is to evaluate an additional sequencer decentralization path for Optimism.
The main goal of decentralization is censorship resistance. Because shutterizing increases censorship resistance, there might be an argument to be made that with Rolling Shutter, rollups won’t have to decentralize the sequencer (as much), which could result in latency and overall system cost improvements.

Grant Structure

We would like to propose two stages of this grant, beginning with a short and cost-effective research/evaluation stage. After each stage, Optimism DAO and the proposer team can refine and choose whether and how to proceed with the actual implementation of Shutter.
We’re not planning on selling OP tokens any time soon but rather see this grant as the first step towards mutual alignment between the OP and Shutter communities.
Rolling Shutter will always be optional to use, i.e., there always be the fallback of an unencrypted transaction path.

If implemented by a rollup using the OP stack, the Shutter keypers will act as the threshold encryption key generators, which ultimately enables the front-running protection. For this, they most likely would want to charge a small fee in ETH. The keypers will be governed by the (to be formed) Shutter DAO