Miners are actively participating in the MEV game, and gas fees are rising. Is it a blessing or a curse?
Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from
Babbitt Information (ID: bitcoin8btc)
Babbitt Information (ID: bitcoin8btc)
, Author: Alex Obadia, Compiler: Screen, published with authorization.
It is said that DeFi is going to revolutionize the life of traditional finance, is it possible that smart contracts and miners replace the role of intermediaries, and the disadvantages of traditional finance can be eliminated? If the evolution of the financial system is like the road to patching, today we found that a patch has come to the blockchain and has not yet been applied. In the traditional financial market, brokers act as intermediaries between customers and the market, and have the advantage of insider information on buy and sell orders that may affect the market in the future. Brokers can profit by executing their own trades ahead of their clients' trades, which is illegal in regulated financial markets.
However, this illegal operation is "legally" staged on the chain. According to CoinDesk, research shows that in the past month, bots that exploit Ethereum network "flaws" for reasonable arbitrage have made at least $1.07 billion in profits, known as Miner Extracted Value (MEV). , this "legal" operation is what we often hear about frontrunning. Nowadays, more and more miners are actively participating in the game of acquiring MEV. The power of miners may be much greater than we imagined. How did they preemptively obtain MEV, and what impact will these operations have on the Ethereum ecosystem?
Flashbots, a research and development organization dedicated to mitigating the negative externalities and risks that MEV brings to the smart contract blockchain, conducted an in-depth study of MEV for the first time. They began to study the Ethereum blockchain from the first block in 2020. Classified more than 1.3 million MEV transactions and found that since January 1, 2020, at least $314 million worth of MEV has been withdrawn, and failed MEV transactions have wasted gas fees of $4.5 million, equivalent to a waste of 4,500 Ethereum block space! The following are findings from research published by Flashbots via the public dashboard and MEV-Explore, a real-time MEV transaction explorer.
introduce
MEV is a metric that refers to the total value that can be extracted by permissionlessly reordering, queuing, or pruning transaction pairs within a block on the blockchain. So far, MEV on Ethereum is mainly extracted by DeFi traders and robots when they execute strategies where the order of transactions is important, and a small part is the gas fee generated by these traders or robots when they extract MEV. MEV-Explore V0 does not give a theoretical value that can be extracted in a specific block, such as how much MEV a miner can get from reordering transactions in the block they are producing, but focuses on the MEV currently happening on Ethereum Empirical evidence of activity.
With these questions in mind, we searched Ethereum, covered more than 8 major DeFi protocols, and collected more than 1.3 million MEV transactions on the chain since January 1, 2020. Through our MEV-Explore v0 (explor.flashbots.net) public dashboard, you can track the latest MEV transactions on Ethereum in real time.
At least $314 million in MEV withdrawals since January 1, 2020
From the first block of 2020 (9193266), we found that the extracted MEV on Ethereum reached a size of at least 314 million US dollars (~540,000 ETH), including successful, recovered and checked MEV transactions, and the gas fees associated with those transactions.
Figure 1: Cumulative MEV from January 2020 to the present
Substantial growth in MEV withdrawn: In January 2021, MEV withdrawals were $57 million (47.6 thousand ETH), an increase of 300 million in absolute terms compared to the $180 thousand (11 thousand ETH) recorded in January 2020 Multiple times, an increase of 43 times in terms of the number of ETH. Given that not all protocols and transaction types were covered during data collection, we believe the actual MEV extracted will be higher than the above metrics. This metric is expected to continue to grow as DeFi will continue to grow, Ethereum will increase in complexity, increased complexity will lead to new methods of extracting value from transaction ordering, and the emergence of more complex MEV extraction methods will also increase MEV Value pushed up.
In MEV-Explore v0, we quantify and classify MEV activity via MEV-Inspect. Currently, we have collected data based on these metrics, observing the eight protocols listed in the table below (see Figure 2). There are many emerging DeFi protocols with significant MEV exposure (such as ESD/DSD), and there are also DeFi protocols with MEV exposure before the DeFi explosion (such as Bancor, Kyber, Etherdelta, Airswap). Added observations of these protocols in . In addition, there are a large number of MEV activities not covered, such as multiple trading opportunities (such as sandwich trading) and CEX-DEX price arbitrage.
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Figure 2: Protocols covered
What does the extracted MEV contain?
As mentioned above, MEV today is primarily earned by traders taking advantage of trading opportunities that depend on the order of trades. This includes opportunities such as price arbitrage between tokens on Uniswap, loan liquidation after an oracle update on dYdX, redemption of ESD (algorithmic stablecoin) vouchers, and more.
We divide MEV transactions into two broad categories: successful and unsuccessful. Failed transactions have two subtypes: Reverted and Checked.
Successful MEV deals are those that track MEV opportunities and successfully capture them.
A reinstated MEV transaction is a failed MEV transaction where a trader tracks a MEV opportunity but fails to take it for any number of reasons, such as someone else grabbing the opportunity before them, they ran out of gas, or market conditions happened unfavorably The change.
The checked MEV transaction is another kind of failed MEV transaction. The reason for the failure is more subtle. In order to save gas fees, the sender will first check whether the opportunity still exists, and then start their MEV transaction. While senders still end up paying gas fees for their checks, the cost is much lower than directly initiating transactions.
https://etherscan.io/tx/0x2bde6e654eb93c990ae5b50a75ce66ef89ea77fb05836d7f347a8409f141599f
Let's look at a few examples −
Example 1: Successful MEV Transaction via Priority Auction Gas Fee
Performed 3-hop arbitrage between 3 liquidity pools: Balancer’s ETH/USDC, Sushiswap’s USDC/SIL and Sushiswap’s SIL/ETH, paid 12 ETH (US$14,100 at the time) as a transaction fee, worth 16.7 Withdrawal MEV of ETH ($19,600 at the time).
High transaction fees indicate the fact that senders repeatedly bid to increase the gas price of their arbitrage transactions before their existing transactions are included in order to compete with other traders for arbitrage opportunities. A loser of a gas auction loses 1.18 ETH of "checked" MEV here (see Example 3). The winning transaction above ended up paying a gas price of 51,600 gwei, 547 times higher than the average gas price at the time (94 gwei), but only 2 times higher than the loser (27,600 gwei).
Extracted MEV details of tx#1: the sender is 4.7ETH (5.5 thousand dollars at the time), and the miner F2Pool of this block is 12ETH (14.1 thousand dollars at the time).
https://etherscan.io/tx/0x8cfb46876ce1d40250e9690482bdaaffc1f6b60e18c3405ff5e98b636840875f
Extracted MEV details for tx #2: Miner F2Pool for this block is 1.18 ETH (1.4 thousand USD at the time).
Example 2: Failed (recovered) MEV transaction
A transaction trying to obtain MEV from Cream Finance’s liquidation failed because there was no gas, and the sender lost 5.75ETH (about 10,000 USD at the time) in transaction fees
There is such a transaction, in order to liquidate the position of Cream Finance, use 1.5M gas and spend nearly 6ETH to apply for 88,000 USDC flash loan. It does this at first, then fails midway due to lack of required gas fees. While 0x8cfb4 appears innocent on the surface, its internal transactions show more than 237 transactions. This is a very complex transaction with complex logic in the EVM calculations, and ended up using 1.5M gas, almost 13% of the blocks it contained! No matter how much gas was used, the transaction still ran out of gas gas and failed, eventually costing the sender about 5.75ETH (about $10,000 at the time) in transaction fees.
After this "recovered" transaction, the opportunity still exists, seized by the second highest gas fee (or first loser) auctioneer, with a total MEV withdrawal value of 4.125 ETH, where the gas fee paid is 3.75 ETH.
tx#1’s MEV withdrawal details: the sender earns $0, the block’s miner Sparkpool earns about 5.75 ETH (about $9.3K at the time)
https://etherscan.io/tx/0xf629036e2740a98e1ca5ce32fff85f27337d224e94cbeee6c3d7aabb7507b050
MEV withdrawal details for tx#2: Sender #2 earns 0.375 ETH (then $600), the block’s miner Sparkpool earns 3.75 ETH (then ~$6k)
Example 3: A failed (checked) MEV transaction
In one transaction, I checked the liquidity pools of Uniswap WETH/PRT, Uniswap SFI/PRT, and Sushiswap SFI/WETH to find a 3-hop arbitrage opportunity, but found that the opportunity did not exist and returned, only consuming 43K gas, which caused the sender to lose About 0.01ETH (19 USD at the time) transaction fee.
Some traders are more cost-effective than the first sender in our example 2, and before sending a logically complex and gas-intensive transaction, they will perform a "check" to verify that the opportunity is still there. We consider these to be failed MEV transactions as well, as MEV transactions are not ultimately sent because the check returns that the opportunity has disappeared.
Extracted MEV details: sender earns $0, miner who produced this block earns 0.01 ETH ($19 at the time)
There's a lot of fascination about MEV transactions, such as their complexity, the way they fail more or less gracefully, and because of the stories they tell about pseudonymous users (like this arbitrage from a seemingly misplaced 0x open order book, It netted the sender $1.9 million in revenue, charging $73 in transaction fees).
Withdraw MEV network fees
Both of these practices are bad for Ethereum, because it makes the transaction volume on the chain explode, and puts upward pressure on gas fees, just like the high gas price in example 2 above. Such a high price would be a blow to Ethereum's permissionless nature, as it would be too costly for small users, forcing them to leave the network.
Additionally, a transaction wins a MEV opportunity, and we found that the Ethereum blockchain was littered with recovered and checked transactions, which we classified as failed MEV transactions. We believe that none of these failed MEV transactions need to be recorded on-chain, taking up valuable block space.
Since January 1, 2020, the operation of extracting MEV has accounted for at least 3% of the overall gas consumption of the Ethereum network (see Figure 4). Zooming in on the reverted and verified MEV transactions, we found that their gas consumption could fill at least 4500 Ethereum blocks, wasting a lot of precious block space!
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The Evolution of MEV: The Maximum Extractable Value of Miners
Before Ethereum turned to POS today, miners had the most power in transaction packaging and ordering because they were block producers. The term MEV was originally proposed by Phil Daian et al. in the 2019 research report "Lightning Boy 2.0: Frontrunning, Transaction Reordering, and Consensus Instability in DEX", which means that miners can extract value. However, MEV exists on all smart contract blockchains, and one of them will be responsible for transaction ordering. It is not necessarily miners who perform this operation, such as validators in ETH2.0 and rollup providers on Optimistic Rollups. Therefore, we propose to rename MEV to maximal extractable value, expanding the scope to cover other blockchain architectures, while still retaining the MEV nomenclature.
Removing the word miner from MEV's name also resolves another common confusion: the belief that miners are the only actors capturing this value. The reality is that, so far, MEV on Ethereum has been primarily extracted by non-mining DeFi traders and bots.
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Figure 4: Extracted MEV share (gas fee) between MEV Tx senders and MEV Tx miners since January 1, 2020
In recent months, however, we’ve started to see more miners actively participating in the MEV game, either by running bots running their own direct withdrawals, entering into profit-sharing agreements with DeFi traders, or adopting market infrastructures that extract MEV, such as Flashbots’ MEV -Geth.
A MEV crisis can occur in the following ways:
outlook
Miner incentive misalignment leads to unstable consensus, unilateral miner transactions lead to unfair information asymmetry, and excessive network fees make Ethereum unusable. This crisis is difficult to resolve because any attempt to prevent miners or traders from accessing the MEV revenue stream could result in the creation of an opaque off-protocol market, yet Ethereum's increasing complexity (such as new smart contract deployments, new user onboarding, new composability) suggest that the size of MEV will only continue to grow.
We believe extraction of MEV is inevitable. To avoid a MEV crisis, extraction must be done in a trustless, fair, and efficient manner. To avoid this crisis, the first step we have taken is to create an efficient and fair withdrawal mechanism and work to improve its trust guarantees.
