Author: George Kaloudis, coindesk analyst Source: coindesk Translation: Shan Ouba, Golden Finance
Key points ：
Arbitrage opportunities in traditional finance It exists in both the and cryptocurrency space, but arbitrage opportunities are more pronounced in the cryptocurrency space due to the visibility of unconfirmed transactions and slow settlement times.
Although not as prominent as Ethereum, MEV on Bitcoin is also developing through projects such as "Ordinal Inscription", Behaviors such as block mining and miner cartels emerged.
The emergence of MEV on Bitcoin may force the market to require the "privatization" of the memory pool, which will undermine one of the founding principles of the cryptocurrency. one.
People think that one of the "killer applications" of cryptocurrencies and blockchain is the ability to trade without centralized financial intermediaries. Able to trade various assets (if you can call them assets). Never mind that most of these assets are useless or simply fulfill a function by doing nothing. People have made huge returns by trading them. For example,SHIB made everyone rich in 2020, and then the WIF and PEPE deals did it all again in 2023.
When early money poured into these tokens, they were first purchased on automated market makers (AMMs) on decentralized exchanges , well before they were listed on centralized cryptocurrency exchanges. AMMs are decentralized applications that match buyers and sellers of cryptocurrency tokens without the need for cumbersome data-sharing procedures such as those required by regulated exchanges. No passport photos, driving license snaps, triple selfies, or waiting for anyone or anything specific. You just connect your crypto wallet, tell the AMM you want to buy a certain amount of an asset, click buy, and you're good to go.
In addition to the convenience and privacy of avoiding authentication, there is another immediately striking thing about these AMMs: despite the fact that cryptocurrency opinion leaders regard cryptocurrencies as and blockchain touted as the “next iteration” of the stock market (imagine a stock market that never closes…if you make a mistake, there’s no recourse…that’s not great unless you’re like some Profiting from trading errors or glitches, such as when Berkshire Hathaway stock appears to be trading around $180 instead of around $600,000, you happen to be on the right side of the trade).
To some extent, the stock market is closer to real-time than AMM.
Rough example: Party A wants to buy stock XYZ for $100, and Party B wants to sell stock XYZ for $99. Since today's financial markets are so highly interconnected, Party C somehow knows this (there are both legal and illegal ways to obtain and exploit such information) and buys stock XYZ from Party B for $99, and then Immediately sell to Party A for $100. Everyone is satisfied: Party A gets stock XYZ, Party B gets $99, and Party C makes $1 through the arbitrage trade.
This profitable trade is now over and the dust has settled. As arbitrageur Party C pockets this profit, the stock XYZ Efficiency (the $1 difference between Party A's buying price and Party B's selling price) also disappears. All of this happens in real time, and we mean linearly, Party C has to be between Party A and Party B at the right point in time to execute the transaction, and it has to happen in this order (A to C to B).
Of course, we can also see similar arbitrage behavior in AMM, albeit in a slightly different form. Let’s say you heard about SHIB early on and wanted to buy some before it appeared on centralized exchanges. Since it's not listed on an exchange, you call an Ethereum-based AMM (SHIB was created on top of Ethereum as an ERC-20 token) and click the button to buy SHIB tokens. When you place this order, it is thrown into a large batch containing many proposed Ethereum transactions. Some of these transactions may be people using USDC to buy things online, but many of them are token transactions like SHIB, WIF, or PEPE.
All these transactions are visible to all until final confirmation and execution, as they hang in a digital waiting room called the mempool. If the AMM you use to trade misprices SHIB due to market inefficiencies (like in our example with stock XYZ), someone on the network can construct an Ethereum transaction using a different AMM before you do Buy SHIB and then sell it to you at a higher price (because remember, these transactions are visible until they are finalized).
To extend this example further, let's assume that you purchase a fairly large amount of SHIB. In this case, everyone can see that this large, market-moving trade of yours is waiting for confirmation, and can trade around your trade to take advantage of market inefficiencies and the market-moving nature of your order .
This type of transaction can be classified as a sandwich transaction. Some people choose to use the term " sandwich attack" because the AMM is unable to match the buyer with the intended seller, and this can result in the original buyer suffering a huge loss before the transaction is completed (imagine if you Want to buy 1 billion SHIB tokens and you can only get 800 million due to the inefficiency of the AMM and the inability to do a sandwich transaction).
Mezzanine transactions and other types of "inefficiency discovery" are more broadly referred to as maximum (or miner) extractable value. (Miners no longer exist in Ethereum, hence the name change). This is what crypto terminologists mean when they use the acronym MEV in conversation, as if it were common parlance (EV or IRR for advanced finance). MEV means that, in crypto, the person validating the transaction chooses to order the transaction in a way that is most beneficial to themselves rather than the trader. Because block times (the time it takes to verify a transaction) are not real-time (in Ethereum, transactions are verified every 12 seconds or so), there is plenty of real-world time for arbitrage trading. Especially if you are a robot and not a real person.
With this in mind,it is not difficult to imagine MEV extending beyond AMM. A logical conclusion to the preceding technical term is this: the more complex what you are trying to do, the more likely MEV is to occur (just like in normal finance).
MEV: Pros, Cons, and Its Vulnerability on Bitcoin
The discussion about MEV is very extensive. Is it good or bad? Is it illegal?
Depends on who you ask.
On the plus side, MEV is a free market that calculates the real cost of things on the blockchain by eliminating inefficiencies that will be exploited , until the inefficiency approaches zero. On the bad side, MEV makes it possible for unsuspecting laymen and new users to be outright defeated by experts and power users (sound familiar?).
So far we have only mentioned Ethereum because, despite its first-mover advantage, MEV has historically not existed on Bitcoin. In theory it exists, but in practice it is not economically feasible (except in very special circumstances).
You may be wondering: "No MEV? If an Ethereum-based AMM has MEV, then surely a Bitcoin-based AMM also has MEV?"
You are right, but there is currently no AMM based on Bitcoin (with meaningful scale). This is because Ethereum is more expressive than Bitcoin, which means you can "do more with it," like create coins with dog mascots or other memes, trade on AMMs, and get rich.
And because Bitcoin is not very expressive, there is not a thriving new token market or AMM on Bitcoin. If there are no new non-Bitcoin assets on Bitcoin, how can AMM-related MEV opportunities arise? What exactly will you do? Exchange Bitcoin for other Bitcoins?
Yes. This is where MEV on Bitcoin starts to reveal itself.
MEV on Bitcoin
MEV is far less robust on Bitcoin than on Bitcoin on Ethereum, and when experts discuss this topic, it always comes with some caveats.
Colin Harper, director of research and content at Bitcoin mining company Luxor Technology (no relation to the Las Vegas hotel) said: "It's more like a game you can play than MEV."
Three years ago, Bitcoin went through an update called Taproot, which made The web is more expressive. This expressiveness also unexpectedly makes the Bitcoin equivalent of NFTs possible through Casey Rodarmor’s Ordinals protocol. This is what I call "exchanging Bitcoin for other Bitcoins": "NFTs" can work on Bitcoin because the Ordinal protocol is able to see which satoshis (the smallest unit of Bitcoin, one part per 100 million) are engraved There is arbitrary data, which can be images, text, or other things. These collectibles are called Inscriptions to avoid confusion with NFTs (individual tokens). If you buy Inscriptions, rather than buying a brand new token like you would on Ethereum, you are just buying some Bitcoins that are special only when viewed through the lens of the Ordinals protocol.
This is actually buying Bitcoin with Bitcoin (use more to buy less, of course). Just like buying SHIB with ETH or USDC with USDT, buying BTC with BTC is a front-running purchase.
"When you sell inscriptions on Magic Eden or other similar marketplaces, you are using PSBT [Partially Signed Bitcoin Transaction]," Harper explained . “The seller signs their half, and when the buyer buys, they complete the transaction with their signature and the buyer pays the transaction fee. So if an NFT trader sees a transaction in the mempool, they can steal it by broadcasting their own transaction , replacing the original buyer's payment and address with their own transaction, they broadcast a higher-fee RBF [replacement of fees] transaction to ensure that their transaction is confirmed before the original transaction."
While this is not pure MEV like the one discussed in the first part of this article, it still looks like MEV: the intended buyer and seller are not matched because a third party steps in and provides the Miners offer more compensation in exchange for inscriptions, and miners maximize their own value in the transaction by accepting third-party transactions.
Other MEV-like stuff on Bitcoin
Bitcoin still has miners and is mining In business, some things happen regularly that look like MEV.
A common example is empty block mining. Bitcoin periodically mines an empty block. The block is of no use to anyone except the miner who mined it, since no other pending transactions are verified except for the coinbase (lowercase "c", not the company) transaction that rewards the miner with the block. There are technical reasons why this happens, and the appearance of empty blocks is actually accidental, but it's hard to argue that this is a) not MEV and b) good for Bitcoin (although it's also difficult to argue that it's a bad thing).
There is also the cartelization of miners. Many Bitcoin miners now use mining pools to balance their income by mining collectively and receiving a share. This can cause problems, especially as mining pools get larger. As Walt Smith of venture capital firm Cyber Fund wrote in a detailed "MEV on Bitcoin" article:
"...pool mining improves by The odds of consecutive block wins, enabling shrewd multi-block MEV, create systemic risks that mining pools and other mining cartels will enforce by abusing pool economics to enforce common block templates will be non-standard. Block-building small miners are blacklisted. Continued excess fees combined with economies of scale can trigger consolidation, creating a pathological cycle. ”
Currently, some mines. Pools control a large portion of the entire network’s hash rate, with two or three of them combining to control more than half of the computing power. If this alliance of mining pools wins enough blocks in a row, it can use its monopoly power to maximize profits.
Another real-world example of Bitcoin miner behavior might be MEV: out-of-band payments. In these cases, Bitcoin miners are paid for accepting transactions that are considered non-standard (either off-chain or via separate and seemingly unrelated Bitcoin transfers). Again, this is not pure MEV, as the extracted value does not appear on the blockchain as a result of smart programmatic decisions. Instead, value is extracted by miners being paid more than they otherwise would have been paid.
Some researchers worry that out-of-band payments are the first step down a slippery slope that could obscure incentives. But miners are seizing the opportunity. Publicly traded mining giant Marathon (NASDAQ: MARA ) has launched a service called Slipstream to accept non-standard transactions.
The concern is that this kind of black-box operation may lead to the emergence of private memory pools, which is a problem for any blockchain. As CoinDesk's Sam Kessler writes: "Most pressingly, there are concerns that private mempools could entrench new middlemenin key areas of the Ethereum transaction pipeline. "
If most transactions are submitted to a private mempool for confirmation, then only a select few (i.e., a designated few) can influence Bitcoin transactions. This would centralize the power of the blockchain, which is obviously an unpleasant situation for anyone who values censorship resistance.
There are other examples of MEV on Bitcoin, and more are bound to emerge. Since it appears in some form, network participants need to be aware.
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Coindesk