Author: Jeffrey Hu, HashKey Capital Source: medium Translation: Shan Ouba, Golden Finance

Introduction

The concept of Bitcoin MEV (Miner Extractable Value) emerged as early as 2013. Although it is still in its infancy relative to MEV on Ethereum, with the introduction of meta-protocols such as BRC-20s, Ordinals, and Runes, the thriving Bitcoin ecosystem is expected to bring more programmability, expressiveness, and MEV opportunities in the future.

This report will analyze the increasing complexity of MEV on Bitcoin and assess its impact on the broader ecosystem.

Why is there increasing attention to Bitcoin MEV?

Before the introduction of Ordinals, MEV on Bitcoin was not widely recognized and valued, and people mainly focused on the Lightning Network and sidechain mining attacks. However, the Taproot upgrade brought more expressiveness and programmability to Bitcoin, facilitating the launch of meta-protocols such as Ordinals and Runes, which have brought MEV concerns to the forefront. Bitcoin’s 10-minute block time also exacerbates the problem, making inexperienced users more vulnerable to various forms of MEV attacks, such as fee sniping when bidding on inscription markets. As block rewards fall, miner profitability suffers, forcing miners to focus on maximizing transaction fees, which may explain the increase in MEV activity.

The chart below shows the surge in fees relative to block rewards after the much-anticipated release of Ordinals and Runes, at one point even accounting for more than 60% of Bitcoin’s total mining revenue share.

So far, we have seen more and more BTCFi applications and developments, transforming Bitcoin's status from a mere digital gold/payment network to a thriving ecosystem with rapidly growing utility. This could bring more MEV opportunities to Bitcoin.

Differences between MEV on Bitcoin and Ethereum

The limited discussion about MEV on Bitcoin can be attributed to the distinct architectural designs between Bitcoin and Ethereum.

Architectural Design

Ethereum runs on the Ethereum Virtual Machine (EVM), which can execute smart contracts and achieves programmability by maintaining a global state machine.

Ethereum adopts an account-based model that runs transactions in sequence by managing transaction random numbers. This means that the order of transactions affects the results of their execution, leading to the problem that searchers can easily identify MEV opportunities and insert their transactions directly before or after the user's transaction. For example, if Alice and Bob both submit transactions to Uniswap to exchange 1 ETH for USDT, the transaction that executes first in the block will receive more USDT.

In contrast, Bitcoin uses a UTXO model that runs on a scripting language and does not have state like Ethereum. If this is just a standard Bitcoin transfer, only the intended recipient can spend the output with a valid signature, which will not cause other users to compete to spend the funds. However, on Bitcoin, it is also possible to construct UTXOs that can be unlocked by multiple parties using scripts or SIGHASH. The first transaction to be confirmed is the transaction that can spend the UTXO. Nevertheless, since the unlocking conditions of each UTXO are only related to the UTXO itself and do not depend on other UTXOs, the competition conditions are limited to this UTXO.

Altcoins on Bitcoin

In addition to the fundamental differences in design mentioned above, the introduction of valuable assets other than BTC also creates incentives for miners to extract value (MEV). The MEV generated in these scenarios is essentially the order in which protocol designers specify asset ownership and the legitimacy of on-chain operations when trying to use scripts + UTXO (a data structure native to BTC) to build new asset classes and on-chain behaviors on BTC. Through events defined based on order, people can be incentivized to compete for the order, thereby generating MEV.

Without considering other assets, rational miners will only package legitimate transactions based on transaction fees and charge fees based on the size of the transaction. However, if a Bitcoin transaction is more than just a standard transfer, such as minting a new valuable asset (such as runes, etc.), miners can adopt various strategies beyond just considering Bitcoin transaction fees: 1) Review the transaction and replace it with a transaction minted by themselves; 2) Charge users higher fees (on-chain, off-chain, or sidechain payments); 3) Let multiple users bid against each other, thereby triggering a fee war.

Mint

A direct example is the minting process of assets such as Runes or BRC20, which generally sets a maximum limit on the minted assets. The first confirmed minting transaction is considered successful, and other transactions are considered invalid. Therefore, the order of transactions in this context becomes crucial and provides opportunities for MEV through transaction sorting.

In addition, the concept of rare satoshis introduced by Ordinals even raises concerns that miners may trigger block reorganizations during halvings to compete for high-value rare satoshis.

Pledge

In addition to minting, staking protocols like Babylon also set an upper limit on the number of assets that can be staked at each stage. Even if users exceed the upper limit, they can still construct Bitcoin and send it to the pledge locking script, but this will no longer be considered a successful pledge and will not be eligible for future rewards. In other words, the order of pledge transactions is also crucial.

For example, shortly after the launch of the Babylon mainnet, the 1000 BTC pledge limit in the first phase was reached, resulting in an overflow of about 300 BTC and the need to unstake.

In addition to on-chain minting/carving assets and staking, some activities on sidechains or Rollups are also affected by MEV. We will provide more examples in the "MEV Events on Bitcoin" section.

What is considered Bitcoin MEV?

So, what exactly is MEV on Bitcoin? After all, the definition of MEV is different in different situations.

Generally speaking, MEV on Bitcoin refers to the various ways in which miners manipulate the block generation process to maximize profits. We can roughly divide them into the following categories:

• Users pay extra fees: For users who want to speed up their transactions, a common channel is through off-chain transaction acceleration services, but this service is usually costly because the user's transaction is included first. Traders can also offer higher fees to miners through mechanisms such as RBF (Replacement by Fee) and CPFP (Pay for Children) to prioritize transactions and achieve faster confirmation times. Transactions with lower rates and fees typically face longer confirmation times, as profit-driven miners prioritize profitable transactions for inclusion in blocks.

• User-miner collusion: Users and miners collude to censor or include certain transactions of specific significance. For example, malicious users and miners collude to censor and exclude penalty transactions on the Lightning Network to illegally obtain assets within a channel. Other new systems such as BitVM and its penalty transactions are also subject to such risks.

• Bitcoin miners mining on sidechains/L2: This includes various early merged mining schemes, where miners reuse computing power on Bitcoin to secure another network. Through merged mining, it can encourage miner centralization, as large miners may use their computing power on the main chain to influence block production, sorting, etc. on L2, thereby obtaining excessive L2 mining rewards and potentially affecting L2 network security.

Open market-oriented bidding methods (such as RBF) have played a relatively positive role in the overall economic system and promoted the development of a free market economy. However, when users make out-of-band payments with mining pools, it undoubtedly poses a threat to the decentralization and censorship resistance of the network and is labeled "MEVil".

Bitcoin MEV Examples

Based on the above classification, we can observe several MEV cases.

Non-standard transactions

The Bitcoin Core software only allows nodes to process standard transactions up to 100 kvB. However, mining pools will still include non-standard transactions in blocks at high fees, usually at the expense of excluding other transactions with lower fees.

Some typical examples include:

• Block 776,884: Mined by Terra Pool, this block contains an inscription transaction of size 849.93 kvB. The inscription is a 1-minute MP4 video of a frog holding a drink, and the miner earned 0.5 BTC in fees.

• Block 777,945: contains a 4000 x 5999 pixel WEBP image of size 975.44 kvB, and the miner can earn 0.75 BTC in fees.

• Another block, 786,501, which received about 0.5 BTC in fees for featuring a JPEG image of Julian Assange on the cover of Bitcoin Magazine, took up 992.44 kvB.

By default, Bitcoin Core nodes are only allowed to relay standard transactions. Therefore, non-standard transactions must be submitted directly to mining pools through private mempools. Private mempools allow mining pools to accept non-standard transactions and prioritize the user's transactions. While this can speed up transaction processing, more transactions moving to private mempools could lead to increased centralization of mining pools and increased censorship risk. Apparently, some mining pools are already taking advantage of the profitability of operating private mempools.

For example, Marathon Digital launched "Slipstream," a direct transaction submission service that allows customers to submit complex and non-standard transactions.

MEV Events on Sidechains/L2

The Stacks sidechain uses a unique consensus mechanism - Proof of Transfer (PoX), which allows Bitcoin miners to mine Stacks blocks and settle transactions on the Bitcoin blockchain while earning STX rewards.

In the past, Stacks adopted a simple miner election, in which Bitcoin miners with high hashrate were more likely to mine Stacks blocks, review other miners' commitment transactions, and thus earn all rewards for themselves. If more miners adopt this strategy, future Stackers may suffer from suboptimal returns.

Impact on the Ecosystem:

1. By excluding commitments from other honest miners, the rewards ultimately passed to stackers will be reduced.

2. If large miners continue to abuse their computing power and exclude the commitments of honest miners, it may lead to centralization problems, allowing a small number of miners to receive all rewards.

However, the Stacks Nakamoto upgrade will alleviate this problem and make this strategy unprofitable again. This upgrade will move from a simple miner election to a lottery algorithm and adopt the Assumed Total Commitment Carryover (ATC-C) technology to reduce the profitability of MEV mining. Miners need to show continuous participation in the last 10 blocks to be eligible for the lottery. Miners who have not participated in mining for at least 5 of the last 10 blocks will be disqualified from winning any Stacks rewards. With ATC-C, the probability of a miner winning a Stacks block is now equal to the miner's BTC expenditure divided by the median of the total BTC commitments in the last 10 blocks. This reduces the incentive for miners to extract disproportionate benefits by excluding other miners from block commitments.

Bidding for Alternative Asset Transactions

MEV associated with alternative assets such as Ordinals and Runes can be divided into the two types mentioned earlier:

• Pool Extraction of Additional Value: Mining pools can extract additional value by including assets such as Bitcoin Ordinals or Rare Satoshis into blocks and transactions.

• Fee Sniping Transactions: Traders can bid to have transactions associated with these alternative assets included in blocks.

For mining pools, the initial success of Runes provides an additional source of profit. For example, during the halving event, the highly anticipated launch of Runes led to record highs in network transaction volume and fees as many users raced to get their transactions included in the historic Bitcoin halving block. Transaction fees surged to over 1,500 sats/vByte after the halving (from less than 100 sats/vByte before the halving). ViaBTC took advantage of this surge and made a profit of 40.75 BTC in 840,000 blocks by mining the halving block that coincided with the launch of Runes, of which 37.6 BTC came from transaction fees associated with Runes. As the block reward has halved, transaction fees from Runes have proven to be a lucrative source of income for miners.