MEV is increasingly prominent on Bitcoin: MEV is spreading to Bitcoin in a more obscure way
Written by:George Kaloudis, CoinDesk
Compiled by: Felix, PANews
Key points:
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Arbitrage opportunities exist in both traditional finance and crypto, but are more pronounced in the latter due to the longer visibility and settlement times for pending transactions.
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Although MEV on Bitcoin is not as prominent as Ethereum, it is emerging through “sniping” Ordinal inscriptions, hollowing out blocks, and miner cartelization.
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The emergence of MEV on Bitcoin could lead to market pressure for the “privatization” of the memory pool, which would underminecryptocurrencyFounding principles.
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cryptocurrencyandBlockchainOne of the so-called “killer apps” of cryptocurrencies is the ability to trade a wide variety of assets without a centralized financial intermediary. Never mind that most of these assets do nothing, or purportedly do nothing. People are getting huge returns from trading them. Just like everyone in 2020Xiaobai NavigationGet rich from SHIB, then trade WIF and PEPE again in 2023.
When early capital poured into theseToken时，首先在代币上线 CEX 之前，通过自动做市商（AMM）在 DEX 购买。AMM 是去中心化的应用程序，可以匹配加密代币的买家和卖家，而无需通过受监管的exchange, and no KYC is required (such as passport photos, driver's license photos or multiple selfies). All you have to do is connect to the encryptedwallet, enter the asset you want to buy through AMM and click buy.
What’s interesting about these AMMs (besides the convenience and privacy of avoiding identity checks) is that while crypto influencers are combining cryptocurrencies andBlockchainPromoted as the “next iteration” of the stock market, but in some ways the stock market is more real-time than AMMs.
Let's take a simple example: A wants to buy stock XYZ for $100, and B wants to sell stock XYZ for $99. Because financial markets are so interconnected today, C somehow knows this (there are legal and illegal ways to find and process this information) and buys XYZ stock from B for $99, and then immediately sells it to A for $100. Everyone is happy: A gets XYZ stock, B gets $99, and C gets $1 from the arbitrage trade.
Now, thatmake moneyThe trade has been completed, and as the trade closes, arbitrageur C eats up the trade, and the market for stock XYZ is inefficient (there is a $1 difference between A's bid and B's ask). This all happens in real time, which means it is linear, C must intervene between A and B at the right time to execute the trade, and it must happen in this order (from A to C to B).
尽管形式略有不同，这种类型的套利也可以在 AMM 中看到。假设您很早就听说了 SHIB，并且想在 CEX 上市之前购买一些。由于它不在交易所，你调用了基于以太坊的 AMM，然后点击按钮购买 SHIB 代币。当你下订单时，订单会被扔进一大批待定的以太坊交易中。其中一些交易可能是人们用 USDC 在网上购买东西，但其中许多交易是 SHIB 或 WIF 或 PEPE 等代币的交易。
These trades are visible to everyone before they are completed and executed because they are all in something called the mempool. If the AMM used for trading misprices SHIB due to market inefficiencies (like stock XYZ in the example), someone on the network can construct an Ethereum transaction to buy SHIB before you use another AMM, and then sell it to you for a profit.
To take the example further, let's say you buy a significant amount of SHIB. In this case, everyone can see that a large buy and market-moving trade is waiting and can trade around your trade to take advantage of market inefficiencies and your order to move the market.
Trades like these can be classified as sandwich trades. Some have chosen the term “sandwich attack” because the AMM is unable to match buyers with intended sellers and can cause the original buyer to lose money before the trade is completed (imagine if you wanted to buy 1 billion SHIB tokens and you only got 800 million because the AMM was inefficient and the sandwich trade was not possible).
三明治交易和其他类型的「低效率发现」更广泛地称为最大化（或矿工）可提取价值（简称 MEV）。MEV 的意思是，验证交易的人选择以对自己而不是交易者最有利的方式对交易进行排序。由于区块时间（验证交易所需的时间）不是实时的（在以太坊中，交易每 12 秒左右验证一次），因此有足够的时间进行套利交易，尤其是交易机器人。
With this in mind, it is not difficult to imagine that MEV has expanded beyond AMM. A reasonable conclusion to the previous technical debate is that the more complex you want to do, the more likely MEV will appear.
MEV: Pros, Cons, and Existence on Bitcoin
There is a lot of discussion around MEV. Is it good or bad? Is it illegal?
It depends on who you ask.
On the positive side, MEV is a free market that calculatesBlockchainThe real cost of doing things on the Internet is that this inefficiency will be exploited until the inefficiency approaches zero. On the negative side, MEV may enable uninformed laymen and new users to be exploited by professionals and advanced users.
Only Ethereum has been mentioned so far because, despite MEV’s first-mover advantage, MEV has not historically existed for Bitcoin. While it exists in theory, it is not economically feasible in practice (except in very specific circumstances).
You might be thinking: “No MEV? If Ethereum-based AMMs have MEV, then Bitcoin-based AMMs must also have MEV, right?”
You are right, it’s just that there is no AMM based on Bitcoin yet. This is because Ethereum is more expressive than Bitcoin, which means you can “do more things with it”, such as creating tokens with Doge or other Memes, trading on AMMs and getting rich.
And because Bitcoin is not very expressive, there is not a thriving market or AMM for new tokens on Bitcoin. How can AMM-related MEV opportunities emerge if there are no new non-Bitcoin assets on Bitcoin? Exchange Bitcoin for other Bitcoin?
Yes. This is exactly where Bitcoin’s MEV starts to emerge.
MEV on Bitcoin
MEV is far less robust on Bitcoin than on Ethereum, and when experts discuss the topic, it is always with a note of caution.
“This is more like a game you can play than MEV,” said Colin Harper, director of research and content at Luxor Technology, a bitcoin mining company.
Three years ago, Bitcoin went through an update called Taproot that made the network more expressive. Through the Ordinals protocol, it was accidentally possible to make Bitcoin equivalent to NFTs. This is what I meant earlier by "trading Bitcoin for other Bitcoins": NFTs can work on Bitcoin because the Ordinals protocol is able to see which satoshis (the smallest unit of Bitcoin, one 100 millionth) are engraved with arbitrary data, which can be pictures, text, or something else. These collectibles are called inscriptions, which are different from NFTs (separate tokens). If you buy an inscription, rather than a brand new token like on Ethereum, then you are just buying some Bitcoins that are special only from the perspective of the Ordinals protocol.
This is essentially buying Bitcoin with Bitcoin (of course, more for less). Just like buying SHIB with ETH or buying USDC with USDT, buying Bitcoin with Bitcoin is an activity that can be preempted.
Colin Harper explains: “When you sell an inscription on Magic Eden or other similar marketplaces, you use a PSBT (Partially Signed Bitcoin Transaction). 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 the transaction in the memory pool, they can replace the original buyer’s payment and address by broadcasting their own transaction (stealTo do this, they broadcast a RBF (Replace-by-Fee) transaction with a higher fee to ensure their transaction is confirmed before the original transaction.”
While this is not quite the same as the pure MEV discussed in the first section of this article, it still looks like MEV: the intended buyers and sellers are mismatched because a third party steps in and offers the miner more compensation in exchange for the inscription, and the miner maximizes his own value in the transaction by accepting the third party deal.
Other things like MEV on Bitcoin
Bitcoin still has miners, and within the mining operation there are things happening regularly that look like MEV.
A common example is empty block mining. Bitcoin periodically mines an empty block. This block is of no use to anyone except the miner who mined the block, because no other transactions waiting to be confirmed have been verified except the coinbase (lowercase "c", not the company) transaction that rewards the miner for the block. There are technical reasons why this happens, and the appearance of empty blocks is actually accidental, but it is difficult to say whether this is MEV and whether it is good for Bitcoin.
There is also the cartelization of miners (PANews Note: A cartel is a monopoly group that can easily occur when a few resources are completely controlled by several companies). Many Bitcoin miners now use mining pools to balance their income, mining collectively and getting a corresponding share. This may create a problem, especially as mining pools become larger and larger. As Walt Smith of the venture capital firm Cyber Fund wrote in a long article titled "Bitcoin's MEV":
“…Pool mining creates systemic risk by enabling smart multi-block MEV by increasing the odds of consecutive block wins. Mining pools and other mining cartels abuse pool economics to enforce common block templates, blacklisting small miners who perform non-standard block construction. Sustained excess fees coupled with economies of scale induce consolidation, creating a morbid cycle.”
Currently, a few mining pools control a significant portion of the network’s computing power, and even two or three of them can combine to control more than half of the computing power. If a mining pool cartel wins enough blocks in a row, it can exercise monopoly power to maximize profits.
比特币矿工行为的另一个真实例子可能是 MEV：带外支付（out-of-band payments）。比特币矿工会因接受被视为非标准的交易而获得报酬（无论是链下还是通过单独且看似无关的比特币转账）。同样，这不是纯粹的 MEV，因为提取的价值并非由于精明的程序决策而出现在区块链上。相反，价值是通过矿工获得比他们原本应该获得的报酬更多的报酬来提取的。
Some researchers worry that out-of-band payments are the first step toward a slippery slope that could obscure incentives. But miners are seizing the opportunity. Publicly traded mining giant Marathon has launched a service called Slipstream that accepts nonstandard transactions.
The worry is that this kind of shady dealings could lead to mempool privatization, which is unsettling on any blockchain. As CoinDesk’s Sam Kessler wrote: “Most pressingly, there are concerns that mempool privatization could entrench new middlemen in a critical area of ethereum’s transaction plumbing.”
If most transactions were submitted to a private mempool for confirmation, a small number of people (a designated minority) would be able to influence Bitcoin transactions. This would centralize power in the blockchain, which is obviously an unacceptable situation for anyone who values censorship resistance.
There are other examples like MEV on Bitcoin that inevitably exist in some form, and network participants need to take note.
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