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I believe that everyone who has read Liu Cixin's "The Three-Body Problem" will remember the "Dark Forest Law" mentioned in the book. The book describes the entire universe as a dark forest. Every shining star in the night sky may be a brilliant cosmic civilization, and each civilization is like a hunter with a gun, lurking in the forest like a ghost, because once a civilization is discovered, it will inevitably be attacked by other civilizations. This is the so-called Dark Forest Law. The Dark Forest Law of the survival of the fittest also applies to the Ethereum ecosystem. In addition to hackers who spare no effort to find smart contract vulnerabilities to attack and make profits, there are also arbitrage robots that have been eyeing the transaction memory pool (Mempool) and trying to arbitrage through on-chain transactions. Today, let’s talk about the Dark Forest of Ethereum Transaction Mempool and what MEV (Miner Extractable Value) is. Ethereum Blockspace Market/Dark Forest Mempool We all know that the Ethereum chain is essentially a distributed ledger, and block space is an auction commodity for the entire Ethereum ecosystem. Users pay transaction fees to use block space to package their transactions. When each transaction is initiated, the transaction information will flow to the transaction memory pool (Mempool) and propagate between nodes. The transaction fee represents the transaction initiator's willingness to confirm the transaction demand speed. Miners will also look for transactions in the memory pool for packaging according to the fee bid. Therefore, there are always two different transaction states on the Ethereum chain, namely unconfirmed and confirmed. However, since the space in each block is limited, the number of transactions that can be packaged within a certain period of time is also limited. Therefore, there is an implicit time value between the unconfirmed and confirmed states of the transaction, which provides opportunities for arbitrageurs in the Ethereum ecosystem. Let's assume that arbitrage robot A detects that a user C on the chain has bought a large amount of asset B, and the transaction information is waiting to be confirmed by the miner in the memory pool (Mempool). At this time, arbitrage robot A sees an arbitrage opportunity, and then buys a large amount of the encrypted asset and pays excess transaction fees in order to complete the transaction confirmation before C. Because before this transaction is completed, the price of asset B is relatively low, but after A buys a large amount, the price of asset B will rise. At this time, C's transaction is still waiting for confirmation in Mempool. Due to the existence of transaction slippage, the amount of asset B purchased by C may be relatively reduced, but the arbitrage robot A will continue to wait for C's transaction confirmation at this time, and sell asset B for arbitrage when the price of asset B rises further. This is the real-life version of the Ethereum Mempool Dark Forest. These arbitrage robots stay in the Mempool for a long time to monitor transaction dynamics. Once they find a profitable trading opportunity, they will compete with each other and pay super high gas fees to rush the transaction for arbitrage. This part of the profit is what we often call the extractable value of miners. The above picture shows the ranking of the fees paid by MEV arbitrage transactions in the past 90 days. The left side also clearly lists the arbitrage income of the transaction executors. Miner Extracted Value (MEV) The so-called Miner Extractable Value (MEV) is a measure designed to limit the profits that miners (or validators or other privileged protocol participants) can make by excluding or reordering transactions. It was first proposed by Phil Daian in the paper "Flash Boys 2.0". The term MEV is very likely to be misleading, because most people would think that miners obtain MEV profits. However, from our description above, we can clearly know that in fact, MEV on Ethereum is mainly captured by DeFi traders or arbitrage robots through structural arbitrage trading strategies, and the participation of Ethereum miners is very rare. An example of this structural arbitrage opportunity is the Uniswap price arbitrage trade: when the Uniswap pool’s asset pricing is different from other exchanges (whether decentralized or centralized), an arbitrage opportunity is created. Arbitrage bots or DeFi users will then arbitrage the Uniswap pool to bring it to parity with other trading venues. Of course, in this process, miners can perform this operation by themselves, or directly bid on transaction fees with a group of arbitrage robots to capture MEV themselves, rather than simply earning a transaction packaging fee. Of course, some MEV can only be captured by miners because they have the right to arbitrarily sort (or exclude) transactions. MEV-Explore 01.01-04.21 MEV Statistics According to MEV-Explore statistics, the total MEV value has reached 393 million US dollars since January, and nearly 190,000 ETH have been captured. These MEV arbitrages mainly occur in decentralized exchanges, with Uniswap (47%) and Sushiswap (21%) alone accounting for the vast majority of MEV. MEV-Explore 01.01-04.21 MEV Statistics So what is the revenue scale of MEV of USD 393 million? Let's make an analogy, assuming that 25,000 ETH have been issued every day since the beginning of the year, and about 3.62 million ETH have been issued in the past 140 days. The total proportion of MEV (about 190,000 ETH) is about 19/2.5*140*100%=5.2%, and with the frequent MEV arbitrage activities, this number will continue to grow. Ethereum daily new block rewards 01.01-04.21 What impact does MEV have on miners’ income? We all know that in the past, Ethereum miners’ income was mainly divided into two parts: block rewards and transaction fees. However, as the ratio of MEV to block rewards continues to increase, miners, mining pools and users can no longer seem to ignore this part of the MEV income. In general, when MEV arbitrage activities are frequent on the Ethereum chain, the gas fee will generally be higher than usual, and Ethereum miners have indirectly obtained a small part of all the MEV obtained by the arbitrage robots. However, miners will definitely hope to get more income from MEV in the face of EIP-1559 and the reduction of mining coin-based income. Because the ultimate confirmer of MEV arbitrage activities is essentially the miners, who can screen the transactions in the Mempool and have the right to decide the order in which the transaction information is packaged. Therefore, miners can take the lead in trading after they perceive the arbitrage opportunities on the chain. Miners can even choose to sort transactions, insert transactions, reorder or even review transactions to maximize the profits of trading operations. Therefore, the current situation where most of the MEV income flows into the pockets of Ethereum arbitrage robots, while miners are squeezed to the margins, must be changed. So how can ordinary miners obtain this part of MEV profit? I think most miners do not have the technical background and financial ability to deploy and design Ethereum arbitrage robots. My most direct suggestion is to connect to a mining pool that distributes MEV income to miners for free, and use the mining pool's professional technology to capture MEV. Fortunately, our CoinIn mining pool has completed the test and launched MEV on March 31, and distributed this part of the revenue to Ethereum miners, trying to help miners fight against the risk of declining revenue brought about by the increase in Ethereum computing power and EIP-1559. |
