Maximal (or "miner") extractable value (MEV) is a hot topic among decentralized finance (DeFi) traders, Ethereum and other non-Bitcoin miners, and DeFi builders as transaction ordering and valuing becomes more complex and profitable. Three experienced MEV thinkers and builders discuss the state of MEV now and its problems and benefits to the cryptocurrency ecosystem.

This livestream is essential watching material for anyone interested in the changing roles miners play for different blockchains as well as the new revenue sources miners can exploit and the incentives those funds introduce.

Video Recording

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Audio Version

Show Notes

Introductions (timestamp)

  • Robert Miller: He helped build flashbots tools to give users front running protection and analytic tools.
  • Nathan Worsley: He is an MEV engineer and trader. He helped build the flashbots protect API.
  • Jordan Frankfurt: He is a Defi app developer at Uniswap Labs.

Defining MEV (timestamp)

  • Blockchains were defined by incentives, collecting rewards for producing blocks is what incentivizes miners.
  • MEV is other value that can be captured by miners in addition to the block rewards.
  • Miners can capture margin between lower bound on slippage parameter and initial market price as their revenue.
  • Miners are seeing increasing amounts of opportunity to use dexes for arbitrage.
  • Traders can form relationships with miners to extract MEV.
  • By using flashbots, traders can specify their transaction ordering preferences; miners can auction off top block space.

Why does MEV matter? (timestamp)

  • Many chains aren’t designed for increased incentives through transaction ordering, this can lead to game theory among chains.
  • Miners must consider MEV now.
  • Miners role before: find profitable blocks and propagate it to the network.
  • Miners role now: find arbitrage opportunities to stay competitive and create the most profitable block.
  • The need for complex MEV strategies can lead to centralization of miners.
  • MEV accounts for 5-10% of miner revenue.
  • MEV efficiency is important because users of a chain assume the chain will always walk forward, if it doesn’t then users will start to leave the chain.

Why aren’t there MEV opportunities on the Bitcoin blockchain? (timestamp)

  • The size of Defi on bitcoin is small.
  • MEV opportunities are generated in the Defi environment, especially on the Ethereum blockchain.
  • Bitcoin pushed off defi development in favor of a conservative development plan.
  • Robert: by briefing vectors and being a counterparty in a channel, bitcoiners can make money using the lightning network (MEV like opportunity).
  • MEV opportunities are context dependent, in bitcoin its limited to managing of UTXOs.

Sandwich attacks and common MEV strategies (timestamp)

  • Sandwich trade: bots will watch for retail trades and look at the slippage parameters that these retail traders set.
  • Then the bots will try to push the price up and get in front of retail traders by buying up the asset to raise the price.
  • Retailers then buy up more of the asset, causing the price to go up higher.
  • Finally, the bot sells and extracts value from that retail trader.
  • Sandwich trades are exploitive because the user expects that their trade will get filled at the price that they set but the sandwich bots makes the transaction more expensive for the user.
  • Some argue that this isn't exploitive because the user agrees to the slippage terms.
  • Sandwich attacks can be sandwich attacked.

Private mempools and dApp neutrality (timestamp)

  • Jordan: we are trying to build the best tools for all users.
  • Private mempools are emerging.
  • Private mempools may lead to centralization.
  • When a user creates a transaction on a blockchain, the transaction is sent to a public mempool.
  • Nodes propagate transactions onto the network, it gives users the ability to find transactions and manipulate them.
  • Flashbots prevents users’ transactions from hitting the public mempool and being manipulated by sandwich traders.
  • Mempools also communicate information about network load and prices of transactions, with private mempools, users will not be able to see this info, this may cause inefficiency.
  • There are trade offs for the use of public and private mempools.

How do you plan these strategies to become mainstream and build tools for the average crypto trader? (timestamp)

  • Defi strategies will always be varied from complex to simple, like the tradfi market structure.
  • Jordan: join the flashbots discord to learn some defi trading strategies.
  • Flashbots is set up to maximize efficiency of MEV trades and minimize the amount of gas fees used.

Comments on senate clip (timestamp)

  • The politicians are attacking permissionless censorship free systems.
  • Slipping party that builds blocks and submits blocks (block proposers) to the network will help keep the market fair and neutral.
  • Miners are not intermediaries and can’t steal your money.
  • Politicians clearly have not studied the crypto market.

Forward looking insights on MEV space (timestamp)

  • Flashbots working on full block proposals.
  • MEV arbitrage opportunities involving single transactions may become unprofitable in the short term; more complex MEV strategies will emerge.
  • Jordan is excited about Flashbots Protect.