Original author:Daolectic Research

Original title: "MEV: how dark is the forest?》

Original title: "

Summary:

• Compilation of the original text: Lynch, Chain Catcher

• Summary:

• Maximum Extractable Value (MEV) is the profit a miner makes by ordering transactions in a block.

• Arbitrage is the most common way to profit on-chain.

MEV

For miners, Flashbots reduce negative externalities while also generating more revenue.

first level title

first level title

memory pool

memory poolmemory pool

memory pool

is an electronic file that includes unconfirmed transactions. The number of unconfirmed transactions contained in each block is limited. Miners have full autonomy in choosing which unconfirmed transactions will be included in a block. When a transaction is selected for packaging, it will be stored in a new block and broadcast.

Miners usually give priority to transactions with higher packaging fees to maximize profits.

This drives them to seek other avenues that can bring them more profits.

Think about it, someone bought a certain token before you, and then sold the same token to you at a higher price!

Flashbots

To mitigate the impact of processing transactions on the main chain, a MEV research group created Flashbots.

first level title

Typically, miners bid for MEV through the Ethereum public mempool.

With Flashbots, the research team created an open communication channel that enabled auctions and MEV bidding to take place on private mempools.

Searchers are key players in this process: they are able to take advantage of the information asymmetry in the DeFi market. Due to intense competition from searchers, miners may only select transaction packages that pay the highest transaction fees. Seekers pay miners high transaction fees to perform bundling.

At this point, the searcher:

1. Bid directly to buy block space from the miners who analyze the quotes.

2. Minimize gas fees to maximize MEV returns.

3. Bid higher for block space without lowering MEV results.

Failure to democratize MEV could result in an increasing centralization of the distribution and accumulation of benefits.

Flashbots Auction democratizes MEV by providing profit-taking functionality to both searchers and miners. In response to some miners attempting to execute their transactions after tracking Seekers’ activities, the pathway also has a code of conduct to protect Seekers from miners.

first level titleCrypto Hedge FundingOn-Chain Opportunities

PwC in its report on crypto hedge funds (

Additionally, retail investors are becoming more aware of on-chain profitability.

arbitrage

arbitragearbitrageInvestors use

• arbitrage

• method:

Buy currency on an exchange

Quickly sell on another platform at a higher price

• Cross-platform arbitrage techniques may use simultaneous or delayed transactions. When using synchronous trading, users must have balances on all exchanges to trade. This approach minimizes price risk while maintaining exposure.

• Look for large orders with variable prices in the mempool.

under theDetermine the arbitrage size that will yield the highest profit and stay ahead of the competition.example

to liquidate

In , the user converts USDC to HEX on UniSwap v2, and then converts HEX to USDC through UniSwap v3. In the end, the user arbitrages nearly $8,000 on the price difference.

to liquidate

Liquidation occurs when traders are unable to meet leveraged position allocations and do not have sufficient funds to maintain trading operations.

Most lending protocols involve overcollateralization. Users' collateral must be higher than their loan value. When the collateral value falls below a certain level, users may repay the debt and redeem the depreciated collateral.Exchanges close leveraged positions of users due to partial or total losses. Among them, the oracle plays an important role because it can provide the latest price to the exchange.the case

: A bot repaid 135k USDC to AAVE v2 in exchange for 11k LINK. Then the robot sold these LINKs at a price of 159 ETH, and finally got 12 ETH.

first level title

FlashbotsMEV profitability

The DeFi market on Ethereum is poisoned by arbitrage, liquidations, and high-frequency trading. As the volume of DeFi transactions grows, the value captured by such transactions becomes greater.

Liquidation opportunities, on the other hand, occur during price falls or short squeezes. From their point of view, arbitrage is the main way to be used. Arbitrage opportunities always exist, and liquidation opportunities generally occur during price declines or short squeezes.

On the other hand, MEV profits are divided between searchers and miners, with the former accounting for 64% ($405 million) and the latter accounting for 36% ($230 million).

first level title

How will the Ethereum merger affect MEV?

Ethereum will move to Proof of Stake (PoS), which will eliminate the need for miners.

At that point, validators, searchers, and bots will acquire MEV. To reduce the likelihood of future block reorganizations, the PoS update includes proposer boosting.

Layer2 rollups are an evolving approach to network scalability: they batch transactions and only send the proof results to Ethereum's public mempool.

This lowers the transaction weight to fit more transactions in a block and potentially hides the chances of MEV from seekers and miners.

On-chain malicious activity

Examples of malicious activity against users include front-running and sandwich attacks.

When using a DEX, users do not know the time and pricing of trade execution. The order total is specified before its price impact.

This time lag allows the bot/trader to place buy and sell orders before and after the pre-announced buy order.

In this way, the malicious trader's sell order will be executed at a higher price than his buy order, thereby generating a profit.

Some large validators like to use front-running transactions because they can take advantage of the next block and process their transactions better.

• Once a user initiates a transaction in the public mempool, the bot scans it for possible attack methods.

• If user transaction is attractive:

The robot will repeat the same execution logicIf the transaction is profitable, the bot will front-end its transaction and transfer the funds to its addressScott Bigelow, one of the co-founders of Flashbots, made a piece about front-running

Interpretation video

• , can help to better understand.

• In a sandwich attack, the robot:

• Execute trades in the primary swap direction

In this case, users face large slippage, especially if the underlying parameters are misconfigured.

Summarize

first level titleRobert MillerSummarize

All the main data shared comes from the huge database created by the Flashbots team. If you want to learn more about MEV-exporer, I recommend checking out

tweets.